News On Capacity Market Auction
By Paul Homewood
The Telegraph reports on the Capacity Market auction due this week:
Four years ago this week, the Government unveiled plans for a bold new dash for gas.
New gas-fired power stations, then-energy secretary Ed Davey said, would be required to “provide crucial capacity to keep the lights on”.
A new Gas Generation Strategy backed “significant investment” in up to 26 gigawatts (GW) of new plants by 2030.
Since then, energy ministers have come and gone, support for solar and onshore wind has been scrapped and the drive for new nuclear has faced security and cost worries. But support for gas had been unwavering.
Relatively cheap and quick to build, much cleaner than coal, and able to generate even when the wind doesn’t blow or the sun doesn’t shine, gas plants tick all the Government’s boxes.
“In the next 10 years, it’s imperative that we get new gas-fired power stations built,” Amber Rudd, Davey’s successor, declared last year.
There’s just one problem: pretty much no one’s building them.
Only one new station, at Carrington in Manchester, has been completed since 2013 as investment has dried up.
This week, though, that could be about to change. A subsidy scheme designed to keep the lights on could, analysts believe, secure construction of several big new gas plants.
Few could dispute that the UK needs new power plants.
“An awful lot of capacity has either closed or is closing,” explains Richard Howard, of Policy Exchange. The think-tank calculates that some 23GW of conventional thermal power plant capacity has been closed or mothballed since 2010.
“That’s more than a third of peak demand,” says Howard. “And a further 24GW of coal and nuclear is expected to close between now and 2025. We need to build some new capacity – otherwise the lights will go out.”
Old coal power plants are closing down. The Government wants gas plants as a greener replacement Credit: Getty
The problem is, the UK electricity market has changed so much – due in large part to the growth of subsidised renewables – investors say they can no longer justify building new plants based solely on their likely returns from selling power in the market. “Essentially no new capacity is being built without some form of government-backed contract,” Howard says.
The Government has attempted to tackle this problem by introducing the “capacity market” subsidy scheme. It’s a simple idea: ministers decide how much reliable power plant capacity they need to keep the lights on in future winters; power plant owners or developers compete in a reverse auction for subsidies to provide that capacity at the lowest possible cost.
The first auction, held in December 2014, awarded £1bn of subsidies to plants to guarantee they would be available in winter 2018-19 – a cost of about £10 per household.
It also appeared to secure a big new gas plant, with developers signing up to build one at Trafford in Manchester.
Two years on, however, that plant is yet to start construction, with the subsidy price of £19.40 per kilowatt – equating to about £35m a year – so far insufficient to lure investors.
Last December’s auction, for winter 2019-20, resulted in an even lower price, and no big new gas plants.
Instead, the big winners both times were existing coal, gas and nuclear plants – as well as an unexpected boom in new small diesel and gas engines.
But as the Government prepares to open the auction for winter 2020-21 capacity on Tuesday, analysts say this time it could be different.
Over the past year, ministers have made a series of changes that should make the scheme more favourable to big gas plants.
First, they increased the amount of capacity to be procured, with the explicit aim of pushing up the price high enough to provide “appropriate incentives for the market to bring forward new gas capacity”.
Then, they brought forward detailed plans to phase out old coal plants by 2025, which Greg Clark, the new Business and Energy Secretary, said should give “a clear signal for investors, particularly in new gas-fired power stations”.
And they have also waged war on small generators, backing an Ofgem regulatory review that threatens to remove a separate income stream they enjoy, and unveiling new emissions standards that are likely to make it much harder for dirty diesel, in particular, to compete.
Dave Jones, of campaign group Sandbag, says this appears to have succeeded in “scaring off” diesel; dozens of proposed generators have dropped off the list of auction participants since October.
As a result, experts say, it is increasingly likely the Government will finally get the gas plants it wants.
Energy consultants Cornwall say 7.8GW of big new gas plants, known as CCGTs, are due to bid and estimate that 3.6GW of them could be successful. They forecast a subsidy price of between £25 and £30/kw – pushing up the cost of the scheme to about £1.4bn, or £16 per household.
Dominic Nash, analyst at Macquarie, suggests subsidies could come in at £34/kw and thinks about 5GW of CCGT could win; Ben Irons, of Aurora Energy Research, forecasts a price in the range of £23 to £27/kw, and says “there will probably be one or two” big new gas plants that succeed.
However, Gareth Miller, a director of Cornwall, adds that the outcome is finely balanced.
“It’s equally plausible that with very minor changes in assumptions we get virtually no new-build CCGT,” he says. Instead, more small new gas engines could win contracts. And if that does happen, he suggests, the Government should perhaps stop trying to “fight the market” and accept that small gas engines could simply be a better value way of keeping the lights on.
Miller says there appears to be “an obsession by government” with big centralised power plants. But if the market consistently signals that smaller, “distributed” plants are cheaper, “shouldn’t we be developing an energy policy strategy that lets the market deliver what it is signalling from the bottom up, rather than trying to shoehorn the market outcome towards a top-down policy objective?”
Howard, of Policy Exchange, agrees. “I don’t think the Government and industry should obsess about getting CCGTs built. As long as we have got security of supply, we shouldn’t really care what technology it is.”
Of course, even if we get 5GW of new capacity, this is still a drop in the ocean, given that we need 24GW by the mid 2020s.
And the fundamental issue remains – although the government is buying 52GW of capacity for 2020/21, the vast majority of this will still be existing generation, such as coal and nuclear. These of course can easily undercut new build.