On 8 December 2016, National Grid as the EMR Delivery Body announced the T-4 Capacity Market Auction (the “Auction”) provisional results. A total of 69.77GW entered the Auction (as we reported on here), of which 75% (52.43GW) provisionally received capacity agreements for delivery in 2020/21.
Successful Projects
Contracts with terms between one and fifteen years were awarded across multiple technologies, with existing generators making up 84.8% (44GW) of the capacity agreements awarded (including 6.1GW of coal and biomass and 7.9GW to nuclear plants). New-build projects accounted for just 3.4GW of the capacity. Existing and new-build Combined Cycle Gas Turbine (“CCGT”) projects took the largest share at 23GW.
Contracts totalling 3.2GW were awarded to storage projects, representing approximately 6% of the total capacity agreements. The majority of these were awarded to existing pumped hydro storage, though more than 500MW of new battery storage projects were awarded contracts. The 1.4GW of DSR contracts awarded represents a significant increase from the last capacity market auction, with aggregators securing a large proportion. In addition, 2.3GW of operational interconnector projects (BritNed, IFA, East-West and Moyle) were successful.
Pricing
Whilst the Auction awarded fifteen year contracts to Centrica’s King’s Lynn CCGT (370MW) and InterGen’s Spalding open cycle gas turbine (“OCGT”) (299MW), several large new-build CCGT projects dropped out as the clearing price fell below the level those developers required to invest. In total, almost 10GW of CCGTs exited the Auction. Despite the expected reduction in embedded benefits (which we reported on here) and other reforms, diesel generators and small-scale projects (those which generate less than 10MW) were awarded 679MW and 416MW respectively. In total, it is estimated that 1.8GW of embedded projects utilising reciprocating engines (either diesel or gas-fired) were brought forward by the Auction, which comprises 49% of the total new-build capacity agreements awarded.
At £22.50/kW/year the 2016 clearing price is slightly higher than last year’s clearing price of £18/kW/year. Analysts and commentators had predicted higher prices in the Auction because of recent interventions in the Capacity Market targeting small-scale generators (as we reported here). The lower than expected clearing price, whilst good for consumers, demonstrates the difficulty the Government faces in promoting new large-scale gas-fired projects prior to the final closure of coal plants in 2025.
What next?
The final results of the Auction are scheduled to be published 20 December 2016, with the Early Auction due to be held January 2017 and the Transitional Arrangement Auction following March 2017 (both for delivery in 2017/18).
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