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News On Capacity Market Auction

December 4, 2016

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.”


Coal plant

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.

  1. Joe Public permalink
    December 4, 2016 12:28 pm

    I suppose those bureaucrats who dish out the subsidies have to create some scheme to ensure their (non-productive) jobs are preserved.

  2. Dung permalink
    December 4, 2016 12:35 pm

    This policy is sheer lunacy. The probl;em is not the lack of enough subsidy, it is that the Climate Change Act forbids the use of fossil fuels in generating electricity IF there is renewable energy available. Under the Climate Change Act Gas Fired Power stations have to be shut down when renewable power is available. Combined Cycle Gas power stations only make money when they are run 24/7, they are not suited to being switched on and off. If they do not make money they will not be built.

    • David Richardson permalink
      December 4, 2016 1:12 pm

      Absolutely Dung – we are just a couple years behind Germany who have already found that prioritising wind and solar leads to companies closing gas and coal stations – can’t make a profit (and it is inefficient anyway). To get those companies to stay they are paying them a subsidy. Germany now subsidisies wind, solar, gas and coal – oh! and wood.

      Total madness – I think Pierre Gosselin over at the No tricks Zone had a piece about it sometime back.

      • December 4, 2016 1:47 pm

        Ironically, Germany is following the UK in setting up an auction-based supply contract system similar to our ‘Contracts for Difference’ in 2017.

  3. tom0mason permalink
    December 4, 2016 1:20 pm

    Yet again the cold dead hand of government interference with subsidies have just about destroyed a market. The electricity industry is the modern day British Leyland.
    Stop all subsidy now! Return to proper market practice and the prices will reduce, and all those wind subsidy farmers can sod off taking their useless piles of junk with them.
    And if the EU squawks just say article 50 and wave them good riddance.

    And to the high-minded nigh-sayer howling ‘the UK can’t do that because it would be going back on their word’, tell them national necessity insists the UK goes forward with self preservation.

    The options are limited and the clock is ticking.

    • December 4, 2016 1:43 pm

      The only minor problem is that most of our generating resource is now owned by foreign-owned energy conglomerates.

      • tom0mason permalink
        December 4, 2016 1:53 pm

        National necessity Trumps ’em.
        Play along or compulsory purchase to resell to those that wish to play along. If not I’m sure Trump could assist with a trade deal. 🙂

        There are dozens of ways to skin a cat! You just got to get use to the short period of excessive noise that’s made!

      • Gerry, England permalink
        December 4, 2016 6:59 pm

        I think you will find that those who own the conventional generation plant would be delighted to see a free energy market where they can run 24/7 and make profits which can be used to invest. As an investor I am not surprised nobody wants to build any plant, and not mentioned is the dreaded CCS that will be required in the future. I would suggest they wait until the government is totally desperate and then make a killing.

  4. tom0mason permalink
    December 4, 2016 1:26 pm

    Why not buy a pile of ‘carbon offsets’ from say Brazil and can all the renewables?

  5. December 4, 2016 2:02 pm

    It has long been recognised by the experts that large wind capacity entails a corresponding gas build. There is an old industry saying: “wind fuels gas” [unless you have large amounts of hydro].

    Back in 2009, PB Power (who did much of the preliminary grid assessment and access work for the wind build) wrote that:

    “10 GW of additional fast-response generation would be needed to connect 30 GW of wind capacity without affecting reliability of supply…

    “The cost-effective fast-response power plant is likely to be open cycle gas turbines (OCGTs). These have high carbon emissions but would need to operate for only a limited period each year.” (‘Powering the Future, 2050’, 2009)

    They wisely warned, obliquely referring to nuclear:

    “There is a risk that decisions and actions taken now to meet the EU 2020 renewables target will have undesired and adverse impacts on the UK’s ability to meet the 2050 carbon obligations. For example, the early and widespread adoption of wind power could severely undermine the viability of other low-carbon technologies, making it difficult to meet carbon targets and longer-term commitments.” (PB Power, ‘Powering the Future, 2050’).

    • tom0mason permalink
      December 5, 2016 8:10 am

      You outline well why the system is broken and requires radical action.
      Remove all subsidies and allow a proper market forces to ratchet the price down.

      The current status quo is a model of reverse Robin Hood action, and MUST be stopped.

