Skip to content

Capacity Market Still Fails To Trigger New CCGT

March 4, 2018

By Paul Homewood

 

image

https://www.emrdeliverybody.com/cm/home.aspx

 

The government has recently announced the results of the latest Capacity Market Auction, for 2021/22.

It makes dismal reading for anyone hoping to see some new capacity coming on stream any time soon.

image

image

 

Once again, the bulk of the auction has been taken up by existing capacity. New build generation is only 767 MW, and this all appears to be small gas engine stuff.

There is no new CCGT. Indeed there has been none at all for any of the four auctions now completed. The only “new” plant has been Carrington, which was already under construction before the CM auction process began.

 

The Committee on Climate Change, in their Fifth Carbon Budget, recognised that 39 GW of existing capacity would be gone by 2030, a mixture of coal, gas and nuclear. This generation gap would need to be filled.

 

Given the lead times involved, we are now leaving it perilously late to get new capacity in place by the mid 2020s, when all coal plants are due to have closed.

 

There is a sub story to the existing generation business.

As Timera Energy relate, a large chunk of coal capacity has also exited:

 

 https://www.timera-energy.com/blog/

 

This is likely to mean that much of this coal, and indeed gas, capacity will shut sooner rather later, as they rely on capacity market payments to justify standing around idle for most of the year.

Timera have this analysis:

There have been genuine reductions in the costs of flexible capacity over the last 12 months.  These have been supported by falling costs of capital as investors target UK power infrastructure.  But capacity cost reductions had little to do with an auction clearing price of 8.40 £/kW.

The auction result was instead driven by lower than expected exit price levels for older coal & CCGT plants.  These are hard to reconcile with the gap between current unit margins and fixed costs.  But low bids suggest an unwillingness from owners to close older plants, whether for ‘strategic’ or other reasons.

A range of analysis has been published on why the T-4 auction cleared at 8 £/kW. In today’s article we focus instead on implications of the auction result.  We consider what it means for evolution of the capacity mix, market pricing dynamics and asset investment.

Capacity mix changes

Successful and unsuccessful capacity in the auction are summarised in Chart 1.

Chart 1: New and exited capacity from 2021-22 T-4 auction

Source: Timera Energy, National Grid

What’s in?

2.2GW of interconnector capacity was successful across three projects, Eleclink (UK-FR), NEMO (UK-BE) and IFA2 (UK-FR). 0.8GW of new generation capacity was dominated by distribution connected gas engines. 1.2GW of new DSR was also strongly influenced by engines and batteries behind the meter.

What’s out?

8.5GW older existing thermal capacity exited the auction. 7.7GW of coal units, 0.7GW of older CCGTs and 0.1GW of coal plant GTs and engines.

These exits will have some important near term implications for coal plant closures:

  • Eggborough (1.8GW) has announced closure this year after exiting the T-1 auction
  • Fiddlers Ferry (1.7GW) and Cottam (1.8GW) will likely close after the 2018-19 capacity year given these plants have no capacity support beyond.
  • Aberthaw (1.5GW) will likely close after 2020-21 given no agreement beyond.
  • West Burton (1.8GW) has no capacity agreement in 2019-20 but does have one in 2020-21. This plant is likely to remain open until early next decade hunting T-1 support, but in doing so may supress T-1 prices.

Beyond 2021-22 the UK coal fleet is likely to be reduced to the IED compliant Drax coal units (1.2GW) and Ratcliffe (1.8GW).  Based on current market conditions the UK may well achieve its targeted closure of all coal stations prior to 2025, on an economic basis alone.

Market pricing impact

The capacity mix changes from this year’s auction set up a major shift in the UK supply stack:

  • Removal of large grid connected coal assets from the middle of the stack
  • Replacement of this capacity with:
    • high variable cost engines/DSR (at the far right of stack)
    • interconnectors whose pricing/volume depends on conditions in foreign markets

The replacement of mid-merit with peaking plants, accelerates a trend established in the previous three auctions.  While it fulfils the government’s goals in a capacity accounting sense, it will have some important implications for wholesale market pricing dynamics.

Changing stack shape is set to support super peak prices.  The removal of coal units means prices will more often need to rise to bring on gas engines during periods of high net system demand.  This is likely to increase the peak/offpeak price ratio as well as supporting spot price volatility.

