New CCGTs offered opening in auction for UK electricity capacity

Around half of the 9GW of distributed generation that pre-qualified for next week’s capacity market auction in the UK is unlikely to enter, sources close to the matter have told ICIS.

The claim comes as further bad news for the embedded sector emerged on Friday when energy regulator Ofgem reiterated its concern over the level of financial benefits afforded to distributed generation in the UK market. The regulator said it will publish a minded to decision and draft impact assessment on recently proposed network modifications that would restrict embedded benefits early next year.

If half of the 9GW of pre-qualified distributed generation is absent from next week’s auction, through which the government aims to procure 51.7GW of guaranteed generation for 2020-21, the auction could result in new large-scale combined-cycle gas turbines (CCGTs) winning contracts.

The UK government’s capacity market mechanism has come under fire since its introduction in 2014 for failing to deliver any new large gas-fired plants, which was the principal aim of the policy.

High attrition

In total, around 57.5GW of de-rated thermal generation capacity pre-qualified to participate in the auction. A further 16.2GW conditionally pre-qualified.

Up to ten gas-fired projects providing 10GW of capacity pre-qualified to enter (see table).

Almost 9GW of new small-scale embedded generation pre-qualified for next week’s auction (see EDEM 14 October 2016). However, sources from companies entering the auction have been told that less than half will actually enter due to recent deterrents from the regulator and government.

Attrition due to unsuccessful planning applications and inability to post requisite credit cover following the pre-qualification stage could also be responsible for the reduction.

Furthermore, those embedded generators that do enter could be forced to submit bids far in excess of previous auctions following recent signals sent out by government that action could be taken to remove other financial benefits afforded embedded generation.

“While there is a fair bit of embedded in the prequalification list, I would suspend judgement on whether it will clear [the auction] or not,” Frontier Economics’ director of energy Dan Roberts said.

“Ofgem has been fairly clear as to their intent on triad benefit, which is major [£40+/kW] revenue for these plants. I don’t think you would pull it [a plant] from prequalification, which is by and large a free option. Rather, you would bid it in but maybe at a higher price assuming you’d read and understood Ofgem’s position,” he added.

While Ofgem has been busy consulting industry on stripping back embedded benefits, the government recently launched a consultation on legislating against NOx emissions from small-scale diesel generation.

The prospect of a higher clearing price at auction leaves the door open for new-build CCGT to secure contracts. Analysis from consultancy Cornwall Energy earlier this year claimed that uncertainty caused by the UK’s vote to leave the EU could push the clearing price as high as £49.00/kW, almost three times last year’s price.

The two previous auctions covering delivery of capacity in 2018-19 and 2019-20 have resulted in the award of contracts to existing thermal plants and new small-scale embedded generation, which will connect off-grid.

As a result, the higher capital costs of building new CCGTs have made them uncompetitive in the auction and restricted the number of successful applicants to just one, the 2GW Trafford Power station, which could yet default on its investment contract.

Negative investment signals

While new embedded capacity could be deterred from entering next week’s auction, developers with existing capacity market contracts are also concerned.

“There is a material risk that a rapid and ill-thought through review by Ofgem of transmission charging could remove the framework in which we made our 2014 and 2015 capacity market investment in more than 500MW of new gas-fired plants across the country,” UK Power Reserve chief executive Tim Emrich said.

The auction is scheduled to start next Tuesday and will run until Friday afternoon at the latest. henry.evans@icis.com