‘Sheer bloody mindedness’ to completely exorcise gas generation

Completely exorcising gas generation from the energy system as part of the drive for net zero emissions would be an act of “sheer bloody mindedness,” an industry analyst has argued.

Tom Smout, a senior associate at Aurora Energy Research, was discussing the results of recent Capacity Market auctions, the latest of which cleared at a record high price of £63 per kilowatt per year.

“One of the things that’s really noteworthy is there was actually not that much flexible gas that went into that auction – there’s not very many open-cycle gas turbines, not very much recip capacity,” said Smout.

“Those are the technologies that actually would be able to push the Capacity Market price down when there’s a real need for firm capacity.”

In the first four-year-ahead (T-4) Capacity Market auctions, the lion’s share of new build contracts went to gas and diesel reciprocating engines. However, following a major backlash, the rules were changed to keep out the latter.

Gas engines have continued to secure agreements, including 0.5GW of de-rated capacity in the latest T-4 auction in February but have been overtaken by batteries as one of the main winners of new build contracts. In the February auction, batteries accounted for 1.2GW of de-rated capacity, although the extremely low de-rating factors for short-duration batteries meant this actually equated to around 5GW of nameplate capacity.

In April last year, Renewable UK put the total pipeline of battery storage 32.1GW, including 1.6GW of operational storage, 1.5GW under construction and 10.4GW with consent. The trade body said the pipeline had double when compared to the previous year’s figure of 16.1GW.

Smout said he does not believe battery storage will continue growing at the same rate seen in recent years: “The size of the battery market is not unlimited. We’re already approaching saturation at least in the short term.

“I don’t want to sound like I hate batteries but I want to give the right view that the level of growth that we’ve seen in capacities coming through the Capacity Market is not going be the norm.”

Smout stressed there is definitely an important role for longer-duration storage technologies such as green hydrogen production and generation in soaking up excess renewable generation, providing firm generation and providing key ancillary services.

But he said the future energy system will require “much more” firm capacity than is needed for “anything else that firm capacity can do.” There is an “inescapable need… to buy a lot of plants that don’t do very much.”

He said fulfilling this need with energy storage will be too expensive: “I know people don’t like gas, but that is the cheapest way to buy firm capacity. If you’re going build a plant that’s going run for a few hundred hours a year, build a gas plant, because running it for a few hundred hours a year, it just doesn’t create that many emissions. And it’s very cheap.”

Smout highlighted that the Climate Change Committee’s own net zero trajectory involves a reasonable amount of offsetting or removals: “It brings the power sector to net zero, but it’s net zero, it’s not absolute zero.

“The reason that we talk about doing net zero is because the only reason to remove all of the carbon emissions from the energy sector is if you place a cost on carbon, which is so high that you’re dogmatically opposed to it. It’s become detached from any value comparison.”

Aurora has previously estimated that the cost to consumers of the new-build contracts awarded in the February auction will total £5.7 billion over their 15-year terms, and Smout noted that the issue of costs is obviously one that is high up the political agenda at the moment.

“We’ve always said that there’s a place for gas because once you get down to that last 6 to 8 gigawatts of flexible gas, the only reason to remove it by any metric is just sheer bloody mindedness,” he remarked.

Smout said the reason gas reciprocating engines have been less successful in recent auctions is not because they have just been outcompeted on price: “What’s actually holding back firm flexible capacity is things like being completely unable to get planning permission because local councils just won’t ever give planning permission to a gas project or investors being really uncomfortable investing in them because of the level of policy uncertainty.

“It’s not the case that batteries are coming into the market and eating up the lunch of a bunch of flexible like gas projects or whatever kind of firm capacity isn’t building. What’s actually happening is that stuff is just not going into the Capacity Market.”

He said the last T-4 auction did secure a 1.7GW combined-cycle gas turbine project but that in a “straight competition” to provide firm capacity at the lowest cost, open-cycle gas turbines and gas reciprocating engines would easily win: “What you actually saw happen in the auction was not very many of those technologies entered because of the difficulty of getting those projects through. Investors don’t want to be seen investing in them. Councillors don’t want to be seeing giving their permission.”

Smout said the issue of delivering firm capacity is not being helped by the lack of clarity from government, which has been considering measures such as a revenue cap and floor mechanism for long-duration energy storage and a ban on unabated gas in the Capacity Market. He says the government has revealed a lot about what it’s “thinking” but less about what it’s actually “doing”.

“And that comes through in the market,” he added. “It’s laudable to have a lot of transparency and spend a lot of time thinking.

“The flip side is if you’re not making decisions and then you’re saying things like ‘We might take unabated gas out of the capacity market maybe’ – but you’re not actually doing it, then people who do have those projects have to attach a huge risk premium to them.”

“The point of an energy market is to turn a security problem into a price problem,” he concluded. “You price the provision of security of supply and then people can come into the market and provide it. And what we have right now is we’re approaching a failure of that market because people can’t enter.”