Record capacity auction to cost consumers £5.7bn

The latest four-year-ahead (T-4) Capacity Market auction will cost consumers £5.7 billion (2022 prices) over the 15-year period of the longest contracts, according to analysis of the preliminary results by Aurora Energy Research.

The auction for delivery starting in 2026/27 cleared at a new record price for a T-4 auction of £63/kW/yr – more than double the previous high of £30.59/kW/yr seen in last year’s auction.

Just over 46GW of de-rated capacity entered the auction, which had a procurement target of 43.9GW. Almost 43GW secured contracts, which Aurora noted is only 600MW more than the absolute minimum that could have been secured.

Aurora said this highlights how expensive new projects have become as a result of both cost inflation and increased uncertainty for investors.

Predicting a record-high clearing price ahead of the auction, Aurora’s head of research for the UK and Ireland, Marlon Dey, said: “The cost of raw materials for batteries reached record highs in 2022, along with the cost of debt and inflation which is likely to manifest in higher bids for investing in new assets.

“Combined with a swathe of proposed reforms to the future design of GB’s electricity market announced under the UK government’s Review of Electricity Market Arrangements, this likely adds a premium to bids due to the uncertainty it adds for the forecasting of power prices and earnings.

“At a time of great geo-political instability, investors, project developers and policymakers are likely all feeling more uncertain about the future.”

Of the 39.1GW of existing capacity that entered, 38.4GW secured contracts, with EP UK Investment’s South Humber Bank combined-cycle gas turbine (CCGT) plant accounting for the vast majority of the difference.

Contracts were also secured by 4.6GW of new capacity, including 1.6GW of CCGTs, 0.9GW of demand-side response and 1.2GW of battery storage.

Due the low de-rating factor for shorter duration batteries, the latter equates to 5GW of nameplate capacity. However, this figure includes almost 770MW of batteries with a discharge duration of four hours.

Source: Aurora Energy Research

Among the winners were a 1700MW high-efficiency H-class CCGT power station and a two-hour 299MW battery storage facility (both nameplate capacity), which EP UK Investments is planning to build on the site of the former Eggborough coal plant in North Yorkshire.

The company said the CCGT project will be the single largest flexible generation asset to be commissioned in the UK since 2012. Its chief executive Tom Bain commented: “The Capacity Market result represents another step in our investment strategy, focused on delivering reliable and climate-friendly power generation sources.

“We are proud that once completed, these projects will constitute in excess of a £1 billion investment in the UK economy, deliver one of the most modern power plants in Europe being carbon capture, utilization, and storage, and hydrogen ready, and help to guarantee security of supply when inflexible renewable generation cannot satisfy demand.”