Will bringing forward the capacity market avoid an energy crunch?
Energy and climate change secretary Amber Rudd announced in early March that government subsidies for energy companies will be brought in a year earlier than anticipated to ensure that the demand for power can be met.
The capacity market scheme, introduced by the Energy Act 2013, introduces auctions whereby the successful bidders will receive regular payments for providing backup power when required. The scheme was due to be introduced for the winter of 2018/2019 but is now due to start in 2017/2018 as a result of the energy crisis that is facing Britain.
The capacity market is part of the government’s electricity market reform package and aims to ensure security of electricity supply by providing a payment for reliable sources of electricity capacity. The purpose of the scheme is to ensure that electricity can be provided to National Grid at short notice. Essentially the payments are for power plants that can guarantee back-up capacity in winter months over the coming years when several coal and nuclear plants are due to close.
The announcement comes amid increasing concerns regarding the UK’s ability to meet its electricity generation needs. Bircham Dyson Bell recently released a report which sets out the findings of its research into whether there is likely to be a shortfall in between the supply and demand of energy generation.
The report highlights that power stations are closing at a faster rate than new electricity generation projects are being constructed. The total electricity generation capacity in the UK is currently just under 85GW which is down from almost 100GW four years ago. A further 24.8GW is expected to be lost by 2025.
The research concluded that measures need to be put in place to smooth peaks in demand and further incentivise projects that will increase supply without affecting climate change.
The government’s consultation on the changes to the capacity market explains that the new capacity that the government will need to subsidise will be confirmed nearer to the auction date, however, it is expected to be at least 1GW, and possibly over 3GW, more than previously anticipated.
The revisions to the capacity market appear to be aimed mainly at the gas industry, in the hope that gas fired power stations will be able to compensate for the increasing number of retiring coal powered plants. However, the consultation confirms that ‘all types of capacity will be able to participate – including existing and new build generation, storage, DSR and interconnectors’.
The subsidies had previously been estimated to be almost £1bn per year for energy firms to ensure that power plants will remain running. The funds for the payments will be raised by levies on consumer energy bills at an estimated £10 per year for a typical household. The revisions to the capacity market proposed by the government’s consultation are likely to significantly increase these costs.
As highlighted in the Bircham Dyson Bell report, there are often a number of hurdles in the way of electricity generation projects actually being constructed. The paper notes that there are 22 electricity generation projects that have been granted consent under the Planning Act 2008, but that only a handful of these have started construction. Of those that have, none are gas-fired power stations.
It therefore remains to be seen whether the introduction of the capacity market subsidies a year earlier will have a tangible impact on whether any new gas fired power stations are enabled to come forward for construction any earlier than they otherwise would.