The competitive position of new interconnectors in the supply stack depends on price levels in foreign markets.  Under normal market conditions, the interconnectors will tend to import cheaper power from the Continent. But Winter 2016/17 has shown that flows can dry up or reverse during periods of UK system stress, if these coincide with stress in Continental power markets (e.g. FR, NL, BE).

 

Asset investment implications

Investors are keenly aware of a key policy question arising from the auction result.  Are the regulatory authorities and National Grid (as TSO) comfortable with the type of capacity being delivered by the market?

If the answer to that question is no, then watch out for potential policy changes that (i) support new CCGTs and/or (ii) reduce the competitiveness of engines/DSR. For example:

  • A rule change to limit cashout price chasing would present a major challenge to gas engines
  • Toughening of DSR performance standards would erode competitiveness of behind the meter flex.

Four capacity auctions have now passed and a large new CCGT project is yet to succeed. However behind the scenes new CCGT costs continue to fall, due to a combination of rising efficiency, falling turbine costs and reductions in cost of capital.  Despite this it will be difficult to build new CCGTs with capacity prices below 20 £/kW.  This means new CCGT projects remain queued to cap any capacity price rises above 25 £/kW.

More efficient and flexible existing CCGTs are set to benefit in the wholesale market from the supply stack transition.  The increasing influence of higher variable cost peaker/DSR capacity supports CCGT margin rents.  But an 8 £/kW capacity price is a tough price to absorb for these benefits.

A single digit clearing price has caught owners of existing CCGTs by surprise.  It brings brings future bidding strategy & closure decisions sharply into focus for older, less efficient and less flexible CCGTs.

These older CCGTs have fixed costs of 20-25 £/kW. On a risk adjusted margin basis it makes no sense to stay open with single digit capacity prices.  The dynamics around exiting CCGTs should provide significant price support around 15-20 £/kW in the next few auctions.

https://www.timera-energy.com/implications-of-uk-capacity-auction-results/ 

 

In short, this over reliance on small scale peakers and interconnectors will exacerbate peak pricing in periods of high demand, ultimately leading to higher prices for consumers.

Advertisements
36 Comments
  1. March 4, 2018 2:26 pm

    “We’re all doomed, doomed I tell you” springs to mind. Private Frazer was well ahead of his times.

    • Hivemind permalink
      March 4, 2018 10:42 pm

      “We’ll all be rooned,” said Hanrahan” – Australian bush poet John O’Brien

  2. Tony Budd permalink
    March 4, 2018 2:38 pm

    OK, I’ve worked out most of the acronyms: Combined Cycle Gas Turbines (CCGT), Demand Side Response (DSR), Open Cycle Gas Turbine (OCGT), Combined Heat & Power (CHP), but still have no idea what CMU is. And I assume Recip is short for reciprocal.

    • Joe Public permalink
      March 4, 2018 2:45 pm

      “Defining CMUs and Portfolios
      Summary

      This paper defines a Capacity Market Unit ….”

      https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/248885/Definition_of_CMUs_and_portfolios.pdf

    • Joe Public permalink
      March 4, 2018 2:46 pm

      Ooop hit post button too soon:

      “A CMU is a unit of electricity generation capacity or electricity demand reduction that can then be put forward in a future Capacity Market auction. In this respect it is the product that forms the capacity to be purchased in the capacity market. It is therefore CMUs that will be accredited (subject to the result of the capacity market auction) and therefore owners or contractual operators of procured CMUs will have obligations assigned to them and the right to receive capacity payments.
      There are two types of CMU:
      i) A Generating CMU – This can be existing or new plant or storage equipment capable of exporting electricity to the transmission system or distribution network via a single half-hourly meter capable of independent control. Participation in the pre- qualification stage of the Capacity Market auction will be mandatory for existing licensed electricity generators. However they may opt-out of the auction during pre- qualification. There will be six classes of Generating CMU: 1/ New build (plant not built at the time of the auction) 2/ Refurbishing (existing plant wishing to refurbish for emissions reduction purposes and access a longer-term agreement) 3/ existing operational opt in 4/ existing operational opt out (plant opting out but remaining fully operational for the delivery year 5/ existing non-operational opt out (plant opting out and which will not be operational in the relevant delivery year) and 6/ retiring plant. Baseload onsite generation may be eligible for a Generating CMU provided it is connected to the DNO network.
      ii) A Demand Side Response (DSR) CMU – DSR is the reduction of electricity demand below a pre-determined baseline (the normal level of electricity consumption in that period) by consumers through the curtailment or time-shifting of activity during the stress event. DSR CMU holders must be able to achieve this shifting of demand either as the owner or contractual operator of the relevant plant and machinery, or have a contractual relationship with the owner or operator. This will then convey a legal right for the DSR CMU holder to either turn down or turn off the relevant plant and machinery.”