  6. It doesn't add up... permalink
    December 4, 2016 2:25 pm

    I’ve been looking at some work presented over at Euan Mearns’ site on what power supply might look like in 2050 if we are to honour the Climate Change Act commitments. It’s still back of envelope stuff, but an order of magnitude more serious than anything produced by DECC (BEIS has yet to offer anything itself). On the basis of a renewables dominated slate they estimate:

    The renewables preferred scenario therefore consists of:

    280GW of wind power capacity (or 200GW if offshore). This would occupy at least 20,000km2, and perhaps closer to 70,000km2 based on wind farm densities in the North Sea. The majority of this would be offshore, and the majority of that in the North Sea.
    100GW of solar capacity. Hopefully, most of this could be accommodated on domestic and commercial roof space. If in fields, these would need to occupy about 2,000km2. (As with wind farms, most of the land can still be used for agricultural purposes).
    500 GWh of electricity storage, or the equivalent of about 50 Dinorwigs.
    500 GWH of thermal “electricity equivalent” storage, used as Demand Side response (demand shifting).
    A thermal fuel (gas, coal, diesel or biofuels) infrastructure with a capacity of 110GW, providing 12.8% of the electricity supply at a capacity factor of 9%. A large proportion of this is domestic / local scale fuel cells, providing combined heat and power.

    Imagine the capacity subisidy required for that.

    • Gerry, England permalink
      December 4, 2016 7:07 pm

      Interesting, and somewhere on the way to that we will pass the point of economic collapse that will render much of it no longer needed as nobody can afford the power generated. Industry will have all gone taking all the jobs with it. Even the service industry won’t be able to compete and will have left. You just have to wonder if before we get that far a couple of things might happen. Donald Trump might have successfully driven a stake through the heart of global warming while the dropping global temperatures start to cause problems. And that a lightbulb (anything but a dim CFL) might have lit in government somewhere that an economic disaster is in process.

  7. CheshireRed permalink
    December 4, 2016 2:28 pm

    The politicos are stuck until they embrace the most charged and humiliating reversal in recent memory, and repeal the Climate Change Act. Hands up who thinks they’ll do the decent thing? Me neither.

  8. December 4, 2016 3:42 pm

    “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.”

    These people don’t have a clue what they are talking about. There is much more to it than “security of supply”. There is grid stability and all those other ancillary services to be addressed. To maintain grid stability needs a lot of massive synchronous generators. The grid did not develop to be a successful and complex system that has worked well for over 50 years because of a “bottom up” policy of small plants – it was designed by power engineers in the CEGB who knew what they were doing.

    • AlecM permalink
      December 4, 2016 5:15 pm

      Precisely: the only way small plants can contribute to real energy security is to reduce demand on the rapidly depleting central generating plant.

      They have to be kept going until new nuclear is ready, otherwise we say goodbye to the Power Grid, and revert to a third world economy with many 10s of millions having to die early.

      This is why I demand those who make such decisions must accept that they will in time face charges of Corporate Manslaughter and end their lives in jail.

      They should also be banned from working in the power generating industry to ensure that they cannot be bribed with future job offers, as has been the case for huhne, Davey and all the junior DECC ministers.

  9. December 4, 2016 3:45 pm

    I should have added that there are no market signals anymore. There is no market full stop. All we have is interference, via subsidies and Government mandates and directives.

  10. Ex-expat Colin permalink
    December 4, 2016 3:47 pm

    Perusing Piers Corbyns site for betting odds on UK snow falls today and came across this:

    2. FACT. Even if CO2 had an effect the idea that Man’s 4% of total CO2 flux rules the other natural 96% flux in and out of sea/land making it follow man’s activity is a ridiculous conspiracy theory of nature.

    “It follows War should be declared on termites which emit 10x Man’s CO2 equivalent. Why has this not happened?”

    What termite would that be..anybody? I know they are pretty busy but…

  11. December 4, 2016 6:28 pm

    UK leaders are in a weak position over electricity generation. They know renewables are by nature unreliable, but as long as they get huge subsidies and grid priority then the ‘traditional’ generators are going to walk away when they’re asked to build new power stations, unless they are offered similar ‘inducements’ aka public money.

  12. Vanessa permalink
    December 4, 2016 9:37 pm

    And we have to import all the gas. At least with coal we could get it in this country.

