Gas engines ‘could be transplanted overseas’ despite Capacity Market penalties if Triad benefits are not grandfathered

So-called car-park generators could walk away from capacity market (CM) contracts if regulator Ofgem goes ahead with plans to cut Triad payments – and that could include dismantling and exporting plants that have already been built, New Power has been told.

Companies with contracts from the 2014 and 2015 Capacity Market auctions argue that their payments should be ‘grandfathered’ but Ofgem has said they should not have relied on Triad payments. An Ofgem decision on whether to confirm the drastic cut to payments now looks set to be delayed, with other Ofgem announcements, until after the 8 June election.

Janine Freeman, business development director at UK Power Reserve (UKPR), said that Ofgem – in its ‘minded to’ proposal to drastically cut Triad payments – had “drawn comfort” from the fact that some plants that won CM contracts in the 2014 and 2015 auctions “could be relied on” because construction was under way or complete. But those small plants could be picked up and transferred elsewhere, and “some countries will value them more highly”, she pointed out.
Freeman said it was hard to assess how many plants might be moved or withdrawn from CM contracts because decisions depended on a number of factors, right down to the efficiency of specific engine technologies. But for many, the penalties paid to exit CM contracts would be worth bearing, she said. In a report for UKPR, analyst Aurora said up to 20% of plant – 500MW – might be cancelled, but UKPR’s own estimate suggested it could be double that.
If plant owners walk away from their CM contracts, larger volumes will have to be procured in the T-1 (year ahead) auctions and prices will have to rise to incentivise plant not supported by Triad payments.
The Triad change would leave small-plant owners faced with unprofitable 15-year contracts, meanwhile transferring value from plant owners to consumers who had already benefitted from the low CM prices made possible by Triad benefits, UKPR said.
If Ofgem confirms its ‘minded-to’ decision it seems certain to face a legal challenge. In its response to Ofgem’s consultation, UKPN said: “Ofgem presents no evidence to explain why investors should have predicted a change in the triad regime against the backdrop of several reviews that concluded the regime should not be altered.”

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