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12 | 25TH NOVEMBER - 1ST DECEMBER 2016 | UTILITY WEEK Policy & Regulation Analysis T raditional thermal generation plants are closing in the UK at a rate not seen before. Coal-fired power stations have already come off the system or are set to no later than 2025, while gas plants are finding it difficult to operate economically, with a number sitting idly by in a state of mothball. New generation is coming online in the form of renewables, dominated by offshore wind and solar. However, these forms of gen- eration are not as reliable as conventional plants because of their variable nature and reliance on the weather. This leads to a gap that needs to be filled when the sun is not shining or the wind blowing. Responding to this, the government cre- ated the capacity market to secure essential capacity to fill the gaps, at least until afford- able large-scale energy storage becomes a reality and can fill the void. Some gas plants are set to come back online, and one of the drivers behind the capacity market was to encourage the devel- opment of new combined cycle gas turbines (CCGTs), so far with little success. And while the capacity market forms part of the gov- ernment's decarbonisation agenda, it has accidentally ended up subsidising diesel generators, which emit more carbon than the coal they are helping to replace. The return of 'dirty diesel' The capacity market has taken a lot of flak over the large numbers of diesel generators that won contracts in the first two four-year- ahead (T-4) auctions. Of the nearly 1GW of new capacity awarded 15-year contracts in last year's auction, 650MW was made up of small-scale distribution-connected diesel generation. Despite the capacity market being part of the government's wider agenda to decarbon- ise the power sector, these diesel generators typically have a greater carbon intensity than most coal plants: 1,010gCO2/kWh compared with the carbon intensity of unabated coal at 930gCO2/kWh, both of which are far higher than that of CCGTs (378gCO2/kWh). Some argue that because these diesel plants will only be running for a limited number of hours each year, their impact will be limited and their carbon intensity does not matter. Nevertheless, measures are being imple- mented to shut them out of the market. Ofgem has been consulting on changes to financial advantages enjoyed by distri- bution-connected generators – known as embedded benefits – and the Department for Environment, Food and Rural Affairs (Defra) is looking into new emissions limits for smaller generators. Environmental campaign group Sandbag says that despite this, the volume of small- scale diesel capacity that has qualified for the upcoming auction may have increased by as much as five times on last year. Around 0.3GW is known to have prequalified, but the campaign group believes the bulk of the 3.6GW of unidentified distributed generation that has also prequalified is likely to be made up of diesel. By comparison, 0.87GW of diesel gen- erators signed up for last year's auction and contracts worth £176 million were awarded to the three-quarters that were successful. If the same proportion cleared the auction this year at the same price, they could bag con- tracts worth as much as £800 million. That said, the proposed changes to embedded benefits will be weighing on the minds of potential investors and are likely to push up the price of their bids. Cornwall Energy senior consultant Thomas Edwards says there are "so many" alternatives being debated that there is unlikely to be "any sort of clear message" before the auction takes place. Even so, whenever changes are enacted they will probably affect all distributed generators with capacity contracts, no matter when they won them, because "Ofgem said it didn't like the idea of grandfathering". Whether this will limit the volume of small-scale diesel generation that wins contracts remains to be seen. The right price for new gas The capacity market may have been touted as a technology-neutral auction, but the government has made clear it is rooting for CCGTs to win. Only two CCGT plants have secured con- tracts so far – the Trafford and Carrington power stations. The clearing price in the first two auctions was simply not high enough to secure large volumes of new CCGT capacity, partly because it was undercut by the afore- mentioned distributed generation. Around 9.4GW of CCGT capacity has pre- qualified for this year's auction, up from around 5.2GW last year. But a greater volume of bids will do little to change things, unless the auction clears for a high enough price. Edwards thinks that is unlikely to happen. Cornwall Energy's calculations indicate that auction is likely to clear in the region of £20-30/kW compared with £19.4/kW and £18/kW in previous auctions. This would not be enough to secure new-build gas, which needs a price of more than £40/kW. Coal clinging on The government recently reaffirmed its com- mitment to phasing out all unabated coal generation by 2025. Poor market conditions have led to several plants closing this year – Ferrybridge, Longannet and Rugeley – but it remains unclear when the rest will fol- low. The prequalification register gives some hints. Eggborough was expected to close in March this year but was granted a last- minute reprieve aer securing a supplemen- tary balancing reserve (SBR) contract for the coming winter. It has also registered for the year-ahead early auction for delivery in 2017/18, so could be with us for another year yet. The plant has opted out of the four-year ahead auction, meaning it should be off the system by 2020/21 at the latest. In March, SSE backtracked on plans to close three of the four units at Fiddler's Ferry aer it was awarded black start contracts by National Grid. It says it expects the plant to stay open until at least March 2017, but it could remain open for longer than that having registered it for the T-4 auction. RWE announced in April it would reduce operations at Aberthaw B beginning in April Securing the right capacity Tom Grimwood looks at the prequalification register published by National Grid in September and assesses what impact the capacity market could have on the shape of UK generation.