Capacity market auction: reaction

The latest capacity market auction has failed to clear at a high enough price to secure significant volumes of the new high-efficiency gas generation which the government wants built. Here is how the industry reacted:

To read the full news story on the latest capacity market auction round, click here.

Energy and Climate Intelligence Unit energy analyst Jonathan Marshall 

“The capacity auction clearing at £22.50 per kilowatt indicates that the market believes there is more than enough capacity in the system to keep the lights on, even on the coldest winter’s day. That’s why the price has settled too low to incentivise building of more than one new medium-sized CCGT gas plant, in contrast to ministers’ apparent wishes to have a whole batch coming through en route to their goal of 26GW new-build by 2030.

“In fact, the perversity of running a technology-neutral capacity market is shown by the fact it has not incentivised a slew of new large gas plants, while it is rewarding old coal plants for staying open until at least 2020. All of this indicates that if ministers really want to incentivise new gas build, they may need something different from the capacity market in its current form.

“Only considering peak load capacity, the current system is often skewed to less efficient technologies that are good for short runs over the winter, but not a sensible long-term plan for the electricity network. Making small changes in the system, mirroring policies in both the US and across Europe to prioritise low-carbon flexibility tools such as demand-side response and storage could not only keep bills down, but would increase the ease of the ongoing transition to a low-carbon system with renewables at the core.”

ADE director Tim Rotheray

“We are very pleased that energy solutions which support the user and the customer, whether that is industrial manufacturers, local businesses or householders, won more than 8% of the contracts in this year’s capacity market. Demand response capacity has tripled, showing the growing importance of smart energy solutions.

“But the scale of the opportunity is much larger, with gigawatts of both demand response and highly efficient combined heat and power not yet participating.

“As coal continues to come under pressure to close in response to our climate change ambitions, it will be more important than ever that it is replaced by lower-carbon, user-led solutions like combined heat and power and demand side response.

“By increasing their participation, we can secure lower costs for consumers and ensure it is businesses and local energy users that benefit from capacity market funding, contributing to industry and wider businesses competitiveness. Government should allow all participants to access the same lengths of contract and should simplify the rules to better allow industrial manufacturers and other business to more easily participate.”

Sandbag analyst Dave Jones

“The auction has delivered good results this year, moving slightly away from coal towards battery and gas peaking plant. Small gas peaking gas is arguably more useful than baseload CCGT as we transition to more wind and solar: it provides cheaper capacity (proved by it undercutting CCGT), more locally, and provides reliable peaking power without the risk of running gas baseload, which would undermine our future climate targets.

“We ask the government to lay out how they see gas emissions going forward, as we build more gas plant. The government acted to avert a huge influx of diesel, which is great; these proposals are, however, work-in-progress, and still need to be implemented.

“Further changes need to be made to the capacity auction. First, to ensure coal phases out by 2025 without a large cliff-edge – they received £128 million from this auction alone, so would be in no hurry to close. Second, to further encourage battery technology, which will be increasingly important in the transition as the technology develops.”

Flexitricity founder and chief strategy office Alastair Martin

“After Combined Heat and Power (CHP), the next best way to burn gas is in a large Combined Cycle Gas Turbine power station. But after three years, the capacity market has still failed to deliver a single new-build CCGT.

“Trafford CCGT, which famously took a contract in the last round, looks certain to pull out of the deal. Carrington, the only new-build CCGT to be commissioned recently, was already committed. Centrica has managed to fund a partial rebuild of its King’s Lynn A power station. But that’s all. So unless the government changes its policy, and tells us that car-park generators are what it really wants, then the capacity market is going to change – again.

“Nevertheless, Flexitricity is in this for the long haul. We’ve patiently built up a portfolio of real, genuinely flexible customers, which is why we’re the only company to have proven demand response capacity in the main auctions. Whatever the government does, it’s important for everyone to deliver on the commitments they make to customers if Britain’s electricity supply is to remain secure.”

UK Power Reserve chief executive Tim Emrich

“UK Power Reserve continues to capture UK market share via the capacity mechanism. It is a compelling growth story. This diversification is an important, strategic move into a technology that will become a critical part of the UK energy mix in the coming decade.

“Since our 2010 inception, we have worked hard to disrupt the status quo and provide superior value and service to UK consumers. We are poised to maintain our market-leading, first-mover advantage in innovative, flexible, and economic distribution generation.”

EnAppSys senior analyst Rob Lalor

“The surprise this year has been in just how much battery and reciprocating peaker capacity has been built, with this driven by potential changes to the weighting given to batteries in future years and the continued viability of small peakers despite potential reductions in triad values.

“At £22.50/kW the market continues to see value in these smaller generation projects and this creates challenges for large new build CCGT plants whose value is weighted more towards trading revenues. Some developers have, however, managed to get round this by developing on existing sites, and presumably achieving significant cost savings.

“This auction style where numerous projects are brought to market only to fail to progress as a result of a single auction will always drive the lowest possible prices whilst developers are still willing to participate in volume.”

EnAppSys director Paul Verrill

“In the very first year of the capacity mechanism it was hard to gauge where the outturn price would fall, but what has been consistent in the auctions run so far is that existing plants were all able to bid aggressively into these auctions.

“For these plants, earnings in recent years have been tight, but the boost provided by the capacity mechanism has ensured they can continue to operate and remain available to the overall market in a reliable and efficient manner.

“While the market has delivered the capacity that it has deemed to be most viable, the government is likely to be disappointed, as it has not delivered the outcome expected. Perhaps it may now take a step back and become more circumspect, judging that its objectives of securing capacity are being achieved with a healthy diversity of solutions and with a range of parties willing to provide them coming forward.”

Citi utilities analyst Jenny Ping

“Given the UK government changed a number of rules to the capacity auction, with the hope to secure additional new build generation today’s result comes as a disappointment. In our view, further rule changes are likely to promote new build or the government could consider alternatives to secure new build.”