In this week’s T-4 Capacity Market auction, the government spent £350m for new fossil gas power stations with contracts up to 2040. UK energy policy is pulling in two directions, as the Climate Change Committee is recommending a phase-out of unabated gas by 2035. The government urgently needs to change the capacity market regulations to stop paying for gas that’s unlikely to be converted to hydrogen or CCS—and commit to a 2035 gas phase-out before COP26 in Glasgow.
The UK’s T-4 Capacity Market auction has concluded, clearing at £18/kW. Of the 7.5GW of new gas capacity bidding for subsidy, 1.4GW has been awarded contracts of up to 15 years, meaning that it is subsidised with public money at the rate of £18 per installed kW per year.
WHAT IS THE CAPACITY MARKET?
The UK Government introduced the Capacity Market to reduce the risk of future electricity blackouts – for example, during periods of low wind and high demand. The Capacity Market makes payments to reliable electricity generators to ensure that enough is available at times of system stress. The payments are intended to encourage investment in new firm capacity and provide an incentive for existing capacity to remain open.
Capacity Market payments are supplementary to other sources of revenue such as electricity sales. Competitive auctions are held to determine which combination of new and existing capacity will meet the system requirement at the lowest cost to consumers. Nearly all of the required capacity for a specific year is procured at auction four years in advance – this allows sufficient time to build any new capacity required. These auctions are referred to as “T-4” auctions.
£350 million to new gas
While the largest amount of subsidy for new builds went to interconnectors, 1.4GW of new gas has also won funding. Drax, who seemed to be moving away from gas after cancelling their plans for a new CCGT, have committed to build 3 new OCGTs totalling 854MW of derated capacity. A further 544MW of new small gas capacity – mostly gas engines – have also won subsidies.
Both existing and proposed units can be awarded capacity market contracts, but given the 25 year lifetime of gas power plants new units are more concerning. New units built as a result of subsidies awarded in this auction will be funded by public money until up to 2040, and could remain operational until 2050.
Not CCS or hydrogen ready
While gas plants are running without CCS technology, the UK cannot have a clean power system. That is why the Climate Change Committee (CCC) has recommended a 2035 phase out date for unabated gas, with all new units being CCS or hydrogen ready by 2025 at the latest.
WHAT IS CCS READY?
Carbon capture and storage is a technology still in the early stages of development that would allow fossil fuel power plants to run with lower emissions. Carbon is captured from the CO2 released by burning fuel and stored underground. Storage sites for carbon have already been identified under the North Sea with possible pipelines running from Teesside and Humberside.
Since 2009 all new gas power plants larger than 300MW have to be “CCS ready”, meaning that they must identify space to accommodate ccs technology and products and a location in which captured carbon can be stored.
However, the CCC is clear that this legislation needs to be made stronger by expanding its scope to include smaller plants, and require that they are located in areas that will be supported by CO₂ and/or hydrogen infrastructure.
UK law already requires new gas units larger than 300MW to be CCS ready, but the legislation is not fit for purpose. The 3 new Drax gas units awarded contracts have a capacity of 299MW (derated to 284MW), just small enough to avoid the law, while the remaining gas capacity awarded contracts, mostly small gas engines, individually less than 50MW each, add up to a total of 544MW that is not affected. Even units over 300MW have only had to make weak considerations about space and transport.
Why new gas is incompatible with the UK’s net zero plan
The new gas units awarded subsidies in this auction stand in the way of the government’s commitment to net-zero. With U.S President Biden declaring a clean power target for 2035, this will result in the UK being left behind. COP26, hosted this November in Glasgow, is the last good opportunity for the UK to mitigate the effects of this auction and maintain its position as a climate leader. The CCC’s recommended 2035 unabated gas phase out should be committed to and CCS or hydrogen ready requirements should be strengthened and expanded to all new gas units. This will provide clarity to business and industry and sharpen the focus throughout all levels of government on the challenges ahead, including the urgency of developing CCS and hydrogen infrastructure and markets, and avoid the same problems in future capacity market auctions.
Some other interesting things we spotted in T-4:
1. Existing gas plants received the majority of subsidy
The capacity market is a way for fossil fuel power plants that would otherwise be unprofitable to continue operating. That remained true this year; with no coal units competing the majority of subsidy went to 22GW of existing gas units.
2. Flexibility technologies made up the second largest recipient of funding
Technology that increases security of supply by providing flexibility instead of generating new power can also be awarded capacity contracts. Energy storage, interconnectors and demand side response (DSR), together made up the second largest recipient of funding. This is good news but could be improved, with only 33% of battery storage and 70% of DSR capacity entering the auction winning subsidy
3. Large new gas plants lost out
One loser in the auction was large new gas plants. Last month we reported that 5.7GW of new CCGTs (Combined Cycle Gas Turbines) were seeking government subsidies through the T-4 capacity market auction, despite the fact that they are a particular risk for locking in the UK to fossil fuel power. However, the low clearing price meant that no new CCGTs were awarded contracts.
4. 1477MW of existing nuclear capacity unexpectedly left the auction
1477MW of existing nuclear capacity unexpectedly left the auction early, increasing the opportunity for new units.