Utility Week

16 | 8TH - 14TH DECEMBER 2017 | UTILITY WEEK Policy & Regulation Market view R enewable energy plays a key role in the UK generation mix, accounting for nearly one-third of all electricity generation, according to trade association Renewable UK. To ensure electricity supply can meet demand even when the wind is not blowing or the sun shining, we also have the capacity market scheme. Aer what could be regarded as a failure to deliver meaningful levels of new generat- ing capacity, the capacity market has been changed in recent years, to give developers of new power plants more time to make their projects commercially viable. Part of the rationale behind the capacity market scheme is to incentivise the construc- tion of new generating plants that have the flexibility to cater for times of peak demand. Guaranteeing a fixed income in addition to any revenues new power plants may receive from generating electricity can make the dif- ference when investors consider whether it is financially viable to proceed. Companies secure capacity payments by bidding in the T-4 auction, which secures capacity available four years hence. To date, the majority of successful bids have come from existing power plants. Last year, pre-qualified participants representing 70GW of new and existing capacity began bidding at the starting price range of £75-70 per kilowatt. All the bidders proposing to build new combined cycle gas turbine (CCGT) projects dropped out by the time the auction had reached its final clearing price of £22.50/kW. Each year changes have been made to the scheme to encourage more new gener- ating plants and to discourage speculative bidding. Probably the most notable change came in 2016, when tougher penalties were introduced for bidders who secured capac- ity contracts but did not deliver the capacity, be they developers who did not build their proposed plants, or existing facilities whose operators ignored the grid's call on their power supply. In 2016, the most recent auction, these penalties helped secure 3.3GW of new gen- erating capacity that will be operational by 2020, up from 1.9GW in the 2015 auction. However, that 3.3GW is a fraction of the total 52.4GW of capacity that secured payments in 2016. While there was one open cycle gas tur- bine (OCGT) plant, several gas engine pro- jects, some battery storage and demand-side capacity, the vast majority of successful bid- ders were operators of existing facilities. As well as the advantage existing facilities have that they do not need to raise finances to fund construction, their operators also have time on their side when bidding against developers of new power plants. Developing a facility like a CCGT plant is a major undertaking, and many bidders are designing their schemes, awarding contracts and securing financing while trying to bid for the capacity market auctions. Perhaps this is why, following consultations with Ofgem, the preparation period of this year's T-4 auc- tion has been extended by two months. Pre-qualification began in July, but the auction will not take place until February 2018, instead of December as in previous years. This extra time is what is needed to avoid a further failure to secure meaningful new generating capacity. It will give bidders more time to refine commercial strategies, making them more likely to prosper in the auction process. In the months aer the last auction CCGT developers began refining their strategies to lower the capital costs. With the extra two months between pre-qualification and the auction – afforded by the changes – they may stand a fighting chance of being able to match a clearing price of £22.50/kW. In April 2018, Ofgem will introduce a three-year programme of removing and reducing benefits paid to electricity genera- tors of 100MW or less, the type of organisa- tions comprising the bulk of successful new-build bidders in previous capacity mar- ket auctions. Because these embedded generators connect to the distribution, rather than the transmission, network they avoid some charges and get paid to generate electricity at times of peak demand. These embedded benefits are estimated to equate to a subsidy of £47/kW per year. Under the changes, National Grid esti- mates the value of embedded benefits will fall to £3-£7/kW per year. This will make it harder for many embedded generators to be commercially viable at low clearing prices in future capacity market auctions. This should help level the playing field between embed- ded generators and developers of new large- scale generating power plants like CCGTs. Given the changes to the rules of the capacity market, the phased withdrawal of the embedded benefits and the extra time afforded to developers of new-build CCGT plants, it appears that in the coming year we could see a CCGT or two moving from concept into construction. Peter Hughes, director of business development, Black & Veatch Europe Encouraging new-build gas After decades of failure to prepare for the retirement of ageing coal, gas and nuclear power plants, the UK is in a hurry to secure electricity generation capacity, says Peter Hughes. Key points Renewables account for one-third of the UK generation mix. The capacity market has been devised to secure peak time baseload, taking ac- count of the proportion of renewables on the system. Part of the rationale behind the capacity market is to encourage the building of new baseload plant. Of the 52.4GW secured in the 2016 capa- city auction, only 3.3GW was new plant. Much of the new plant secured in capacity auctions to date has been distributed generation. The auction process has been extended to make it more accessible to CCGT developers. Ofgem is phasing out embedded benefits to remove the advantage enjoyed by distributed generation.

• Cover