Capacity Market auction favouring increased flexibility

Capacity Market auction favouring increased flexibility

The UK’s third Capacity Market auction – for delivery in 2020/21 – cleared at £22.50 per kilowatt per year. While this was higher than the price paid for the last few auctions, it was still lower than most forecasts and below the level expected to encourage new-build large-scale generation.

Existing plant continued to dominate the Capacity Market auction, accounting for over 90% of the capacity bought. However, there was some new, smaller-scale generation supported, as well as a growing indication of a move towards grid flexibility.

Over 75% of projects which bid into the auction won a contract. The UK government secured 52.425GW of capacity for delivery in four years’ time. 95% of the contracts awarded were for one-year deals, but over 2.5GW of new-build generation received 15-year contracts. Though this was made up of smaller-scale units than the Government may have wanted. One of the aims of the Capacity Market was to provide an incentive to invest in new large gas-fired plant.

Capacity Market auction encouraging flexibility

A winner in the auction this time around has been flexibility. Battery storage was able to bid into the Capacity Market for the first time, securing 500MW of capacity on 15-year contracts. Meanwhile, around 2.3GW of existing Interconnector capacity secured one-year contracts, with the power links able to bid into the Capacity Market auction for the second year running.

At the same time, fears of further payments towards polluting diesel generators have failed to come to fruition. Only 76MW of small diesel projects securing contracts. This was down significantly from the 650MW of diesel generations which secured a contract in the auction last year.

Meanwhile nearly 4GW of coal power capacity failed to win a subsidy contract, including the Fiddlers Ferry and Cottam coal plants. This could hasten the closure of the Fiddlers Ferry site. However, coal plant still received around £128m in subsidy contracts.

The auction was able to secure contracts for two new large gas-build sites but only at a total of 630MW. A 15-year contract was awarded to a new CCGT development at Kings Lynn for 333MW, while a 300MW OCGT plant as part of an extension to the current Spalding gas power station also won a deal. Calon Energy also won a one-year contract to refurbish its existing 468MW Baglan Bay gas plant.

The majority of the gas projects which won subsidies were for small generators. The clearing price, although the highest of all the Capacity Market auctions so far, was not enough for over 9GW of large-scale gas projects which had initially bid into the auction.

Power transition

The UK faces a significant challenge as it navigates through a shutdown of its coal-fired power stations. This will help form a transition towards more wind and solar generation as a means to meet future climate targets.

The auction results, however, can be seen as a positive step towards a cleaner and more flexible system. As the grid moves away from traditional large scale generation, it is driving towards battery power and smaller gas peaking plant. More flexible generation capabilities will become increasingly important in the coming years.

Ross Moffat

Posted by on Friday, the 9. December at 17.00

Ross Moffat has been a part of the Market Intelligence team at Utilitywise since early 2014. His responsibilities include delivering Market Intelligence reports to clients and managing the Utility Insights Twitter account. Ross has a first class Honours degree in Business and Marketing from the University of Stirling.