      • Harry Passfield permalink
        March 5, 2018 9:59 am

        So, DSR is really Smrt Metering; and Recip is really STOR. No?
        To my mind, it looks like ‘investors’ are pushing the market for their benefit (do bears defecate in woods?) Ignoring the needs of the PBC – poor bloody consumer.

    • John F. Hultquist permalink
      March 4, 2018 8:30 pm

      At a site I use for such things, DSR has over 100 possibilities listed.
      Demand Side Response is not one of them.
      Devil’s Slide Rock is a suggestion. I’ve no idea.
      It is hard to keep up.

    • It doesn't add up... permalink
      March 5, 2018 11:30 pm

      Recip. is short of reciprocating engines, as opposed to turbines..

  3. TinyCO2 permalink
    March 4, 2018 4:01 pm

    If the country is committed to importing electricity, dragging its heals on fracking and doing away with local CO2 emissions, then those companies would be better building plants in countries with no such plans and then selling it to the British thorugh the interconnectors. Everyone but the bill payers and employees will be happy.

  4. jim permalink
    March 4, 2018 4:16 pm

    Reliance on interconnectors is economically risky and from a security of supply perspective, alarming. Given Macron’s green agenda, relying on France is not wise.
    Its a famine and feast agenda. Shortfalls will occur , prices will dramatically increase, CCGTs will have to be built, there will be a gap of years without adequate reserve, then there will be a glut. If the government believe that demand-side management and/or more wind/solar is going to fill the gap, they are deluding themselves.

    • Harry Passfield permalink
      March 5, 2018 10:05 am

      The analogy I use, especially in current weather, is this: I own a set of snow tyres for my car but I shall continue using the worn out Summer tyres, even in the snow, until I really need to fit the Winter ones – which I shall switch back asap. And all at great cost as I have to store and maintain the Winter tyres.

  5. A C Osborn permalink
    March 4, 2018 4:25 pm

    Sticking Plasters.

  6. Bitter@twisted permalink
    March 4, 2018 6:08 pm

    Capacity Market?
    More like a game of Russian roulette.

  7. Jack Broughton permalink
    March 4, 2018 6:12 pm

    What is most worrying about the imminent demise of coal is that there is no other real storage of energy available to the power system. Gas stores are no longer economic and being allowed to deteriorate, wind and sun are not certain, we have little hydro power; so what happens if there is serious competition for power and gas in the market place during a cold snap, or when there is a gas supply crisis? Prepare for rolling power cuts and buy a small gen-set if you can afford it, (as in the developing world).

    Short-termism is not a good approach to national security and wellbeing. The Germans have built coal fired power stations and will thus have security, and low energy generation prices if carbon taxes are removed from the equation. The French still have nuclear in abundance. “Doomed” seems to be right I’m afraid.

    Maybe the best and cheapest answer, apart from saving the coal fired stations, is to convert CCGTs to dual fuel and store fuel oil as a security guarantee. Also, OCGTs can be very efficient and economic using the best aero-derivative units. However oil is 88% carbon!

  8. Green Sand permalink
    March 4, 2018 6:39 pm

    Why is this article not authored by Jillian Ambrose?

    ‘UK weather: Big freeze death toll could rise above 2,000 as it emerges Met Office warned ministers a month ago ‘

    “The death toll from Britain’s big freeze could rise to more than 2,000, as it emerged the Met Office had warned ministers a month ago about the cold snap.

    The number of people who have died in cold homes in the UK might reach 100 per day this winter, a charity warned in an analysis of Office for National Statistics figures…..”

    https://www.telegraph.co.uk/news/2018/03/04/uk-weather-big-freeze-death-toll-could-rise-2000-emerges-met/

    Ho hum, when you are saving the planet what does the lives of a fe3wv plebs matter?

