New tech unable to spread without a route to market, MPs told

The lack of a route to market is slowing the spread of disruptive technologies such as demand-side response and storage, MPs on the Energy and Climate Change Committee have been told.

The capacity market in particular must be fixed to allow them to compete on a level playing field with the alternatives. Crucially, they need to be able to access the longer-term contracts which are currently available to conventional generators.

“What’s really important is that we reform the capacity market so that it isn’t biased towards capacity, but is biased towards buying three different types capabilities in the network,” said PassivSystems chief executive Colin Calder. “One is storage, the second is demand-side response and the third is generating capacity itself. This is not picking technologies. It’s about picking different capabilities.”

Giving evidence to the committee, he urged the government not to be afraid of setting procurement targets for each: “If we don’t we will not shift the market away from its risk averse tendency of buying [generating] capacity.”

Demand-side response (DSR) firms like his are only able to bid for one-year contracts in the capacity auction, unlike the developers of new generating capacity which can bid for contracts lasting up to fifteen years. Calder said they cannot make do with one-year contracts as they need to cover the upfront costs of installing equipment in homes and businesses.

Tempus Energy chief executive Sara Bell agreed: “When you go and speak to a customer and explain the capacity market to them, explain all the changes they would need to make to their operation, to how they run things, to what they do and then say the revenue is only for one year, they tell you to go away… If the contracts were all the same length, we would immediately make it a competitive market.”

Asked by the committee why the spread of new technologies was progressing so slowly, she responded: “Transitions are hard because there are winners and losers, and the losers tend to have very big balance sheets and are very good at lobbying. We saw that clearly in the capacity market.”

She continued: “We need to ensure that those conservative tendencies to support generation are not allowed to take precedence over new technologies and that’s definitely happening today.”

The view was also shared by director of the UK Energy Research Centre Jim Watson: “If we’re interested in the least cost, then it seems crazy to me that we’ve got this capacity mechanism, which is supposed to be technology neutral, but is simply not.”

Kiwi Power director Yoav Zhinger said the problem has been exacerbated by the credit cover requirement: “Demand response is the only type of asset in the capacity market where we are required to put up a bond to be able to bid, like a power station, but we are only to receive a one-year contract.” He said his company has had to put down millions of pounds just to take part: “That’s more than we spend on any other line item in my entire business.”  

Renewable Energy Association chief executive Nina Skorupska said the capacity mechanism is the only route to market for storage developers, aside from National Grid’s recent Emergency Frequency Response tender. So far the mechanism has “failed to deliver”.

She called on the government to consider removing the restrictions against the “stacking of revenues” from the provision of balancing services and said it should scrap the rule preventing participants from receiving subsidies through other mechanisms such as the Contracts for Difference scheme: “Solar prices are coming down so much, if you add storage to it, it could play its part.”

“All of those assumptions that were written and put into the capacity market many years ago all have to be reviewed and that should not take too long to do,” she added.

A further concern for storage developers is the way capacity market warnings are issued, said Electricity Storage Network director Jill Cainey: “If you miss a stress event you attract a penalty … For storage it’s a big risk because you may not hit that half-hour period.”

Capacity market warnings are issued to market participants to alert them that a stress event may be about to occur in the coming hours. They must be available to provide capacity during the stress event but will only find out if it has actually happened afterwards – a problem if you need to store up sufficient energy in advance.

“Storage can absolutely hit those settlement periods if it’s called on at the time the system needs it,” said Cainey. The capacity market would become “very attractive” if the rules were changed to allow this.

As things stand “it would be a brave storage developer that would dip their toe in the capacity market this December,” she added. “Perhaps next December we might see a bit more. It was never designed for storage.”

The meeting was the last to be held by the Energy and Climate Change Committee before it is disbanded on 17 October.