Capacity market: Fossil fuels favoured over renewables?

In December 2014 it was announced that, through the Capacity Market auction, generators are to receive almost £1 billion towards securing generation capacity in future years in order to safeguard that there will be sufficient generation to meet demand at peak times. The Capacity Market has been introduced as one of a number of measures under Electricity Market Reform which aims to combat concerns over security of supply, while also securing affordable energy and enabling the transition to a lower carbon economy. However, this month the Energy and Climate Change committee (ECC) issued a report which argues that the Capacity Market favours fossil fuels rather than renewables.

Is a cheaper and lower carbon outcome possible?

The report states that of the £1 billion in payments already committed, only 5% is to go towards new build generation with 20% of the contracts awarded so far going to coal power stations. The ECC have posited that this could lead to higher costs for consumers, because it favours paying coal fired power plants over reducing electricity demand. The ECC has further voiced concerns that this trajectory could lead to higher carbon generation and impede the development of low-carbon energy generators. Only 0.4% of the committed payments will fund demand-side response schemes (e.g. using on-site generators; shifting business operations to a different time of day; or switching off electricity to reduce demand) which could reduce the number of fossil fuelled power stations required. The report also argues that the way low-carbon energy investment is being implemented could be improved to provide better value-for-money for customers. A proportion of the Levy Control Framework (a mechanism which caps the amount bill consumers will pay for low-carbon energy investment) already allocated to early contracts for off-shore wind farms may impede the development of other renewable and low-carbon energy projects, which could potentially provide better value-for-money for consumers.

DECC has stated that the Capacity Market auction has in fact guaranteed energy security at the lowest cost for consumers by ensuring that existing power stations are properly utilised, unlocking new investment in flexible plant, and by putting in place plans to enable the demand side to play a growing role in the market. DECC also asserted that the auctions held for renewables contracts at the end of February in the Contract for Difference auctions would fund schemes which would power 1.4 million homes, creating thousands of ‘green’ jobs, boosting home-grown energy, and thereby reducing the need to rely on volatile global energy markets.

The debate over the initial allocation of funds in the Capacity Market demonstrates the challenges faces by policy makers in satisfying the sometimes competing aims of ensuring security of supply, providing affordable energy, and stimulating low carbon generation. It remains to be seen whether the Capacity Market will continue to invest in pre-existing and fossil fuelled power generation projects, or whether future payments committed at capacity auctions will invest more significantly in renewable and demand-side response schemes.

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