Capacity Market Auction For 2019/20
By Paul Homewood
I reported on DECC’s announcement of proposed changes to how the Capacity Market operates the other day.
In short, they are clearly getting concerned about the number of closures of coal power stations already announced and the likelihood of more. The whole basis of the Capacity Market mechanism is to encourage the construction of new plant, mainly CCGT, to replace older plant and give standby capacity for intermittent renewables.
Unfortunately however, most of the successful bids for the first two auctions, to provide capacity for 2018/19 and 2019/20, have come from existing generators, for whom there is no cost involved. They consequently can afford to bid much lower than new build proposals.
Regardless of individual bids, all successful ones receive the same payment, at the price where all of the government’s requested capacity is met. In the latest auction, for instance, the National Grid bought 46.4 GW, at a price of £18/KW/Year, as shown below.
Figure 3 shows that existing generators/interconnectors accounted for 95% of the total awarded capacity.
As for new build, Carrington CCGT, which was already under construction anyway, provides 810 MW, with the other 1125 MW coming from what are known as small scale peakers, eg diesel gen sets and reciprocating engines.
Demand Side Response, DSR, accounts for another 456 MW. This is where large consumers are paid to switch off at times of high demand.
In the first auction in 2014, a further 900 MW and 200 MW of small scale peakers and DSR was contracted for 15 years, so that gives a total of 2.0 GW and 0.6 GW of peakers and DSR respectively available for 2019/20. While these are useful for short term balancing of the grid, they clearly are not going to make much of a dent in the 50 GW + that is required.
Apart from Carrington, the only other new build plant to bid successfully has been Trafford, in the 2014 auction, which ended at £19.40/KW. However, Trafford is still to make a Final Investment Decision as it is struggling to attract investors.
To attract new CCGT, DECC acknowledges that it needs to increase the amount of capacity bought, which will have the effect of pushing the price up high enough to make it an economic proposition.
Just how high this has to go is anybody’s guess, but according to Timera Energy, at least 3 GW of new build CCGT exited the auction, at a price of anything up to £70/KW. Given competition from absurdly subsidised renewables, carbon tax and the uncertainty as to whether they will even be allowed to operate after 2030, it would be an extremely brave, or foolish, investor who built a new gas fired power station without a very generous capacity payment.
Looking at the graph in Figure 1, it is easy to see how the auction price could climb to over £40/KW, more than double the current rate.
Reference
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NOT A LOT OF PEOPLE KNOW THAT 
This whole business is lousy with unimportant issues raised to prominence, such as “emissions phobia”, “technology neutrality” and “free and fair market competition”. If DECC decides (correctly) that we need some more CCGT then it should just go out and achieve it via a targeted competition.
I think we need some old-fashioned central planning, to achieve security via diversity, 30% coal, 30% gas, 30% nuclear, 10% others. To de-risk capital, giving a lower price, power stations could be built and paid for upfront, and generators allowed to charge for electricity at fuel cost + maintenance cost + profit. If one particular fuel gets expensive then those generators could be limited to periods of peak demand, but the operators would still make a small profit.
We have known for a long time that those deciding our energy policy were illiterate from an engineering and science point of view. A degree in English Lit. being deemed more appropriate. BUT it is also obvious that the simple ability to add up is missing as well.
Surely the sums here aren’t difficult. If you take the cost of a CCGT plant as £1bn/GW, but only offer peaking utilisation, the capacity charge must finance the capital cost over the projected lifetime. That’s going to work out at £60/kW or more if you can’t guarantee a full 40 year life because of decarbonisation.
The solution is to change the nature of the market to require all intermittent/unreliable generators to purchase their own backup capacity. This would have the effect of limiting grid penetration as ever higher levels of wind etc. would make backup more costly. Of course, such common sense will be in short supply at DECC and their consultants.
Paul,
Is there any data on how many of these companies will use or are going to install “emergency” generation facilities to keep operations going during these periods and have a nice little earner at the same time? It’ll be another hidden subsidy.
There’s no data that I know of, but you are dead right. That is exactly what they are likely to do
From my experience of companies taking part in the DSR schemes there is no need for back up generation.
The peak times are usually around the same period for a week day or week end.
The requirement is not to reduce usage to zero but below a specific target which would generally be high or peak usage for the company taking part.
The peak period is normally a half or one hour period per day for which the company taking part in the scheme needs to keep their usage below the set target. As long as production is organised that lows in production or periods of maintenance, shut downs of certain area’s of production are coordinated with this time period then huge savings are made with the cost of electricity that the company pays making the schemes very palatable to finance departments.
Generally the cost saving in the charge for electricity outweighs the loss of revenue for the period required even though production is never stopped.
Back in the 1970s, we had Maximum Demand Periods at British Steel. Normally 30 minutes long, any electricity used was charged at some ridiculously high price.
We were obviously given proper warning, but the whole works effectively shut down, even down to lighting. It was great fun to sit around in the gloom and not doing any work. Nowadays Elf & Safety would probably have a fit!
I agree that the only way to get new build CCGT is to guarantee the capital will be repaid – the competition would be between power companies as to who can build them most cost effectively.
However, I still think there is a flaw in DECC’s thinking that CCGT’s will be able to ramp up fast enough to counter the variability of wind and solar if the latter have any greater penetration than at present. Ramp rates for CCGT’s rely on the National Transmission System being able to deliver the gas to them fast enough. The NTS is already showing the strain of having to deal with increasingly variable gas flows in recent years and this will get worse if there’s more CCGT capacity just acting as back-up.
If renewable generators were required to buy their own back-up we would most likely end up with lots of small diesel generators rather than a few larger CCGT’s, which would likely cost more due to the loss of scale. .