2017 was an interesting year for the GB power market – with coal generation falling to all time lows, renewables growing to all time highs, and significant announcements from government such as the Clean Growth Strategy, the outcome of the CfD auction, and more clarity on carbon prices and future renewables subsidies.
This year looks set to be just as busy as the market continues to evolve. Richard Howard summarises six key events and emerging trends which are likely to affect power generators during 2018:
1) Capacity market auction
Prequalification results indicate that both the T-1 and T-4 auctions are heavily over-subscribed, and are therefore likely to be highly competitive. 53.2GW of existing (derated) capacity and 24.5GW of new build capacity has prequalified for the T-4 auction, against a procurement target of 49.5GW. We expect the clearing price in the T-4 auction to be lower than previous auctions, with a relatively small amount of new build generation capacity winning a contract.
A key uncertainty is the bidding behaviour of coal stations and the extent to which they withdraw from the auction leaving more space for new build projects.
2) Grid-scale battery storage
Last month saw the successful completion of Tesla’s 100MW battery storage project in Australia – currently the world’s largest – which has already proved its worth by responding to a coal plant fault. In the UK, batteries are already making headway in the frequency response market, with over 400MW of battery capacity having secured EFR/FFR contracts to date. We expect to see more battery capacity enter the FFR market, putting further downward pressure on prices. Although 4.8GW of battery storage capacity originally prequalified for the capacity market auction, 1GW of this has already withdrawn from the process – likely due to the new derating factors announced in December.
We expect that only a small proportion of projects will take a CM contract now. Project developers will increasingly move towards alternative business models like energy arbitrage which require more sophisticated optimisation and forecasting capabilities.
3) Subsidy-free renewables
The UK has already seen its first subsidy-free project in the form of the 10MW solar + 6MW battery project built by Anesco at Clayhill. We expect to see more solar and battery projects emerge during 2018. Hive Energy is working up plans for a 350MW project in Kent, whilst Elgin Energy is seeking planning permission for a 50MW project in Scotland, and there are a raft of other similar projects in scoping – typically around 10-50MW each.
Subsidy-free wind is also on the horizon, with increased developer interest. Innogy recently submitted a capacity market rule change proposal which would allow unsubsidised onshore and offshore wind projects to access the CM going forward. Nearly 900MW of onshore wind capacity was granted planning consent during 2017, the majority of which is located in Scotland.
4) Changes to network charges
Ofgem’s proposed reforms to embedded benefits are due to be implemented from April, with the residual element of triad avoidance payments cut substantially over a three-year period.
However, the proposals are still subject to an ongoing legal challenge – for which a court date is yet to be set. More broadly, we should expect to see progress on wider reforms to network charges. For example, in an update to the ongoing Significant Code Review, Ofgem revealed that it intends to shift the burden of residual network charges to suppliers (as opposed to a mix of suppliers and generators as currently) – tackling what it perceives to be a market distortion encouraging behind the meter generation.
An update on the SCR is expected in the summer. This will change the competitive balance between transmission and distribution-connected generation.
5) A positive year for nuclear?
Last month saw the takeover of the Moorside project by South Korean KepCo, and regulatory approval granted for the new reactor to be used at Wylfa and Oldbury by Horizon Nuclear Power. After the government laid down the gauntlet in its Industrial Strategy White Paper, the nuclear industry has pledged to cut construction costs by 30 per cent – a level which would rival recent offshore wind CfD projects.
All eyes will be on the government as it delivers on its Clean Growth Strategy commitment to “progress discussions with developers to secure a competitive price for future projects in the pipeline”.
6) Impact of Brexit
Details of the UK’s post-Brexit relationship with the EU should (hopefully) emerge during 2018. The current plan is to conclude negotiations with the EU by October, leaving sufficient time for the deal to be signed off on both sides by March 2019.
Brexit could potentially have wide ramifications for the energy sector in terms of: UK-EU trade arrangements including the UK’s participation in the internal energy market, the UK’s future participation in Euratom and the EU ETS, and the extent to which the UK must adhere to EU energy market rules and targets (such as the recently agreed 2030 renewable energy and efficiency targets). Indications suggest that project developers have not been put off by Brexit-related uncertainties – for example, three interconnector projects have prequalified for this year’s capacity market auction.