The boss of Drax Power says he is confident the company will be able to secure capacity market contracts for new gas turbines, despite the record-low price in the latest auction.
The four-year-ahead (T-4) auction in February cleared at £8.40/kW – the lowest price yet for a T-4 auction – as interconnectors crowded out new build generation.
Drax Power chief executive Andy Koss was speaking to Utility Week following the release of the Drax Group’s preliminary financial results for 2017, which showed a 64 per cent increase in earnings, before interest, tax, depreciation and amortisation (EBIDTA) to £229 million.
The company entered two open-cycle gas turbine (OCGT) projects into the auction but neither were successful. Contracts were won by three new build interconnectors with a combined capacity of more than 2.1GW.
Despite there being a number of other interconnectors in the pipeline, Koss said closures of existing generation will pave the way for new build gas turbines to secure agreements: “We and the market were all surprised at how low the capacity market auction cleared at.
“However, when we look to the future there’s another 3GW of coal that needs to come off the system. We’ve got older gas closing. We’ve got some of the older nuclear power stations that need to close too. We’re confident that the market will clear to bring on new gas in the near future.”
He said the projects will also be well-placed to earn revenues from ancillary and balancing services: “Things like inertia, reactive power, frequency response – all the services that were provided by the older plants which are now coming off the system; we need to replace that, and there’s a growing demand with more intermittency on the system”.
Back in 2016, Drax acquired four new build OCGT projects, including the two which it bid into the recent auction. Koss said the other two projects are expected to be ready to enter the T-4 auction in December 2019.
Drax is also planning to replace two of the three remaining coal units at its power Yorkshire with combined-cycle gas turbines. The company will install four new 600MW gas turbines and repurpose the existing steam turbines to generate electricity using the waste heat from the exhaust gases.
Koss said the firm is hoping to submit planning applications in the second quarter of 2018 and receive approval some time over 2019. “That means we can enter at least the first of those units into the capacity market auction in December 2019,” he added.
Of the six generating units at the plant, three have so far been converted to run on biomass instead of coal. Two receive subsidies via the Renewables Obligation (RO) scheme, whilst the third is supported by a Contract for Difference (CfD).
Drax had originally hoped to secure a CfD for a fourth biomass conversion, but was prevented from doing so by the government, which said it should instead seek support through the RO.
In an effort to the limit the impact of low-carbon levies on energy bills, the government decided in July 2015 to end the grandfathering policy for new biomass conversion projects receiving subsidies through the RO. The policy previously guaranteed that once a generator was accredited and began receiving Renewable Obligation Certificates (ROCs) the level of support it received would not be changed for the lifetime of its support.
In September 2017, the government outlined further proposals to curtail the cost of subsidies by either capping the number of ROCs a non-grandfathered generator could receive at 105,000 per year or adjusting the number they received per megawatt hour of output.
After consulting with stakeholders, the government revealed in January it had opted for an annual cap. It also decided to increase the cap to 125,000 per year and apply it across the whole of a generating station rather than just individual units. The whole-station cap is based on a forecast for the number of ROCs grandfathered units will receive in a given year plus 125,000 for each non-grandfathered unit.
Drax responded by announcing it would proceed with the conversion of a fourth unit.
Koss said it would have been unable to do so if the cap had been applied to individual units: “The fact that we now have this cap being applied across all units means we can optimise our biomass generation across three units in total.
“We’ll be running a lot in winter time, in the peak periods, when carbon intensity is higher, and less so in the summer, when prices are lower and carbon intensity is much lower.”
The conversion will take place in the third quarter of 2018 during a regular quadrennial outage. Drax will reuse old co-firing equipment to limit the cost of the conversion to £30 million. The unit is expected to return to operation in late 2018.