Policy & regulation

While the latest Capacity Market auction is the most successful yet for awarding contracts for new generating capacity, it is far from the giant leap that many were expecting.

This was the third T4 auction for energy generators to bid to secure contracts for their facilities under the government’s Capacity Market mechanism – introduced to encourage the construction of new generating assets and ensure the security of supply.

The previous two auctions failed to deliver meaningful new build capacity, with the majority of capacity secured – 49.26 GW in December 2014 and 46.3 GW in December 2015 – coming from existing generating facilities. In total 52.4 GW of de-rated capacity was secured in this latest T4 auction, slightly above the government’s target of 51.7 GW.

Securing a higher level of overall capacity than previous auctions has resulted in more new generating capacity benefitting from the scheme, with 3.3 GW of de-rated capacity securing 15-year contracts, up from 2.4 GW a year earlier; or 1.9GW if you exclude 456MW of demand side response capacity, rightly reclassified as existing capacity in this year’s auction.

Of the 3.3 GW of new capacity contracted, more than half comes from new gas plant. This comprises just one combined cycle gas turbine (CCGT) plant – Centrica’s 333MW project in Kings Lynn, Norfolk – and 1.5GW of gas engine and gas turbine projects.

The only large frame open-cycle gas turbine (OCGT) to secure a capacity contract was Intergen’s 299MW expansion of its plant at Spalding in Lincolnshire. The vast majority of new gas projects to secure capacity contracts were smaller, distributed generation units, such as Centrica’s 50MW OCGTs at Brigg in North East Lincolnshire and Peterborough in Cambridgeshire, together with numerous small gas engine projects.

This auction may represent one small step for smaller new-build gas plants, but it is a missed opportunity to deliver the flexible, highly efficient new CCGT plants that our network requires. The UK energy market has changed dramatically during the last decade. In order to meet the challenge of securing our supply for the next one, which will be available when we need it and delivered efficiently in a cost competitive manner, it is clear CCGT is best placed to meet this challenge.

Perhaps one of the auction’s most encouraging results was the inclusion of new battery storage projects for the first time. Just over 500MW of new battery capacity – vital technology for storing the electricity generated by renewables like wind and solar – secured capacity contracts. This new battery capacity is spread over 28 projects, including Centrica’s 49MW battery storage facility at Roosecote in Cumbria, and a 33MW unit by RES.

It is also encouraging that, in light of proposed changes to the UK air quality rules, very few new diesel generators secured capacity payments: just 76MW, down from 650MW of new capacity from inefficient diesel generators that secured 15-year contracts in last year’s auction.

Despite the positive outcomes for some generators, December’s auction failed to live up to the expectations of many who thought it could represent a leap forward for the commissioning of new electricity generating plant.

More than 10GW of generating capacity – including 9.7GW from new gas plants – that had prequalified for capacity contracts exited the auction early.

The Capacity Market auction is run as a descending clock auction, where the price being offered as a capacity payment is incrementally reduced until the government secures the level of capacity it is looking for.

In the latest auction pre-qualified participants representing 70GW of new and existing capacity began bidding at the starting price range of £70-75 per kW. However, by the time the auction had dropped to its final clearing price of £22.50 per kW, more than 17GW of capacity had exited the process, most of it coming from new plant.

The largest fall in capacity bidding for contracts came once the price dropped below £35 per kW, which confirms many industry commentators’ predictions before the auction that a price of between £35 and £40 per kW would be needed to make new CCGTs financially viable. Of the capacity that exited, new CCGT plants represented 9GW.

 The Capacity Market process would benefit from reform. Current rules mean the process is technology agnostic and does distinguish between new build and existing capacity. As a result CCGT plants struggle to compete with the blended output.

As well as pre-qualified gas, 3.9GW of existing coal-fired plants, exited the auction, leading to speculation about how long some plants can remain financially viable without the additional payments. Any closures would be in addition to the 8.8 GW of coal-fired plant that came off-line in 2015, alongside 2.6 GW of gas.

While some of this capacity is being replaced by renewables, wind and solar’s intermittency means that the UK is – even after this auction – in need of significant new storage and generating capacity to help plug the gap and balance the grid.