New power projects being built through the UK’s capacity market are “for sale”, several sources have told ICIS. It raises the prospect that many plants will not come to fruition, described by one insider as a “looming scandal”.
This comes after concerns were raised over transparency around progress on new projects with capacity market contracts (see EDEM 20 March 2017).
Despite the absence of any new large-scale combined-cycle gas turbines (CCGTs) being financed since the capacity market was implemented in 2014, around 4.5GW of new-build capacity across sub-100MW sites has been contracted to come online between the start of winter 2018 and 2020.
Most of this capacity plans to connect directly to distributed networks and bid into capacity market auctions on the basis of having access to supplementary revenue streams, such as triad avoidance payments for generating during peak winter hours.
However, news that energy regulator Ofgem is minded to accept industry proposals to significantly reduce financial benefits – including triad payments – for distributed generation has caused turmoil for developers (see EDEM 1 March 2017 and ICIS Power Perspective 22 March 2017 ).
“I know that a lot of these projects are being touted around the industry for sale,” Frontier Economics’ energy director Dan Roberts said.
“The investors I’ve spoken to have said that most of them ‘just don’t work’ – in other words, you can’t get a positive internal rate of return with any sensible assumptions.
“There is a strong risk the owners of these ‘options’ – they are not yet projects – just pay the penalty [for non-delivery] and move on,” he added.
The proposed changes by Ofgem are a stark contrast to the original expectations developers had when bidding for capacity payments.
Triad payments will drop from the current level of approximately £45/kW to around £2/kW over a three-year period beginning in 2018 if the proposals are implemented. Previous forecasts had been for the payments to increase to £72/kW over the next four years.
The expectation of increasing triad revenues has enabled distributed generation to undercut larger new-build CCGT in capacity market auctions.
“There is a high risk that the sale of assets and capacity hit by Ofgem’s proposals will result in lower-than-expected delivery of capacity,” another source said.
“There are many barriers to bringing capacity to fruition and a sale halfway through the build process drastically impacts a company’s ability to deliver it.”
The source added that any acquisition of new assets, including generating equipment, could result in them being taken to a foreign market.
However, Roberts cautioned against the idea that the sale of assets represents an immediate security of supply issue, highlighting the fact that the government has the ability to procure replacement capacity for delivery years in one-year ahead (T-1) auctions.
Ofgem did not comment directly on the attempted sale of assets but said it was still consulting on its final decision around the proposed removal of embedded benefits.
“We are consulting on the minded to decision and draft impact assessment and we intend to make a final decision in May,” a spokesman said.
In its statement on 1 March, the regulator said it did not believe that the proposed reforms would have a “material impact on supply”.
One source at a commodities trading house is already banking on the fact that new-build capacity will fail to deliver:
“We see a decent volume of small scale plants now for sale after the Triad announcement,” he said referring to Ofgem’s 1 March statement. “Much of which won’t be built,” he added. firstname.lastname@example.org