Energy and Climate Change Committee Criticise Capacity Market

The UK’s House of Commons Energy & Climate Change Select Committee issued a report today on the implementation of Electricity Market Reform which is highly critical of the new electricity capacity market. This may strike you (as it does me!) as a severe case of shutting the stable door after the horse has bolted, but nonetheless the executive summary puts it this way:

The Government’s flagship Electricity Market Reform was designed to drive investment in our energy infrastructure and manage the transition towards generating low-carbon, secure and cost-effective electricity. After years of planning, the Government has successfully put in place the necessary framework for the first Capacity Market and Contract-for-Difference (CfD) auctions under EMR, and DECC, National Grid and the Low Carbon Contracts Company have been helpful in preparing industry in the run-up to the auctions.

However, the speed at which participants have had to assimilate the complex policies have made it a challenging environment for smaller companies, and DECC is still failing to ensure that demand-side response (DSR) providers are given a level playing field in the Capacity Market. In order to avoid paying for more expensive generation capacity that may not be needed in the future, the Government should consider means to further support DSR in the Capacity market, for instance by increasing the contract length of DSR capacity agreements.

There also remain strong concerns around National Grid’s potential conflicts of interest as EMR Delivery Body, and it is important that clear steps are taken to ensure that it does not have an unfair commercial advantage in future Capacity Market auctions.

Speaking as one of those “smaller companies” it seems from our perspective that the playing field is indeed located on a rather steep slope! Tim Yeo, chairperson of the committee, said that:

Every consumer in the country is currently subsidising spare electricity generating capacity that may only be used for a few hours each year. But smart technology has now made it possible to reduce unnecessary electricity demand at peak times, thereby reducing the number of polluting power stations that need to be switched on. This could mean we can reduce the total electricity generating capacity that has to be maintained in future, bringing down costs for consumers while enabling us to reduce consumption of fossil fuels.

Yet this promising new demand-side response technology has been disadvantaged in the auctions under the Government’s Capacity Market – meaning costs and emissions could be higher than necessary. Only a fraction of the £1 billion pounds that will be spent keeping the lights on through the Capacity Market will actually provide new capacity and just 0.4% will go on demand-side response – with most of the rest going to existing fossil fuel power stations, paying some of them to stand idle for much of the year. Nearly a fifth of the capacity contracts already awarded are going to highly polluting coal power stations.

Which sums things up quite nicely for us. We would go even further than Tim Yeo. Not only should Demand Side Response be getting a better deal, so should distributed energy storage in general and V2x in particular. Tim does however also point out that:

The results of the first CfD auction for long term low-carbon contracts show that small companies or community energy projects are in danger of being shut out. The fact that the final strike prices were cheaper than the administrative price is a very positive result, but it casts further doubts over the value-for-money of the early contracts for renewables under the Levy Control Framework.

The committee’s concluding bullet points read as follows:

DECC’s upcoming review on EMR should focus hard on the issues voiced by stakeholders and raised in the Committee’s report. In particular, it should focus on:

  • The role of highly polluting coal and diesel fired power generation in the capacity market
  • How to facilitate cheaper and cleaner demand-side solutions to keep the lights on
  • How potential conflicts of interest with National Grid will be avoided or addressed
  • How engagement with small players can be improved

to which we would add one of our own:

How to design UK energy markets such that distributed storage and generation operate on a level playing field?

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