Is The Government’s Capacity Market A False Economy?

Is The Government’s Capacity Market A False Economy?

  • 18 Jan 0

Energy secretary Amber Rudd has defended the capacity market, revealing it will cost about £10 per household per year to pay for back-up power. Speaking to the House of Commons, Ms Rudd said the capacity market will ensure energy security will never be a question in this government. The question is whether this is a short-sighted resolution to a longer term problem?

According to the Government, the capacity market is specifically designed to ensure that energy security is not negotiable. Due of the lack of investment in energy infrastructure over many years it has become necessary to put measures in place to ensure that the UK can ensure energy security. The capacity market is seen by this Government as the solution with coal generation dominating this.

Under the capacity market scheme, millions of pounds in public subsidies are handed out to power generators. In December 2015, the second capacity market auction closed its books, with 46.4GW of capacity procured at a clearing price of £18/kW. Although slightly higher than predictions of £14kW-16/kW, it is still being universally characterised as a “low price”.

It is true that the two capacity market auctions have achieved their basic objectives: procuring the required security volume at the lowest price in the context of a technology-neutral auction but whilst the price is low, the longer term costs are high. In each of the first two auctions, there have been significant pay-outs to coal plants despite the government clearly stating its position that it ultimately wishes to close these.

The issue is that capacity market in its current format has only limited strategic value as it fails to provide any compelling solution to what will replace old coal and gas capacity at a scale which is consistent with the evolving system security requirements, increasing requirements for flexibility and tougher de-carbonisation objectives following COP21. It is difficult to see where the current capacity market fits in as part of the solution to the trilemma. This concern becomes more acute when combined with significant reductions in funding available to support new renewable technologies. The capacity market appears to be actively undermining efforts to address the trilemma.

As a result of anticipated further plant closures, system security margins will tighten further in the next couple of winters. To save the consumer on both counts, policy reforms will be necessary to deliver new build generation which will be urgently needed. It appears that it is time to give less thought to the current features of short term delivery and take a step back to fundamentally reconsider how to deliver on the trilemma in light of changing, and at times incompatible, energy and climate policy. The outcome of COP21 has propelled environmental sustainability back to centre stage despite the Treasury preferring that de-carbonisation be an afterthought of security of supply at the lowest cost.

Taking all of this into account it is time that the Government looked for a more comprehensive and broader strategy to set a pathway into the next decade constructing a realistic strategy around the roles of disruptive demand side and storage technologies. Developing such an approach would require another period of painful transition to new incentives and structures shortly after the conclusion of the Electricity Market Reform but the alternative is the continuation of the current practices that fail to support the UK in meeting the challenges of the energy trilemma.


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