Capacity auction attracts interest from more than 27GW of new projects

National Grid has published the pre-qualification registers for the upcoming capacity market auctions.

More than 27GW of new build projects have pre-qualified for the four-year-ahead (T-4) auction, according to analysis by Aurora Energy Research, including more than 4.6GW of batteries and 11.4GW of combined-cycle gas turbines (CCGTs).

A further 53.2GW of existing and refurbished capacity has also pre-qualified. It means the auction looks set to be massively oversubscribed, with as much as 80.7GW of capacity bidding for just 50.1GW of contracts.

The auction for delivery beginning in 2021/2022 is due to take place in February, several months later than previous rounds. Roughly 5GW of contracts have already been awarded for 2021/22 across the three T-4 auctions to take place so far.

The register for the year-ahead (T-1) auction for delivery in 2018/19 shows 14.1GW of capacity has pre-qualified, compared to a procurement target of 6GW. The successful bidders will join the 49.3GW of capacity which was secured in the first T-4 auction in 2014.

Pre-qualifified capacity by type for T-4 auction

Pre-qualifified capacity by type for T-1 auction

Source: Aurora Energy Research, National Grid figures

Note: All capacity is de-rated. Figures for batteries are based on de-rating factor of 96 per cent.

When the registers were published at the end of last week, the Department for Business, Energy and Industrial Strategy (BEIS) had yet to reveal its updated de-rating factors for batteries.

De-rating factors reflect the expected availability of different types of generation. Auction participants bid and receive payments on the basis of their de-rated capacity.

BEIS announced plans in July to lower the de-rating factor for most batteries due to concerns they were being overcompensated and may not be able to fulfil their obligations. The department said they would be divided according to their discharge duration into eight different classes, each with its own de-rating factor.

Up until now, batteries have all received a de-rating factor of around 96 per cent based on the historical availability of pumped hydro storage – a figure which Aurora has described as “phenomenally high”.

However, earlier today (4 December) BEIS revealed that batteries in the lowest class (30 minutes plus) will receive a de-rating factor of less than 18 per cent in the upcoming T-4 auction.

Batteries with a discharge duration of over an hour will receive de-rating factor of at least 36 per cent, whilst those with a discharge duration of over an hour and half will receive a de-rating factor of least 52 per cent. Only batteries in the highest class (four hours plus) will retain their original 96 per cent de-rating factor.

Updated de-rating factor for batteries

Source: BEIS

The reductions mean that some of the batteries which pre-qualified for the T-4 may drop out before it takes place.

Responding to the decision, Renewable Energy Association policy manager Frank Gordon said the changes are less drastic than first proposed but will still make it much harder for many battery projects to compete.

“One cannot forget that this is one of many recent changes that are undermining the growth of this sector,” he added. “Recent revisions to ‘embedded generation’ payments slashed the support that small-scale, distributed generation receives and there could be more pain for the sector in future grid payments reform.

“Considering the government research and development funding going towards batteries at the moment and the drive to encourage future battery manufacturing it seems strange to undermine the development of a battery storage market.

“The timing of these changes is our main criticism however. As they are being applied in the midst of an on-going auction process it akin to changing the rules of a football match at half-time.”

The reductions have also been criticised previously by Cornwall Insight senior consultant Tom Edwards, who told Utility Week the government has circumvented its own rules to make the changes.

However, they were welcomed by UK Power Reserve, which said in a statement: “We accept and understand the government’s decision to de-rate battery storage ahead of the capacity market auction in February next year. We agree with the conclusions from the Department for Business, Energy and Industrial Strategy that de-rating factors should reflect technology duration, and believe that this is in the best interests of the market and the consumer.

“This decision provides the incentive for developers to build the higher quality, longer duration batteries that can help secure the UK’s electricity supply when it is threatened during a stress event. It protects security of supply and delivers real value to the consumer – the founding principles of the capacity market.”

The firm has pre-qualified more than 1GW of new build capacity for the T-4 auction, including around 400MW of batteries and more than 600MW of gas-fired reciprocating engines.

It will be the first to take place since Ofgem confirmed plans to slash the triad avoidance payments available to distributed generators, which enabled gas and diesel-fired reciprocating engines to take home the lion’s share of new build contracts in previous rounds.

The changes were anticipated to provide upwards pressure on the clearing price, perhaps opening the door to more expensive to build but more fuel efficient CCGTs. Nevertheless, BEIS expects the auction to clear at just £15/kW, compared to £22.50/kW in the previous round.

The department expects the T-1 auction to also clear at £15/kW, up from £6.95/kW in last year’s auction.