Energy efficiency ‘not yet ready’ for capacity market

Energy efficiency projects are “not yet ready” to compete in the capacity market, the Department for Business, Energy and Industrial Strategy (BEIS) has stated.

It made the pronouncement whilst launching a call for evidence on the creation of new markets for energy efficiency.

The department reached the conclusion based on the findings from a multi-year trial designed to simulate the participation of energy efficiency projects in the capacity market.

The pilot scheme began in 2014. Participants bid across two auctions for contracts to reduce their electricity demand between 4pm and 8pm on winter weekdays. The first covered the winter of 2015/16, whilst the second covered the winters of 2016/17 and 2017/18.

Those which secured agreements were paid according to what they bid rather than a common clearing price. Given that they could receive the amount only once, the price was capped at £300/kW – the equivalent of four years of maximum bids in the capacity market.

In the first auction, contracts worth £1.28 million were awarded to 22 projects to deliver 5.6MW of peak demand reduction. The weighted average bid was £229/kW, with the lowest being £94/kW and four organisations bidding at the price cap.

Contracts worth £4.74 million were awarded to 37 projects to deliver 23.3MW of peak demand reduction in the second auction. The weighted average bid was £203/kW, with lowest being £48/kW. The two highest bids came in at £299/kW.

The winners included businesses, local authorities and aggregators such Limejump and British Gas Trading. Most of the projects were focussed on lighting upgrades.

Agreements were eventually signed for projects totalling 27.6MW. Of this, 6.9MW dropped out of the pilot before being completed. The actual amount of peak demand reduction delivered over the three winters was 18.9MW.

BEIS said the scheme was cost-effective, generating significant net benefits for both the participants and society as a whole. But it nevertheless concluded that energy efficiency projects are “not yet ready” to enter the capacity market.

Significant changes would be needed accommodate energy efficiency projects within the scheme. In its current form, participation would be low and bidders would struggle to secure agreements.

The department highlighted a number of challenges, for instance, how to accurately and cost-effectively measure the demand reductions achieved by energy efficiency projects.

There is also the issue of how to compare the value of permanent demand reduction from energy efficiency measures against temporary capacity from flexible technologies such as generation, storage and demand-side response.

Furthermore, energy efficiency projects tend to have access to fewer sources of funding than their potential rivals and participation in auctions is often a complex process with high associated costs. Combined with their own high upfront costs, this would likely make it difficult for them to compete.

At the same time, BEIS noted: “Under different regulatory landscapes in other regions, forward capacity markets have been successful in mobilising investment in energy efficiency measures that would otherwise not take place and bringing clearing prices down.”