Britain is bringing forward a scheme to encourage power companies to supply electricity at peak times by a year in a bid to avert a looming supply crunch and prevent price spikes following the results of a consultation held in March 2016. The country faces the risk of electricity supply shortages over the next few winters as coal plants close due to weak economic conditions and investors say there is little incentive to build new power plants. The Government has announced today that it is taking action to ensure the UK’s long-term energy security as it builds a system of energy infrastructure fit for the 21st century. Following a consultation launched in March, a package of reforms to the Capacity Market has been confirmed.
The Capacity Market is the UK’s principal tool to ensure that the UK has secure supplies of electricity. It is a necessary addition to the supply market to guarantee that there is sufficient electricity to maintain supply in the absence of a more robust and longer term plan to address the energy requirements of the UK. Under the government’s capacity market scheme, the owners of power plants are paid to provide electricity at short notice.
The consultation primarily focussed on a number of reforms designed to ensure sufficient, reliable capacity is available in 2017/18 and beyond, and make a small number of additional adjustments to the framework in the interests of clarification and simplicity. The UK energy market conditions have changed considerably since 2014 when the original capacity market was designed with greater operational losses for thermal generating plants being realised causing early closure. The consultation also covered proposals to introduce an early capacity auction in 2017 for the delivery year 2017/2018 in recognition that there is a need to mitigate this risk to supply.
Responses to the March consultation reflected clear support from industry and investors for three key reforms which will ensure the Capacity Market continues to deliver energy security:
- Buying more electricity and buying it earlier;
- Toughening sanctions for firms which go back on their Capacity Market agreements;
- Bringing forward the Capacity Market by one year to the winter of 2017/2018.
In light of the responses, the Government has set out its intention to hold an auction this winter for delivery in 2017/2018 and will proceed with its other core proposals in the consultation, giving both bill-payers and the energy industry more certainty for the coming winters with the aim of better safeguarding energy security to protect users from spikes in energy costs in the future. The effect of the announcement will see energy bills rise for end users as DECC’s impact assessment has shown that bill payers will bear the costs of this decision. The gross impact of the early capacity market auction on household bills in 2018 is dependent on the cost of agreements. Using an estimation of between £2 billion and £3 billion, the gross impact would be between £28-38 per household and higher for business users.