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Capacity market mess

By Dave Elliott

The UK’s new Capacity Market auction process aims to ensure that there is enough capacity to meet demand by contracting with suppliers to be available when needed. However, it has failed to deliver any new gas projects, as well as failing to back much in the way of demand-side balancing – just 456MW. As with the first round, which gave contracts for 2018-19, it’s ended up mainly just backing old gas, coal and nuclear plants – with £1bn in contracts for 46GW overall for 2019-20. Most only get 1 year contracts, but the 650MW of new small diesel sets have 15 year contracts, and in all £155m. The 220MW of existing diesel get £93m. So much for clean energy!

This is all about capacity being available to meet shortfalls in supply when needed e.g. at peaks or when there are short-term wind and solar deficiencies. Hard to see the 7.5 GW of mostly very old inflexible nuclear plants being too reliable in that latter context: they get £136m, the 4.4GW of old inflexible coal plants £80m. That’s dwarfed by the 24.7GW of old gas plants and 810MW of gas projects already being built (so not ‘new’), which together get £460m.  The only storage seems to be old pumped hydro, at 2.6GW. And there’s no new interconnectors – just the existing 1.8GW.

A bit thin on new stuff then. Just around 2.3GW in all, including gas. It seems 4.6GW of new gas plants that bid didn’t get contracts. DECC’s new push for gas doesn’t seem to be working! The reduced (£1.40 less) subsidy price of £18/kWh maybe wasn’t enough.  Except for old already-built coal and nuclear. Even some old gas plants it seems have problems – 1.6GW didn’t get contracts. But cheap dirty diesel – no problem!

Can’t we do better than this? And press ahead with new more flexible balancing systems, like demand-side response interconnectors and energy storage, rather than using the Capacity Market mainly as a way to provide extra support for old fossil and nuclear plants and few new gas plants?  Last year, the House of Lords Science and Technology Select Committee report on The Resilience of the Electricity System made a number of recommendations on these issues, to which the government has now responded:

The Lords wanted the Government to ensure that Demand-Side Response (DSR) ‘is not disadvantaged in the Capacity Market relative to generation’ and recommended that ‘the length of DSR contracts in the Capacity Market should be brought into line with generation’.

In its reply the government said ‘Capacity Market was developed with the sector and includes specific features to promote the participation of DSR resources. However, to encourage a mix of technologies and promote competitive auctions and therefore value for money to consumers, the Capacity Market auction is technology neutral. The auction mechanism is driven by cost-effectiveness to determine the most suitable providers and the introduction of specific targets in the Capacity Market would lead to less competitive auctions increasing costs to consumers.’ It added ‘one year capacity agreements are the default position in the Capacity Market with fifteen-year capacity agreements being available only to new build generation which requires high up-front capital investment. Current evidence suggests that DSR is a relatively low-cost solution and should therefore be able to compete effectively on the basis of one-year agreements’.

The Lords wanted the Government to examine whether electricity storage should be placed under the Contracts for Difference regime rather than in the Capacity Market. The government said that it recognised ‘that other countries are approaching energy storage in different ways. A few countries, such as Germany & Japan, which have more substantial or more urgent system balancing challenges, are using operating incentives to support energy storage deployment. We do not want to introduce targets which could lead to the deployment of one particular balancing mechanism where other solutions may offer a more cost-effective or lower-carbon solution to deal with intermittency of supply or other balancing problems’.

On interconnectors the Lords said there was ‘a worrying lack of clarity about what options exist if a number of interconnected countries experience system stress simultaneously’. The government said ‘according to historical analysis of system stress events between GB and its interconnected countries conducted by Poyry for Ofgem in 2013, the expected correlation with interconnected countries is likely to be low, despite some coincidence in times of peak demand. There are good reasons for expecting the future contribution of interconnectors at times of system stress to increase relative to this analysis’, e.g. since ‘GB  wholesale prices are becoming more cost-reflective in times of system stress’, and while ‘market arrangements mean flows have not always followed prices’ that should be addressed ‘through market coupling reforms’. DECC was looking at the implications and has commissioned a Whole System Impacts of Electricity Generation Technologies model, looking at the impacts of electricity generation technologies on the overall electricity system, including intermittent renewables, system costs, and wider system balancing issues generally. Not before time!

The Carbon Brief group has also looked critically at the Capacity Market, and notes that it has many problems: ‘The first is that it provides continuing subsidies to fossil fuel generators, and highly polluting diesel plants, at a time when the UK is trying to decarbonise its electricity system. Indeed the energy market now has two contradictory policies working against one another – the carbon price floor penalises coal-fired power stations at the same time as the capacity market rewards them. Decarbonising electricity will be even more important as the heat and transport sectors are increasingly electrified. The capacity market also awards payments to plants that would have been open anyway – in the first auction, around a third of the plants which won contracts signaled they would have stayed open with no or very little payments. These windfall payments are arguably not the best use of bill payers’ money. The market is also focused on the needs of large fossil fuel and nuclear plants rather than new technologies which can reduce costs to bill payers by shifting demand. Such technologies can reduce the need to build expensive new power stations and the amount of time that the most expensive stations need to run’.

It suggests separate auctions for new and old capacity might help, along with emission criteria for projects. The government seems to now see the Capacity Mechanism as a way to get more CCGT gas plants built, so that might work, if they were willing to let higher cost new projects through (old fossil and nuclear capacity and diesel are cheaper), but as Carbon Brief says, it would be far better to promote more demand response. Certainly as more variable renewables come on line, something new has to be added to aid balancing: 

The IPCC has come up with a similar analysis – it too wants sub-auctions, CO2 limits with CCS for large gas plants, and more, longer term, Demand Response contracts: 

All in all, it does seem clear that the Capacity Market isn’t working properly and that changes are needed, depending on what its role is seen as being:’t-working’-says-former-Npower-chief/1229832#.VwD3s8dlldu and

With the plant margin falling as old plants close, and new variable renewables coming on stream, this is getting urgent and in the latest move, the Government has said it is bringing forward the Capacity Market start a year, to the winter of 2017/18, with the next auction being held this winter:

But what will it cover?

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