{"id":246130,"date":"2023-02-28T16:32:12","date_gmt":"2023-02-28T15:32:12","guid":{"rendered":"https:\/\/climatescience.press\/?p=246130"},"modified":"2023-02-28T16:32:14","modified_gmt":"2023-02-28T15:32:14","slug":"uk-capacity-auction-results","status":"publish","type":"post","link":"https:\/\/climatescience.press\/?p=246130","title":{"rendered":"UK Capacity Auction Results"},"content":{"rendered":"\n
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From NOT A LOT OF PEOPLE KNOW THAT<\/a><\/p>\n\n\n\n

By Paul Homewood<\/p>\n\n\n\n

Timera analyse the latest capacity auction:<\/strong><\/p>\n\n\n\n

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Implications of a surge in UK capacity prices<\/em><\/h3>\n\n\n\n

The UK capacity market auction process normally takes two days of bidding rounds before a result. This year\u2019s auction for 2026-27 capacity was over almost before it started.<\/em><\/p>\n\n\n\n

The auction cleared at a record 63 \u00a3\/kW\/yr, around 3 times the average clearing price of previous T-4 auctions.  Successful new build projects were dominated by batteries, engines, DSR, a CCGT & an interconnector. These will benefit from a substantial portion of required revenue being underwritten by multi-year fixed price capacity agreements (15 years in most cases).<\/em><\/p>\n\n\n\n

Let\u2019s take a look at what caused this surge in capacity prices and what its implications are for flexible asset investment, both in the UK and more broadly across Europe.<\/em><\/p>\n\n\n\n

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Auction deconstruction<\/em><\/strong><\/h4>\n\n\n\n

It was clear before the event that this was going to be a tight auction. There was a structural deficit of existing capacity (38.48 GW) vs the government set auction demand target (43.00 GW at the clearing price). This was exacerbated by an older CCGT (0.75 GW) exiting the auction early (South Humber 1).<\/em><\/p>\n\n\n\n

Chart 1: Deconstruction of 2026-27 T-4 capacity auction result<\/em><\/p>\n\n\n\n

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Successful new capacity was dominated by a new CCGT (EPH\u2019s Eggborough 1.55 GW project), batteries (1.25 GW derated), the Viking Interconnector (1.04 GW), DSR (0.79 GW) and gas engines (0.51 GW).  The high auction price saw 352 MW of 4-hour duration batteries successful, which have less penal derating factors than shorter duration BESS.<\/em><\/p>\n\n\n\n

Much tougher battery derating factors also contributed to the capacity deficit in this auction. For example 2-hour BESS projects were derated at 23.63% (vs 39.73% in last year\u2019s auction). Tougher derating factors saw 5.0 GW of nominal BESS capacity contribute only 1.2GW of derated capacity. BESS derating factors are likely to decline further in future as the marginal capacity contribution of batteries erodes with scaling.<\/em><\/p>\n\n\n\n

The big surprise in the auction was how high offer price levels were for new build capacity. Historically there has been a strong overhang of new build gas engine & CCGT projects above 30 \u00a3\/kW\/yr that have acted as strong price resistance. The increase in cost structure of this thermal capacity is playing an important role in pulling up capacity prices.<\/em><\/p>\n\n\n\n

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5 factors driving the capacity price surge<\/em><\/strong><\/h4>\n\n\n\n

At the simplest level, the reasons for a high clearing price were:<\/em><\/p>\n\n\n\n