UK: The UK's Second Capacity Market Auction – Likely To Deliver More Of The Same?

Last Updated: 5 October 2015
Article by Adam Brown

The results of the pre-qualification stage of the 2015 Capacity Market (CM) auctions, published on 25 September 2015, confirm the trend towards increasingly decentralised power generation.  Less than 3 GW of new projects will be competing for capacity agreements in December, but the total de-rated capacity of the pre-qualified bidders is only just greater than the target capacity identified by DECC in the auction parameters.

CCGT: familiar disappointments

When the results of the 2014 auction were announced in January 2015, there was disappointment at how few sizeable CCGT projects had been successful.  The low auction clearing price of £19.40 was good for consumers (and a welcome supplement to the revenues of many existing plants), but too low to enable most large new-build projects to be viable.

Subject to the outcome of any pre-qualification appeals, it appears that by one measure, only one really new pre-qualified unit of "new" generating capacity with a capacity of more than 100 MW will participate in the "T-4 auction" for delivery in 2019.  This is 370 MW of CCGT capacity at King's Lynn, but in the 2014 CM register, the same project was said to incorporate some "existing but overhauled and enhanced" elements. Meanwhile, three CCGT projects in the 1GW+ bracket (at Spalding, Damhead Creek and London Gateway) were all rejected in the T-4 pre-qualification process, as was a proposed new unit at Thorpe Marsh (640 MW).  The recently consented Hirwaun and Progress open-cycle projects (299 MW each) also failed to pre-qualify.  Carrington (880 MW) will go forward to the auction, but although it is described as a "New Build" project in the CM Register, this is a project whose construction is already well advanced, so arguably does not represent the CM stimulating new investment.  Meanwhile, the T-4 2015 auction CM Register records about 1 GW of existing CCGT capacity that has opted out on the grounds that it will have decommissioned or otherwise ceased to operate by 1 October 2019.

A number of the rejected projects pre-qualified successfully for the 2014 auction, so their rejection seems puzzling given that the eligibility criteria are unchanged.  On the evidence of the pre-qualification results, it looks as if most, if not all, the new generating capacity will be connected to the distribution, rather than the transmission network, and will have a capacity of no more than 20 MW, often in the form of reciprocating engines that can be fuelled either by gas or diesel.  Such plants can be developed relatively cheaply, and – being distribution-connected – can boost their revenues with "embedded benefits" such as Triad payments, or ancillary services contracts, in addition to power sales and CM payments.  It is interesting that even the 370 MW King's Lynn project is described as being distribution-connected.

Coal carries on

The large volume of CCGT schemes consented over recent years were seen by some as the natural successors to the UK's ageing fleet of coal-fired plants and, with new technology, better able to cope with fluctuations in demand in generating mix increasingly affected by the intermittent characteristics of renewables.  (In a recent interview with World Energy Focus, National Grid's CEO, Steve Holliday, noted that three of NG's four future energy scenarios have 20 GW of solar in the UK by 2035.)  But although the CM Register reminds us that by 2019, we will have lost over 5 GW of generating capacity with the closures of coal-fired plants at Eggborough, Longannet and Ferrybridge, it also highlights the point that we are still likely to have at least 13 GW of old coal-fired generation in 2020.

The same point emerges from the recent consultation on the UK's Transitional National Plan (TNP) for compliance with the Industrial Emissions Directive (IED) as it affects large combustion plants).  It also appears from an Annex to the TNP consultation that some plants have still left themselves the option of either upgrading their SOx and NOx emissions abatement measures so as to meet the IED in a phased manner under the TNP, or taking the "limited life derogation" (LLD) and running for no more than 17,500 hours between 1 January 2016 and 31 December 2023, before closing for good.

So far, most seem to be choosing the TNP route, suggesting that we may have a significant rump of old coal-fired plant beyond 2020.  Those hedging their bets have until the end of the year to make their final choice as between TNP and LLD (or earlier closure).  Among the factors they will have to weigh up is how far low coal prices will offset the tax burden of the carbon price support rate of the Climate Change Levy; the reliability and maintenance costs of their ageing equipment; and whether there is a realistic prospect of new subsidy for biomass conversion or co-firing following e.g. the recent response to consultation on changes to the Renewables Obligation rules for those technologies.  Other generators may have to calculate how far the CM subsidies to coal may depress wholesale power prices, making the economics of CCGT more challenging and Contracts for Difference for low carbon plant more expensive per MWh.

New elements

Ofgem has now taken over the main responsibility for the complex rules that govern the CM.  Following the 2014 auction, a very large number of rule changes were suggested, and a significant number were made.  However, perhaps the two biggest changes in the 2015 process originated in DECC and European Commission policy decisions.

When the auctions take place later this year, the T-4 auction will be the second time that a CM auction has invited bids to provide reliable generating capacity four years ahead but the "Transitional Auction" will be the first specifically in support of Demand Side Response projects.  In fact, a number of DSR projects have been successful in both the T-4 auction and Transitional auction pre-qualifications.  These projects are a mixture of "behind the meter" generation and what is sometimes called "genuine" DSR in the form of load reduction.  Some are based around a single large industrial or commercial user, and others would aggregate the demand of multiple customers.  Both specialist aggregators such as Kiwi Power and "mainstream" electricity suppliers such as EDF and Smartest feature among the pre-qualified projects.  Given that the Transitional Auction is for first delivery in 2016/2017, it is interesting to note that a number of bidders have yet to specify exactly what their capacity market units will consist of.

The European Commission required the UK Government to include interconnectors in the CM, but accepted that this was not possible for the 2014 auction.  Following a consultation, a lot of work on how to approach the de-rating of interconnector capacity in the CM context, and some steps forward in Ofgem's broader policy-making on various interconnector projects, a number of interconnectors were eligible, or required, to engage in the pre-qualification process for the 2015 T-4 auction.  The two Irish interconnectors (Moyle and East-West) opted out, BritNed's application was rejected, and  among the proposed new interconnectors, only Nemo appears to have applied, and was rejected.  The IFA has pre-qualified, but by definition it will be four years until its performance in the CM can inform further policy debate or the strategies of other interconnectors.  The case that national capacity markets will be easily compatible with the workings of the EU internal electricity market is perhaps not fully made out yet.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
28 Sep 2017, Seminar, London, UK

On 26 July the FCA published its long-expected consultation paper on the extension of the SMCR to all FCA-authorised firms. The so-called "core regime" introduces the key concepts of regulator-approved senior managers, firm-approved certification staff and conduct rules applicable to virtually all staff.

3 Oct 2017, Conference, Zurich, Switzerland

As the founding Partner of the Europe-Iran Forum, Dentons Europe will once again support this year’s event. This compelling event which explores all Iran-related topics will take place in Zürich on 3rd and 4th October.

4 Oct 2017, Workshop, London, UK

We are hosting an interactive workshop where we will run a mock High Court trial of an employee competition case – where the members of the audience are the judges. The session, aimed at in-house counsel and HR professionals, will offer an insight as to how disputes involving employees moving to a competitor play out in practice.

 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.