On Friday 14th October 2016, the much awaited pre-qualification results for the T-4 2016 Capacity Market auction were published. The results are likely to have left a sinking feeling for most large-scale gas developers.
The ability for the auction to bring forward investment in new-build plants will be heavily dependent on the bidding behaviour of two large categories of plants.
The recent and ongoing collapse of dark spreads due to rising carbon taxes has increased pressure on coal plant operators.
Our analysis suggests that the mix of the new-build plants brought forward (i.e. large scale vs. small scale new build) will depend on how aggressively this 5 GW of existing Combined Cycle Gas Turbines (CCGT) bids in the auction.
New small-scale distribution-connected generation
A bullish developer could be undeterred by the ongoing reviews and thereby continue to displace new large-scale gas plants, in particular CCGT, in the bidding curve. Others, however, may adopt a more cautious strategy.
While some of this capacity gap will be filled by optimistic small-scale developers (circa 1 to 1.5 GW), our internal analysis shows that Open Cycle Gas Turbines (OCGTs) (circa 0.5 to 1 GW) are more likely to be brought forward in this year’s auction. However, strategic bidding by new-build CCGTs cannot be ruled out.
The auction will begin on 6th December 2016, with results to be approved by the Secretary of State for BEIS by 21st December 2016.