    • March 4, 2018 7:58 pm

      But the Met Office was also forecasting a warmer than average February to April. Did they suddenly revise their forecast? Possibly they did after seeing what Piers Corbyn was forecasting. Who in their right mind would believe a Met Office forecast beyond a few days?

    • March 4, 2018 8:14 pm

      In fact the quote in the Telegraph is:

      “On Sunday, the Met Office’s chief long-range forecaster revealed that he had warned ministers a month ago about incoming cold weather.

      Adam Scaife told The Sunday Times how he had stocked up his own home with logs and food after briefing the Cabinet Office on warnings about the big freeze.

      The Met Office said Mr Scaife was referring to a three-month outlook and that the extent of the cold weather only became clear around 10 days before it hit.”

      Adam Scaife is a liar because it is the three-month outlook of Scaife at the end of January that said “For February-March-April above-average temperatures are more likely than below-average temperatures” and that there was “an increased likelihood of milder-than-usual conditions, at least in the first half of the 3-month period” and that “forecasting systems show little likelihood of a sudden stratospheric warming (SSW) in February”.

      As Paul knows, I have complained to my MP about Scaife and his cover-up of his incompetence with lies.

      • Mack permalink
        March 5, 2018 12:29 am

        Phillip, I would be interested to know if Mr Scaife would ever have the courage to sue you for libel for calling him a liar. On this side of the pond it seems our alarmist climastrologists are less keen than their brethren across the Atlantic in initiating court action against contrarians. Having said that, when push comes to shove, the ‘Mann’ made warming crowd in the old colonies, who have sued their detractors thus far, have seemed strangely reluctant to actually test their evidence in open court, merely hoping that the expensive court process would strangle their opponents before their views would ever be fully tested. Can’t imagine why? In a similar vein, I was delighted to hear of Tim Ball’s recent victory in the Canadian courts for his honesty in calling out a vociferous doomsayer, but it ‘s the Steyn v Mann case that could really be a game changer in the whole debate. Sadly, with the lethargy of the local court circuit where that case seems to be moribund, we will probably all be dead before that matter is resolved. In the meantime, keep up the good work! Your contributions to this site and others are always illuminating and entertaining.

  9. March 4, 2018 7:17 pm

    RWE is still planning a massive CCGT plant at Tilbury if they get the permissions. Details here…

    http://www.rwe.com/web/cms/en/3797656/rwe-generation-se/fuels/location-overview/uk/tilbury-energy-centre/

    • Stuart Brown permalink
      March 4, 2018 8:05 pm

      OB – from your link

      “The current UK total electricity demand is around 1.1TW”

      err… we just about managed 50GW on a cold day

      yep – even press folks working for power companies don’t need to understand power/energy

  10. Philip of Taos permalink
    March 4, 2018 7:27 pm

    How long has the UK been suicidal? At some point your voters will have to throw the Idiots (politicians) out. Here s hoping the survival instinct kicks in soon.

    • Harry Passfield permalink
      March 5, 2018 10:12 am

      The trouble is the politicians are on a magic roundabout so as soon as we kick them out, especially the ones with energy in their portfolio they end up working for the power companies. Huhne, Davey, Barker come to mind immediately.

      • Gerry, England permalink
        March 5, 2018 1:53 pm

        And the people simply elect another bunch of idiots in their place rather than abstain and request new candidates.

      • Harry Passfield permalink
        March 5, 2018 2:05 pm

        “Request new candidates” – would that we could, Gerry. But we don’t run Primaries so you can only cast a vote for the candidates imposed on you – or spoil your paper, which is my last resort, as they get counted.

  11. John F. Hultquist permalink
    March 4, 2018 8:43 pm

    forecasting systems show little likelihood of a sudden stratospheric warming

    I’ve not come across an article (not that I’ve looked) that explains forecasting SSW.
    They happen, and then folks try to say what will happen next in the Troposphere, the surface weather.
    Many years ago the consequences were referred to as “Arctic outbreaks”, or some such thing. Now the weather is given personal names without a great deal more understanding.
    Oh well.

  12. Athelstan permalink
    March 4, 2018 10:36 pm

    Shut the coal fired plant, shut down Britain – in simple terms.

    Oblivion beckons.

    Someone whom George Monbiot describes thus, Claire Perry, “”a firebrand who wanted to nationalise the banks and overthrow capitalism” Brasenose? Brass for brains more like.

