Latest Capacity Market Auction Fails to Build New Plant Needed

By Paul Homewood

Latest Capacity Market Auction fails to deliver:

From Timera:

Prices in the latest T-4 capacity auction smashed UK records clearing at 30.6 £/kW (~€37/kW). This follows last year’s auction clearing price of 18 £/kW.

The latest auction is for delivery of capacity in 2025-26. By this point the UK coal fleet will be retired. The nuclear fleet is also closing more quickly than anticipated given safety issues with ageing plants. Sizewell B is the only nuclear plant with a T-4 capacity agreement in 2025-26.

By the second half of this decade the UK is set to lose 9GW of coal and nuclear capacity. In addition there is likely to be more than 7GW of ageing CCGTs that retire by around 2030. Renewable build is accelerating but on a derated capacity basis this is significantly outweighed by closures of coal, nuclear & gas plants.

The result? After a period of lower price outcomes, the UK capacity market is again providing a clear price signal for investment in flexible capacity.

In today’s article we look at the UK’s latest auction and what it reveals about how the capacity deficit is being addressed.

Batteries the clear winners

Almost 5GW of official ‘new-build’ capacity & almost 1GW of DSR was procured in the T-4 auction, split across interconnectors, gas peakers, storage, wind and waste. Only 1.9GW of that total represents genuine new-build with the interconnector capacity listed as ‘new’ due to a quirk in the capacity market rules.  In addition there was 0.8GW of Unproven Demand Side Response (DSR) capacity that received one year contracts.

A breakdown of the 2.7GW of genuinely new capacity is shown in Chart 1.

Source: Timera Energy, EMR Delivery Body

The clear winners in the latest auction are batteries with 3.3 GW of new capacity successful (around 1GW derated).  This volume represents around double the currently installed battery capacity in the UK. It is also more than 3 times the battery capacity successful in the last T-4 auction.

It is one thing to secure a capacity agreement but quite another to secure the cells and balance of system equipment required to build it.  Battery projects are currently strongly impacted by global supply chain issues.

There is a shortage of input materials for manufacturers (driving up costs) and major delivery delays to buyers. There is also intense demand for cells from a rapidly growing EV industry. So while large UK battery project pipelines are quoted on a regular basis, there are very real constraints around turning concept into reality.

The 3.3GW of successful battery capacity represents around 5GWh of storage volume.  Chart 2 shows the clear trend towards longer duration batteries, with 2 hour batteries now dominating new capacity.  There were even a couple of projects of greater than 2 hour duration (one of 4 hours). However the impact of supply chain issues on cell costs may slow the extension of duration over the next couple of years.

Chart 2: Successful battery capacity by duration

Source: Timera Energy, EMR Delivery Body

DSR was also successful as a category, dominated by a range of small-scale Enel X and Flexitricity (Quinbrook) projects. There is not clear published information on what this DSR capacity is comprised of, but behind the meter batteries play a role, effectively expanding the battery volumes set to come online (vs those summarised in Chart 2).

Distribution connected gas engines continue to receive 15-year capacity agreements.  There was also a successful OCGT project at Immingham. The limited duration of batteries leaves a key gap for provision of longer duration flexibility (e.g. from 2 hours to 2 weeks). As flexible coal & gas plants close, gas engines & OCGTs are stepping in to provide that longer duration flexibility to support the system through periods of low wind & solar output.

New CCGTs the clear losers

A range of new build CCGT projects have historically provided strong resistance to higher auction clearing prices. But despite the capacity price climbing over 30 £/kW, there was not a single successful CCGT project in the latest auction, despite over 5GW competing.

This reflects the growing decarbonisation risk for a large CCGT asset which has an economic life well into the 2040s. In the absence of a credible plan to decarbonise the emissions footprint of CCGTs, it appears they have effectively been removed as a competitive source of new capacity.  The future of new CCGT projects looks to depend on an economic CCUS solution via the industrial clusters receiving fast track support from the government.

In terms of existing capacity exiting the auction, SSE’s ageing 670MW Medway CCGT failed to clear, highlighting the possibility of additional CCGT retirement across the next 5 years.  Of the UK nuclear fleet, only Sizewell B pre-qualified despite EDF extending the life of Heysham 2 and Torness to 2028.  This raises the risk of a further significant reduction in nuclear capacity against base-line projections.

The Capacity Market is designed to secure standby capacity to cover the intermittency of wind and solar power.

In total, 42.4 GW of capacity has been secured, but most of this is existing capacity, such as gas and nuclear. As Timera point out, this older capacity is expected to shrink in the next few years, and must be replaced by new, dispatchable generation.

However, investors are understandable reluctant to spend money on gas power plants when politicians may regulate or tax them out of business in a few years time. There therefore must be a firm, legally binding commitment from government to investors, guaranteeing a long term future for gas power stations, for say twenty years.

Batteries have taken 1.1 GW of the auction, but these should never have been allowed to compete, as they are incapable of supplying capacity for more than an hour or two. As Timera point out:

 “The 3.3GW (1 GW derated) of successful battery capacity represents around 5GWh of storage volume”

The Capacity Market is intended to guarantee standby capacity for days and weeks, not hours. The same criticism applies to Demand Side Response (DSR).

This auction has gone through at £30.60/Kw, already a record. As more and more older capacity shuts, we could well see this cost rise to £70/Kw or more, judging by the bidding price spreads:

A price of £70/Kw would equate to about £3 billion a year, all of which is added to our electricity bills.

via Not a lot of people know that

MARCH 7, 2022