Investor view: Daniel Wong

“Capacity payments should encourage the new build and continuing availability of existing gas-fired capacity in the UK power market”

The UK power market has been on a rollercoaster since its privatisation in 1990, moving from a regulated model to an essentially non-regulated one, and back to a hybrid model, where regulated assets have their return on capital in effect protected (renewable and new nuclear), while merchant assets on the fringes of the merit order are still going through tough times (gas).
The market has gone through at least two phases of serious distressed financial situations (early 2000s and post-2008) and seen a shift in the generation mix, initially geared towards reliable coal and nuclear generation and now increasingly dominated by intermittent renewable power. This increased weight of intermittent renewable generation requires a larger reserve margin, as well as peak and mid-merit generation with greater flexibility and speed of reaction. As such, there is a strong case to suggest this critical gas-fired capacity should enjoy similar protections to those of renewable generation and new nuclear capacity. Properly implemented, capacity payments should encourage the new build and continuing availability of existing gas-fired capacity, which will help to ensure the stability and reliability of the system in a post-carbon era.
But while the government’s proposals for the capacity market are moving in the right direction, questions remain: are the current government policies fair to all investors in generation; are they contributing to the security of supply and stability of the UK power market; will they deliver their decarbonisation objectives; what will they effectively do to the retail electricity prices that UK consumers pay; and finally, what effect are they likely to have in the UK economy as a whole?
Current energy policies are likely to result in a more expensive power market. This should be communicated to consumers as a necessary cost for meeting the UK’s energy objectives. At the same time, policies can be introduced to improve value for money for consumers through the introduction of renewable tariff tenders, encouragement of cheaper and proven technologies and stricter energy efficiency policies. One or all of these could be the key to riding out the next loop of the rollercoaster.