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.