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.
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