Interconnectors look set to play an increasingly dominant role in Britain’s power generation market following the closure of coal, nuclear and CCGT units.
That was the stand-out highlight of the recently announced results of the T-3 capacity market auction, energy data analyst EnAppSys said.
The T-3 auction was held to determine capacity delivery in the year running from October 2022 to September 2023 and a further auction, T-4, is due to be held in March for delivery in 2023-24. With several coal, nuclear and gas-fired plants due to close in these periods, additional capacity will be needed to make up the shortfall.
From the results of the T-3 auction a significant amount of the required capacity will come in the form of interconnectors. In the T-3 auction, interconnector operators won 2.8GW of new contracts – almost one half of the total interconnector capacity of 5.9GW. This came as the number of coal plants in the bidding process dropped to just two, with Drax and West Burton removing all of their coal units from the auction. Hinckley Point B nuclear station, which is due to be decommissioned in 2023, also dropped out of the running and the nuclear unit in Hartlepool is due to exit the market in future auctions. Two older and lower merit gas fired power stations, Medway and Keadby, also departed the process.
Another notable result from the T-3 auction was that non-interconnector new-build capacity amounted to only 319MW. Of this, energy from waste plants accounted for 122MW, reciprocating engines 150MW, batteries 27MW, onshore wind 15MW and combined heat and power plants (CHP) 6MW.
The clearing price for the T-3 auction was £6.44kW per year – compared with the previous T-4 auction result of £8.40/kW and the highest price to date of £22.50/kW. These recent low prices are lower than many analysts had predicted and significantly lower than similar auctions in Ireland and Poland.
Interconnectors are eligible for support via ‘cap and floor’ mechanisms in addition to being able to win a capacity mechanism contract. These mechanisms guarantee a return and have driven large investment in new interconnection capacity that is currently under construction.
Paul Verrill, director of EnAppSys, said: “The T-3 auction marked a shift from domestic capacity to interconnected capacity, with limited build-out of new projects as a result. Levels of non-interconnector new build were relatively low compared to significant levels of build in previous years. On the face of it, the 15MW of onshore wind is very small but represents a large share of the known non-offshore wind renewable build out without Contracts for Difference (CfD) subsidies.
“We weren't surprised by the low clearing price as increased competition from interconnectors and the level of capacity procured meant there was little room for new build assets to get the prices they need to mitigate the ‘lost money’ from renewable growth.
“The results also show that there isn't actually enough room under the current arrangements for some older assets and UK’s security of supply will therefore rely on European generation. This seems a bit ironic given that we have just left the European Union!
“The problem arises that currently under EU rules interconnectors between member countries have to operate in a commercial open market regime where energy flow follows price and demand.”
“After the Brexit transition ends on 31st December, 2020, whatever the negotiated outcome, the GB market will no longer be part of the EU internal energy market and interconnectors will operate under different arrangements where energy flows do not automatically follow price and demand. This will mean that the reliance on interconnectors in providing security of supply will have to be reviewed.”