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GB Wholesale Power Market Reform–new CCGTs require guaranteed returns

'New CCGTs need guaranteed returns' – a summary of BW Energy's article for Utility Week: February 2012.

DECC's announcement on March 17th 2012 of a 'Gas Generation Strategy Review' (GGSR) to run alongside the ongoing Electricity Market Reform (EMR) process reflects a welcome, albeit belated recognition, by the UK Government that CCGTs have a key role to play in the decarbonisation of the GB power sector. New unabated gas fired plant will be required when dirtier coal plant is closed after 2015. New CCGTs not only have lower emissions but also retain the operating flexibility required to accommodate an increasing generation share from more variable renewables such as wind.

However, current EMR proposals for a market wide capacity mechanism whilst supporting all non fossil generation only provide for fossil 'peaking' capacity. This will not be sufficient to encourage new CCGT build. Fundamentally, long term contracts with a credit worthy counterparty are required. This is to offset the increasing investment risk of CCGTs under an operating regime that is moving from baseload to much lower and intermittent load factors (if targets for non fossil generation are to be met). Furthermore, with the Big 6 already having built sufficient CCGT capacity backed off against their more loyal domestic customers, new CCGTs would have to be merchant and dependent upon the much more competitive industrial and commercial sectors.

EMR, as it currently stands, has recognised the problems of meeting peak demand but the proposed solution is unlikely to result in new CCGTs. The suggested 'market wide' measure will reward all dispatchable generation with a capacity payment. This payment is likely to be around the cost of the cheapest forms of capacity such as OCGTs and well below the levels to cover the higher fixed costs of CCGTs. A prospective owner of a new CCGT would have to rely upon the size of future clean spark spreads to offset any shortfall – a brave position in the face of a market being lost to wind and nuclear.

With EMR proposing a 'single buyer' for all new non fossil and a 'single buyer' for all new fossil peaking capacity, why not move to a single buyer for all new capacity thereby underpinning new CCGT build? Contracts would be offered on capacity and energy payments: capacity payments would be adjusted for availability and energy costs linked to contracted efficiency and a market reference price (such as NBP for gas and a coal equivalent). This approach would encourage competition between developers and incentivise operating efficiencies. It would ensure that system security is maintained through CCGT new build during decarbonisation of the power sector whilst keeping costs down. Contracts with a single buyer would attract low costs of capital and take advantage of the substantially lower operating costs of new CCGT plant compared to OCGT plant.

BW Energy