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** Amended at 15:00 for “up to” 4.0GW of diesel; also at 20:00 to explain why we suspect undefined plant to be diesel.

So, last Friday, National Grid told us who will be bidding for 15 year contracts to build new electricity capacity.

The government wants to build new large CCGT gas plants.  And the CCGT pipeline almost doubled from 6GW to 11GW.   Half of this increase was from two new 1600MW projects – Willington in Derbyshire owned by MPF Generation, and Knottingley in West Yorkshore owned by ESB.

Job done, right?

Unfortunately not.  Gas may not see the light of day, because it may be undercut by distributed generation, which has exploded even faster.

8.7GW of smaller projects have bid (<100MW).  Sandbag went through each of these 498 projects to assess the fuel type of each project. Battery technology appears for the first in scale, making up 23% (2.0GW) of the distributed generation.  Gas was 25% (2.2GW).  Diesel was 4% (0.3GW).  However, a further 3.6GW is not defined, and we suspect the vast majority of this is diesel.  The reasons we suspect this is: 1) diesel is far cheaper and easier to build than gas; 2) we would expect gas to define as gas to avoid the stigma of maybe being diesel; and 3) gas requires a connection which is not mentioned in the descriptions.

This means amount of diesel bidding has increased up to five-fold from 0.87MW to up to 4.0GW.  Last year, three quarters of the diesel bidding got accepted on 15 year contracts, at a total cost of £176m.

If the same proportion get accepted this year, at the same price as last year, £800m would be paid to diesel over 15 years.

Again, it seems diesel will undercut CCGT and other technologies, to win the lion’s share of new-build in the capacity market.

The warning signals of the last 2 auctions have yet to be heeded.  The consultation in March on the capacity mechanism strongly identified diesel as a problem.  Defra then issued a note in August saying “Investors bidding for new capacity into the Capacity Market auctions in 2016 should be aware that installations with a thermal input less than 50MW that become operational after the publication of proposals are likely to be directly impacted when the legislation comes into force”.  On embedded incentives, which have contributed to the super-profits on diesel generators, Ofgem have warned this summer on the rise of embedded generation, saying “these arrangements may be distorting energy markets and there should be a level playing field for all generators. This could also impact on the decisions to either build or close large power stations which also play an important role in delivering security of supply.”

But diesel investors are obviously dismissing these threats, and instead have been searching for more and more projects.

We are surprised and disappointed that so much new diesel has bid to be built.  Our hope that the government will have closed loopholes which allow high emissions from diesel and give generous embedded payments to diesel, with hindsight, seems very naïve. 

The government needs to review the situation around new-build diesel, to ensure that the capacity auction is incentivising the right investment, rather than building a nationwide fleet of dirty diesel.