‘Bizarre’ to blame price hikes on Capacity Market

Blaming price hikes on the Capacity Market is “bizarre” as there is “no inherent reason” why it should lead to higher bills, the Energy and Climate Intelligence Unit has said.

The think tank was responding to Npower, which earlier today (2 February) announced an average increase of 9.8 per cent to its standard variable tariff for dual fuel customers. The supplier said the increase was in part down to the growing cost of government policies, including the Capacity Market.

“It’s bizarre, frankly, to see energy suppliers such as Npower blaming the capacity market for raising bills,” said Energy and Climate Intelligence Unit director Richard Black.

“For one thing, this week’s capacity auction has seen the lowest prices ever – far lower than most onlookers expected and raising questions if it was even needed – but in any case, there’s no inherent reason why the capacity market should lead to any noticeable increase in people’s bills.”

Black said the mechanism essentially hands energy companies cash for doing “very little” as almost of the power stations receiving contracts would have carried on operating anyway: “It’s a straight payment to their profits.” An efficient market would “erode” those profits, “effectively bringing bills down close to where they were before”.

The Capacity Market will also allow energy companies to use their plants “more flexibly”, making their operations more efficient, reducing the risk of price spikes and “again putting a downward pressure on bills”.

He said as long as the retail market works properly and regulators keep an eye for “profiteering”, then the mechanism should be able to secure backup capacity for “much less than headline figures might indicate”.

A spokesperson for Npower responded: “Npower, through its press release makes it quite clear that the Capacity Market is one of many factors behind today’s announcement.  To suggest otherwise is disingenuous at best.

“Everyone agrees that the Capacity Market is vital to ensure that Britain has enough reserves to meet demand and there are costs associated with this.  In addition it should also be noted that Npower is a supplier and not a generator.”

Ofgem chief executive Dermot Nolan said in January it is “not obvious” that there should be any significant bill hikes in the near future. Launching Ofgem’s replacement for the Supply Market Indicator, the Supplier Cost Index, he said a rise in wholesale energy costs over the last year is “far from unprecedented.” 

At the Utility Week Energy Customer Conference in Birmingham regulators warned that the retail market is in a “last chance saloon” and risks becoming “a thing of the past“. They said unless the “two tier” energy system can be ended and customers persuaded they are not being “ripped off” then the government will be forced to take radical action.

However, former regulator Stephen Littlechild has called for a fresh probe into the energy retail market as the Competition and Market Authority investigation reached “implausible” conclusions and exaggerated the market’s failings.