    • It doesn't add up... permalink
      December 5, 2016 1:14 am

      We could develop our own gas…

  13. Peter MacFarlane permalink
    December 5, 2016 10:48 am

    So, to simplify: we subsidise wind etc because otherwise nobody would bother…which makes gas etc uneconomic, so nobody bothers; so we subsidise that, so that people do bother; so the wind people then demand a larger subsidy, so …

    What’s wrong with this picture?

    Can we not just do a New Zealand and abolish all subsidies?

  14. December 5, 2016 11:47 am

    The madness of closing perfectly good coal fired power stations based on ridiculous subsidies to prevent harmless carbon dioxide emissions reveals a number of deep and dangerous flaws in the long-term thinking of our leaders:
    Storage capacity such as the above mentioned 50 x Dinorwig are not available and may well not be in time;
    CCS is unproven and so-far economically unattractive; and,
    Investment in traditional power plant are now entirely subsidy dependent, so unlikely to happen due to their high capital costs.

    A Parsons Brinkof report, possibly that mentioned by Nlys above, also gave costs for the stand-by power that were mind-boggling, but I do not have a copy of that report.

    It seems that the only viable and proven stand-by power plant is open-cycle gas turbines. Below 10 MWe these cost about £ 600 k / MWe, at 100 MWe unit size this falls to about £ 400k / MWe. To get a capacity of 20 GWe from these will need a mix of sizes and thus a spend of say £ 10 b, all of which will be a subsidy as the plant will have such poor load-factors. To complement these, during windless cold winter days will require a massive increase in gas storage, again to be subsidised by tax-payers on the altar of carbon dioxide.

  15. Dave Ward permalink
    December 5, 2016 12:04 pm

    “And a further 24GW of coal and nuclear is expected to close between now and 2025”

    Do we actually HAVE 24GW still operating (or even potentially available)? Gridwatch shows about 8GW each for nuclear & coal – are there still another 8GW of coal plants sitting idle?

    “Instead, more small new gas engines could win contracts”

    Is that a misquote, or is he inferring gas powered piston engines, rather than OCGT? Many large diesel sets are capable of running on either (or both) diesel and natural gas. If nothing else, this would go a long way to avoiding the justifiable complaints about standby capacity being provided by “dirty diesel”… I see that several large cities are now saying they will ban all diesel transport by 2025

    • Stuart Brown permalink
      December 5, 2016 1:34 pm

      I happened to be browsing Dukes 5-10 (as one does to pass the time). There was 8.918GW of nuclear and 14.513GW of coal generation according to that, dated May. Total <23.5GW. Kilroot can burn oil or coal so that's yer other 0.5GW, I suppose.

      Since then Rugeley, Fiddler's Ferry and Eggborough have closed or part closed…

    • December 5, 2016 6:53 pm

      I believe it refers to gas reciprocating engines, Dave

      • Dave Ward permalink
        December 5, 2016 7:39 pm

        Or what I (clumsily) called “gas powered piston engines” 🙂

  16. Green Sand permalink
    December 5, 2016 12:32 pm

    What a chuffing mess!

    ‘Battery subsidies spark energy row’

    “Battery storage projects could this week win Government subsidy contracts to guarantee they can provide electricity in a crisis – despite the fact they that they run out of juice in as little as half an hour……”

    ‘Stakes are high in showdown for Britain’s future energy strategy’

    “It is high noon for Britain’s fledgling energy policy. Years of failed interventions, arbitrary green targets and damaging subsidies will come to a head in this week’s capacity auction, when we will either see investors commit to building desperately needed new power plants or simply walk away.

    The stakes could not be higher, for the Government and for those policymakers who believed they had designed a credible strategy to keep the lights on……..”

  17. December 6, 2016 3:16 pm

    Drax news : “the owner of Britain’s biggest power station, has unveiled a £340m deal for the leading challenger business energy supplier and plans to build up to 1.2 gigawatts (GW) of new gas plants in a strategic overhaul.” Telegraph
    Our useless media fail to explain Drax has only bought start of projects and will need to raise £2bn to finish them.
    “Drax said it would pay 18.5 million pounds to buy four open cycle gas turbine (OCGT) projects with a capacity of around 1.2 gigawatts from Watt Power, a unit of Noble Group Ltd (NOBG.SI). The plants, which are yet to be built, will bid to supply back-up electricity in 2020-21 in a government-led auction which starts on Tuesday.”

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