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Cornwall Insight comments on Capacity Market prequalification

On 11 December the EMR Delivery Body (National Grid ESO) published the prequalification registers for the T-1 (2021-22) and T-4 (2024-25) Capacity Market (CM) auctions. The headline figure from the prequalification register is 54.0GW of de-rated capacity has prequalified for the T-4 auction against a target of 41.2GW. However, this figure – and the 12.8GW surplus between prequalified and target capacity – does not tell the whole story.

Lee Drummee Analyst at Cornwall Insight explores the prequalification picture for the T-4 auction and what this could mean in pricing outcomes ahead of the auctions in March.

“This is the first-ever CM auction in which existing generation capacity does not exceed the procurement capacity, with several large plant opting out of the auction. 3.8GW of nuclear capacity has opted out with Hinkley Point B, Hartlepool, Hunterston B and Heysham 1 all expected to be decommissioned by the start of the Delivery Year. A further 2.0GW of CCGT capacity from Sutton Bridge, Baglan Bay and Severn Power has opted out after the owners Calon Energy entered administration in 2020.

“Coal-fired units are also totally out of contention, following the government bringing forward the proposal to enforce coal closure to October 2024 under new plans detailed in the Energy White Paper.

“Despite the apparent opportunity to ‘fill the gap’ left by retiring assets, the large deficit between existing generation and the procurement target does not guarantee success for New Build Generating Capacity Market Units (CMUs).

“This is mainly due to the capacity of prequalified New Build Interconnector Capacity Market Units (CMUs) with 3.6GW of such de-rated capacity prequalified from Eleclink and IFA2 (both connected with France), NSL (Norway) and Viking (Denmark). These assets are either completed or under construction andthey already gain security on their revenues through the Cap and Floor Regime (except Eleclink), meaning many will be able to bid at very low prices with the CM seen as extra revenue.

“Assuming high success from existing interconnectors and adding the capacity from refurbishing plant, there is a 1.2GW surplus of de-rated capacity.

“Added to this is the 10.2GW of de-rated new build capacity coming from Combined Cycle Gas Turbines (CCGTs) (4.8GW), gas reciprocating engines (1.7GW), battery storage (900MW) and onshore wind and solar (40MW). Many of these sites will be trying to utilise the CM auction to underwrite their investment opportunities through the scheme’s stable revenues. Notably, onshore wind and solar assets may be choosing to enter the CM instead of the upcoming CfD auction if they are successful.

“The deficit of existing generation against procurement targets makes it likely that a greater amount of New Build Generating CMUs is successful than recent auctions. However, they will still need to be more competitive than the headline figures suggest to win agreements in the T-4 auction.”

About the Cornwall Insight Group

Cornwall Insight is the pre-eminent provider of research, analysis, consulting and training to businesses and stakeholders engaged in the Australian, Great British and Irish energy markets. To support our customers, we leverage a powerful combination of analytical capability, a detailed appreciation of regulation codes and policy frameworks, and a practical understanding of how markets function.

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