Helm’s firm power auction plan dropped

The government has dropped a key plank of Professor Dieter Helm’s 2017 energy review from its Review of Electricity Market Arrangements (REMA).

The Department for Energy Security and Net Zero (DESNZ) published yesterday (7 March) its feedback on the responses to last summer’s REMA consultation paper, which outlined a series of proposals for comprehensive reform of the wholesale electricity market.

Among the ideas under the spotlight was the Equivalent Firm Power auction, a recommended market reform proposed in Helm’s government-commissioned Cost of Energy review.

These auctions would see all power procured through a technology-blind process, which would unify existing support mechanisms, including the Capacity Market and Contracts for Difference (CfDs).

Bids by wind and solar power farms would have to include the cost of supplying so called firm capacity when they are unable to generate.

The concept was designed by Helm to reflect the wider system costs of renewables, which are able to offer very low electricity prices through the CfD process because the costs of generation are very low once they have been built.

The DESNZ response to the REMA consultation says it has decided not to proceed with equivalent firm power auctions through the REMA process.

The response says it agrees with the auction’s broad objectives of avoiding multiple uncoordinated support schemes and supporting the efficient deployment of low carbon power while maintaining security of supply.

However, respondents to the consultation were not in favour of the auction proposal due to concerns that it could undermine the system’s wider efficiency, increase capital costs and risk disrupting investment by creating greater uncertainty.

The response says that the government will continue to explore wholesale market reform proposals in the REMA paper, which are designed to break the current link between electricity generated by gas and much cheaper renewable power.

These include the paper’s headline proposals to split the wholesale market and create a green power pool, although the DESNZ says that the CfD scheme or additional support for the Power Purchase Agreement (PPA) market could be viable alternatives for achieving the government’s core objective.

However, the paper drops proposals to introduce local imbalance pricing and move to pay-as-bid pricing in the wholesale market.

Power exchanges currently operate on a pay-as-clear basis, meaning all generators receive the same price as the most expensive accepted bid, whilst bilateral trades tend to converge on the price of the marginal generator in the merit order. Under pay-as-bid pricing, generators would instead receive what they bid individually.

This proposal was dismissed after respondents raised concerns that pay-as-bid pricing could lead to tactical bidding by generators, which may seek to bid at the price of the expected marginal plant. Combined with imperfect information about the likely marginal plant, this could also distort the merit order, leading to inefficient dispatch.

The response also shows that the government remains committed to exploring the controversial concept of locational pricing, whereby wholesale prices would vary by location, reflecting the network constraints and balance of supply and demand for a series of zones or nodes across the transmission network.

And the response shows that the government has decided to retain the option of creating a strategic reserve as an emergency or transitional measure. While not the government’s preferred option, and one expected to progress only if absolutely necessary, a strategic reserve could help to address specific security of supply or capacity needs if required, it says.

A supplier obligation to furnish flexibility solutions is also given an amber light on the grounds that it could provide “stronger investment and operational signals for flexibility, particularly for demand side and small-scale flexibility”.