    Economic calamity, it is in the stars, the ‘death rock’ will hit us square in the face soon and the BEIS, Claire Perry (Minister of state for dept of Business, Energy and Industrial Stategy) horror struck will say “we never saw it coming”!

    And in return we’ll say, since the late 70’s HMG commenced to back off from nuclear and tories in their thoughtful wisdom gently at first running down and not renewing coal fired generation, plus remember the the the dash for gas? Yessiree, for 40 odd years ago: we’ve seen it coming

    Claire Perry – Mrs clueless the Maybot and not forgetting the Maoists on the opposite benches, you’re extracting the urine.

    • Harry Passfield permalink
      March 5, 2018 10:15 am

      I have written to Claire Perry to ask her opinion of Paul’s piece on wind costs. My MP, the AG, has requested she supply him with the answer. Still waiting.

  13. Geoff Sherrington permalink
    March 5, 2018 4:45 am

    As an occasional commenter from Australia, I have to say that my pride in fair use of the English language is in crisis because it is bloody difficult to work out what this report is trying to communicate. What, for example, is ‘batteries behind the meter’ and ‘no capacity support beyond’ and ‘The increasing influence of higher variable cost peaker/DSR capacity supports CCGT margin rents’?

    Sure, I can work it all out slowly, but why? Do the writers intend to disguise simple expression as part of hiding from the public some decisions that would cause adverse reactions from that public? The Australian position is getting this way, where, as the Rosicrucians used to say ‘Unforeseen powers direct our lives’ but you dear friends in Brit are definitely being screwed around by the green blob in ways that will prove very expensive for the next few generations – even if they can manage to evolve as traditional Brits and not crossbreds by imposition.
    Sad. Geoff.

    • March 5, 2018 6:31 am

      The electricity generation rules and regulations in the UK are now so complex that I suspect there are very few people who totally understand them. As understand it ‘batteries behind the meter’ refers to battery storage built alongside a solar or wind farm so that electricity is stored at times of peak supply and low demand and then released at times of low supply and high demand. Thus the export meter measures the exported electricity of the combined effect of the wind/solar farm and the batteries, rather than each system having its own meter, which would be an import/export meter for the batteries. As for the other expressions, well life is too short to understand them all.

      I am sure that you are correct in that the system rules and regulations have been deliberately set up by the bureaucrats so that no member of the public (or of course in the Government) is aware of what is going on. This is aided and abetted by the media, which tends to be even more clueless than ‘the man on the Clapham omnibus’.

  14. Bloke down the pub permalink
    March 5, 2018 10:18 am

    The benefit of coal fired generation that seems to get lost in discussions of price, is that coal is readily storeable. Peaks in demand that we’ve witnessed over the last week will be much harder to cope with once all the coal plants have shut.

    • March 5, 2018 10:33 am

      Gas is also storeable, but the UK’s largest gas storage facility (Rough) was closed last year. If it existed at the time of abundant North Sea gas why was it deemed unnecessary now?

  15. Ian Wilson permalink
    March 5, 2018 1:36 pm

    Coal has been providing around 20% of our generating capacity today (wind under 5%, solar don’t ask). Over the last week coal has reached 27%, at times the highest contributor to the grid. It does make one wonder what will happen when coal is no more.

  16. It doesn't add up... permalink
    March 6, 2018 2:27 am

    153. One source of risk of course is what has become known as ‘’black swans” – events (sometimes, the convergence of multiple events) which could hardly be conceived before they happened – in which case, assigning them probabilities is a somewhat false exercise. For example, the GB system could obviously be at severe risk of blackouts if there were a sustained interruption to gas supplies, but GB has a relatively diverse mix of gas supplies and strong infrastructure, and BEIS indicated that this is not considered a source of concern. It is hard to conceive how this could happen and therefore somewhat arbitrary to assign probabilities, other than “very low”.

    https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/625885/PTE_Report_2017.pdf

    PANEL OF TECHNICAL EXPERTS
    Final Report on National Grid’s Electricity Capacity Report

    Experts???

  17. Coeur de Lion permalink
    March 6, 2018 2:16 pm

    Noted that during the recent cold snap UK demand was near max at 41GW and wind usually 10% but sometimes 22% while coal banged away at max output at a quarter of our demand on a continuous basis.

Comments are closed.

%d bloggers like this: