Utility Week

14 | 16TH - 22ND FEBRUARY 2018 | UTILITY WEEK Policy & Regulation Analysis F our years in and the capacity market has still only secured one new combined-cycle gas turbine (CCGT). Every auction so far has seen them undercut by rival technologies. First it was gas and diesel-fired reciprocating engines (recips). Then batteries and demand-side response (DSR) piled in. Now it is interconnectors. The latest four-year-ahead (T-4) auc- tion saw 7.6GW of coal generation drop out. According to the provisional results, all but 2.6GW of coal capacity exited the auction, with the only exceptions being two units at Drax and three at Uniper's Ratcliffe. "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 reciprocat- ing engines, that's not the case," says Tom Edwards, senior consultant at market intel- ligence firm Cornwall Insight. "It's actually been replaced by interconnectors." All interconnectors successful All of the interconnectors to enter the auc- tion won contracts. They included three new- build projects – Eleclink, Nemo Link and IFA2 – with a combined capacity of 2.2GW. By comparison, just 762MW of new-build generation was successful. Nemo entered the previous T-4 auction but failed to win a contract, despite the much higher clearing price of £22.50/kW. Eleclink dropped out shortly beforehand, while IFA2 is a completely new entrant. Edwards says Eleclink and Nemo probably decided to stick it out in the latest auction because they "both have certainty that they are going to be built". According to Stephanie Zhang, project manager at Aurora Energy Research, the committed participa- tion of these inter- connectors helps to explain the record- low clearing price for a T-4 auction of only £8.40/kW. She says interconnectors are price takers not only under the rules of the auction – meaning they cannot drop out at above £25/kW – but also in terms of their economics. Both Nemo and IFA2 will have a guar- anteed minimum income under the Ofgem cap and floor regime, meaning they are not reliant on the capacity market to be viable. "They are not like normal new-build," says Zhang. "They will be bidding in at a few pounds per kilowatt and that basically crowds out other new-build generation." There are numerous additional projects in the pipeline, meaning interconnectors will likely continue to drive down prices in future auctions. Following their previous success, recips and batteries took multiple hits to their busi- ness models, partly in the name of levelling the playing field with other technologies. The triad avoidance payments available to distributed gen- erators were slashed, new emissions limits were introduced for mid-sized generators, and the de-rating fac- tors for shorter range batteries were reduced. There will now be questions as to whether interconnectors will and should see similar changes, and not without reason. As well as being subsidised through the cap and floor regime, they have exemptions from trans- mission and balancing charges and do not face the same carbon price as domestic gen- eration. Aurora has estimated these exemp- tions to be worth around £10/MWh. Importing coal power Zhang says the presence of interconnectors means Great Britain is "basically importing power generated by coal plants in Europe and that means, at an EU level, emissions are actually going up". Arguing for the removal of the UK-only top-up to the European carbon price, the carbon price support, Tom Glover, chief com- mercial officer for RWE Supply and Trading, previously said: "I optimise power stations across Europe and I know that when I turn down my gas station in the UK, we turn on a coal station in Europe because of the carbon tax. If that is sensible carbon reduction, then it doesn't make any sense to me." Dieter Helm's cost of energy review Interconnectors beat new gas Every capacity market auction so far has seen new combined-cycle gas turbines undercut by rival technologies. In the T-4 auction, it was interconnectors that stepped in, reveals Tom Grimwood. T-4 AUCTION PROGRESSION SOURCE: NATIONAL GRID Dieter Helm's cost of energy review argued that the carbon price support should be applied to imports Round 1 Round 2 Round 3 Round 4 Round 5 Round 6 Round 7 Round 8 Round 9 Round 10 Round 11 Round 12 Round 13 Round 14 Round 15 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0 Price (£/kW/y) 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 Demand curve Remaining capacity Capacity procured/Clearing price Capacity (MW)

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