The market research firm said the auction is likely to result in a higher level of emissions than the Supplemental Balancing Reserve which it is replacing.
Cornwall predicted that 6.7GW of coal-fired power stations will secure contracts in the early auction in January at a cost of £152.2 million. The total cost of the auction was projected to be £1.5 billion- the equivalent of an extra £16.60 on the average household electricity bill.
The government confirmed in May that it was abandoning the Supplemental Balancing Reserve (SBR) a year ahead of schedule and replacing it with an early capacity market auction for the winter of 2017/18. Cornwall said this decision is likely to add to emissions levels: “Opportunities for coal plants within the SBR would likely have been more limited than they will be in the capacity market auction.”
Analysts also predicted that 3.6GW of new gas plant will win contracts in the four-year-ahead (T-4) auction for the winter of 2020/21, less than half of the of the 7.8GW which has prequalified. They said the failure to secure significant volumes of new gas generation could mark a “crossroads moment” for the Department for Business, Energy and Industrial Strategy (BEIS).
“State Aid conditions prevent positively discriminating in favour of large gas until Brexit is given full effect,” they added. “Many of the more subtle levers available to BEIS to ensure new large gas will succeed in a T-4 capacity auction have already been pulled. So, an outcome without material new large gas succeeding could create a natural opportunity for government to reconsider the current arrangements.”
The capacity market garnered widespread criticism in the national media after small-scale diesel generators won the bulk of contracts for new-build generation in the first two T-4 auctions in 2014 and 2015. Cornwall expects embedded – or distribution connected – generators such as these to remain in competition with large, new-build in the next auction in December.
“This expected outcome is despite recent coordinated policy developments such as those from Defra on increasing emissions restrictions on diesel generation, off-setting Enterprise Investment Scheme and venture capital trust financing from capacity market payments for future new build and the on-going triad review ,” noted analysts.
“Should the auctions play-out in broadly this way, the combination of a higher clearing price than the concurrent T-4 auction and the marginal price setting plant being our most carbon intense form of generation may be hard for BEIS to defend politically,” they concluded.
“It will need to justify this as a short-term necessity rather than a long term policy signal. These two capacity auction outcomes are likely to be seen as important staging posts in an apparently transient energy policy environment… Changes in the political landscape, in technology costs and in market dynamics all look poised to increase these pressures for meaningful review.”
The upcoming capacity market auctions will clear at “significant higher” prices than they have previously, Macquarie Research predicted last week.