Pre-qualifiers for the Capacity Market – will large-scale gas and storage benefit?

On 14 October 2016, National Grid published the register of projects that have pre-qualified for December’s T-4 Capacity Market auction for delivery in 2020/21. The breadth of technologies that have pre-qualified provides an interesting insight into the future of the Capacity Market. Nearly 75GW of de-rated capacity has pre-qualified including: large-scale CCGTs, a large number of storage projects, several interconnectors, demand side response and a significant amount of existing conventional projects.

Energy Storage

Most of the projects that have prequalified (or conditionally prequalified) are at the distribution level. This includes just over 2GW of de-rated energy storage. The flexibility offered by energy storage provides a wide range of benefits (as we summarise in our Energy Storage E-guide). The storage industry has repeatedly stated that the Capacity Market needs to be reformed to better support storage projects (for example, in terms of discharge requirements and clarification of the revenue interface risk) as highlighted in the recent ECCC report. Nevertheless, analysis indicates that 1.5GW of battery storage projects have pre-qualified for this auction, as well as a range of pumped storage projects. This suggests that developers are progressing with their projects despite the imperfections in the current regime for storage.

CCGT

New build CCGT plants are a vital part of the Government’s pledge to close all coal-fired power stations by 2025. To date only one new-build CCGT plant has been successful in the Capacity Market auctions, but around 9.4GW of new-build CCGT has prequalified for the coming auction. The degree of success for such plant will be closely monitored and is likely to be seen as the barometer of whether the Government’s proposed reforms of the Capacity Market (summarised below) have been successful.

Small-scale generation

Around 11GW of the capacity that has pre-qualified is for small scale generation (<100MW) (excluding storage) showing that the series of reforms and announcements since the last Capacity Market auctions have failed to discourage small scale generators from applying (last year only around 5GW of small-scale capacity prequalified). It is, however, useful to recap on the series of reforms and consultations currently under consideration that potentially impact this class of generation.

• The Government’s consultation into the Capacity Market launched in March 2016 and the outcomes were published in May 2016. Some key outcomes include the introduction of an auction for 2017/18 additional capacity, tightening delivery incentives and buying more capacity. It also included a focus on diesel emissions (as we commented here).
• In July Ofgem published an open letter in relation to the charging arrangements for small-scale (sub-100MW) embedded generation (as we commented on here), Ofgem believes that the main beneficiaries of the TNUoS Demand Residual embedded benefit are small-scale reciprocating engines etc. As a result, it is argued such technology has an advantage over larger scale CCGT, for example, in the technology neutral Capacity Market auction, enabling them to enter lower bids. The TNUoS Demand Residual embedded benefit is currently subject of CUSC modifications CMP264 and CMP265, and such reforms are a key focus of the industry at present).
• The high proportion of Capacity Market uptake by small scale diesel generators is particularly concerning given the high levels of pollution they emit, relative to the energy they produce. This was touched upon in the Government’s consultation paper. However, compliance with the requirements of the Industrial Emissions Directive (IED) may result such generators facing higher costs in the future.

While these reforms are not yet in force, they highly likely to be implemented prior to the 2020/21 delivery date for this auction.

Interconnection

Interconnectors were first admitted to the Capacity Market auctions in 2015 (for delivery in 2019/20). In that auction only the Britned (0.8GW) and IFA (1GW) interconnectors were awarded Capacity Agreements. Nemo Link (0.5GW) was the only new-build interconnector to prequalify. An additional two interconnectors have prequalified this year; Moyle Link and East-West Interconnector. The total pre-qualified de-rated capacity from interconnection is now around 3GW. Interconnectors are currently only able to bid for 1 year Capacity Agreements.

Conclusion

It is exciting to see the mix of technologies that have pre-qualified for the Capacity Market this time around, despite some market uncertainties and the various on-going reforms. However, as previous auctions have shown, prequalifying for the Capacity Market is no guarantee of success. Only 52GW of the 74.7GW of capacity that has prequalified will be procured in December. It will be interesting to see whether the increasing mix of participants will lead to a greater diversity of contracted capacity.