Interconnectors beat new gas in record-breaking capacity auction

Interconnectors have elbowed out new gas in the latest four-year-ahead (T-4) capacity auction after it cleared at just £8.40/kW – a record low price for a T-4 auction.

Despite all but 2.6GW of coal generation exiting the auction, only 762MW of new build generation was successful. The majority consisted of gas-fired reciprocating engines, while no new gas turbines secured agreements.

By contrast, all of the interconnectors which entered the auction won contracts, including three new build projects – Nemo, Eleclink and IFA2 – with a combined capacity of almost 2.2GW.

Out of the 74.2GW of total capacity to enter the auction for delivery starting in 2021/22, 50.4GW secured agreements. The overwhelming majority (43.3GW) went to existing generation.

More than 7.6GW of coal generation dropped out, as did 11.2GW of new build combined-cycle gas turbines (CCGTs). Existing CCGTs were the biggest winners, securing agreements totalling 23GW.

The largest new build contracts went to two energy-from-waste plants – SSE’s Ferrybridge Multifuel Energy 2 (66MW) and Covanta’s Rookery South (57MW).

Around 2.7GW of reciprocating engines were awarded contracts. Undeterred by the recent introduction of new emissions limits for mid-sized generators, 444MW of known diesel engines secured agreements although 172MW dropped out.

Following reductions to the de-rating factor for most batteries, only 153MW secured agreements, with 949MW of storage exiting. Demand-side response was awarded 1.2GW but missed out on more than 1GW.

Winning capacity

Losing capacity

Source: National Grid

Tom Edwards, senior consultant at market intelligence firm Cornwall Insight, told Utility Week: “Even though large amounts of coal-fired capacity have not won a contract and the traditional thinking was that would all be replaced by new CCGTs or reciprocating engines, that’s not the case. It’s actually been replaced by interconnectors.”

As most interconnectors have a guaranteed minimum income under Ofgem’s cap and floor regime, Edwards said they “don’t really care what the price is in each given year”, hence the record low clearing price. They also benefit from an exemption from transmission charges and the fact that continental generators face a lower carbon price than UK generators.

With a number of other new interconnectors also in the pipeline, he said they are likely to continue depressing prices in in future auctions, preventing CCGTs from finding some long-awaited success.

The “big exodus” of capacity at around the £40/kW mark suggests this is the price that most new build CCGTs will need to go ahead, although some could bid lower if they face lower transmission charges due to their location.

“We didn’t think that was going to happen this year and probably won’t next year either because we’ve got to wait for a large exit of capacity,” added Edwards.

Aside from coal closures, he said the next major “pinch point” will come when old nuclear plants begin closing around the mid-2020s: “That’s when gas really should come into its own and be able to capture the market.” Even then, CCGTs will face strong competition from interconnectors and gas-fired reciprocating engines.

The only coal generation to secure agreements consisted of two units at Drax and three units at Ratcliffe. However, Edwards said this doesn’t mean that these will be the only coal units left operating for 2021/22.

“Pretty much all of the other coal plants have a contract for the year before, so they’re not going to close between now and then,” he explained. “I guess there’s no reason for them not to hang about and see if they can or can’t get a [year-ahead] T-1 contract.”

Capacity procured across all auctions to date

Source: National Grid

Further reaction

Martin Pibworth, wholesale director, SSE

“We are disappointed that our bid to build Keadby 2 has been unsuccessful. SSE believes new, highly efficient CCGTs, like Keadby 2, should be a part of the solution to keep the lights on as coal generation is phased out in line with the UK government’s commitment to close unabated coal stations by 2025.”

Jonathan Marshall, energy analyst, Energy and Climate Intelligence Unit

“At long last, coal seems to be finally slipping off the capacity market life support system. This year’s auction shows that there is clearly more than enough capacity on the grid, and that we can keep the lights on even without resorting to the oldest and most toxic form of power generation… Modelling has shown that we can move beyond coal before the 2025 deadline, and now facts on the ground are beginning to support these forecasts.”

“This takes us to four auctions without significant new large gas plants coming to fruition, which was once thought to be needed as a bridge towards a low-carbon power system. Utilities and lobbyists claim that these are needed for the future, yet legal carbon restrictions show they will face limited running hours into the 2020s and likely end up funnelling losses onto balance sheets – even if they could pick up capacity payments.

“Big gas plants are not needed to bridge the gap between coal and renewables, especially in the light of unprecedented falls in the cost of wind and solar power, which will lead to lower bills for homes and businesses going forwards.”

Lawrence Slade, chief executive, Energy UK

“This capacity market auction clearing low once again proves that competition is successful at providing security of supply at the lowest cost to consumers. This auction along with those preceding it have supported innovative, emerging technologies whilst ensuring we get the best value from existing assets. We will continue to work with government as the capacity market evolves, including the possible inclusion of renewables in future auctions, and in the forthcoming review of Electricity Market Reform.”

Tim Emrich, chief executive and co-founder, UK Power Reserve

“We are excited to reaffirm UK Power Reserve’s position as one of the world’s largest flexible generators by crossing the 1GW mark. This capacity market auction has cleared at the lowest price ever, and in doing so has delivered tremendous value and security of supply for the UK consumer. It is complementary to the government’s decarbonisation policies, thereby allowing independents like UK Power Reserve to deliver cleaner and cheaper energy.”

Michael Phelan, chief executive, Endeco Technologies (soon to be renamed Gridbeyond)

“The low clearing price of the auction suggests that the market is increasingly valuing flexibility, rather than capacity. The ability to swiftly adjust and accurately control consumption, rather than the blunt delivery of power onto the system with lots of advanced notice, is of greater significance.”

“The ratio of won to failed MW in DSR was around 50/50. When comparing that to the five percent awarded to new build generating [capacity market units], it’s fair to say that the days of high prices and the encouragement of new generation plants are behind us.”

Chaitanya Kumar, senior policy advisor for low-carbon energy, Green Alliance

“Today’s capacity market results indicate that coal’s exit from the UK’s energy system just moved a step closer as coal contracts fell by half compared to last year. Three electricity interconnectors with France and Belgium also won contracts, making UK’s sustained participation in the internal energy market all the more important.

“Unfortunately, the capacity market is still failing to support flexible technologies like battery storage in favour of large centralised fossil fuel generation. It’s time the government revisited the rules so the market can support the low carbon energy system we need for the future”