Energy MPs warn that Electricity Capacity Market may cause higher energy costs and more emissions


The Government’s electricity Capacity Market – designed to meet peaks in demand and help keep the lights on – could result in higher than necessary energy costs and emissions, according to a new report by MPs on Westminster’s Energy  Committee.

MPs found that the market’s design has been skewed in favour of fossil fuel generating capacity rather than innovative new demand-side response technology.

Only a fraction of the £1 billion spent 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.

Tim Yeo, MP,  Energy Committee chairman, said: “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.

“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 Government deserves to be congratulated for meeting the challenging timetable of EMR implementation, but important concerns about coherence, value-for-money and market accessibility remain. As it stands, the Capacity Market and CfDs are in danger of pulling UK energy policy in opposite directions, rather than complementing each other.”

The MPs also raised concerns about National Grid’s potential conflict of interest in its role overseeing the Capacity Market as the main Delivery Body for the Government’s Electricity Market Reforms (EMR), as well highlighting how small projects were potentially disadvantaged.

The report said that small players and community energy projects, who may have more limited resources than larger counterparts, are potentially disadvantaged by the complexity of the process in awarding long-term contracts to supply low-carbon electricity. Small enterprises also face financial barriers in attempting to secure these Contracts for Difference (CfD).

In particular, the timing of CfD allocation rounds–currently once a year–means that, after having invested large sums of money to meet prequalification criteria, unsuccessful applicants have to remain afloat for an entire year before being able to bid in the next auction for a chance to secure revenues for their projects.

The Capacity Market provides a regular retainer payment to reliable forms of capacity, in return for the capacity being available when the system is tight. Generation and demand-side providers can compete for capacity payments in an auction held four years ahead of the year in which capacity is expected to be delivered.

Pixie Energy

Pixie logo Pixie Energy is an incubator and a facilitator of strategic research and project work, focusing on energy regulation, policy and markets at the local and national level. Find out more about Pixie Energy here.

Local Energy Matters: Scotland

Local Energy Matters: Scotland is a free-to-download brochure with a focus on energy tariffs in the two Scottish electricity distribution regions, as well news on local energy and low-carbon schemes.

Previous editions can be download here.

Scottish energy market overview

You can read an overview of the Scottish energy market here.

Scottish Government energy feed