Opinion: Government capacity markets

Last week the government announced reforms to the main policy in place for ensuring that the UK’s lights stay on in the future – the Capacity Market.

The reforms may help deliver the new gas-fired power stations that the government is keen to see come forward but they fall short of delivering the kind of flexible, efficient and secure system that new technologies are increasingly making possible.

The Capacity Market allocates subsidies to new and existing power stations in exchange for a guarantee that those stations will be online when they are needed. So far it has failed to bring forward enough new capacity. Based on the recent announcement, the government’s approach to fixing the problem is straightforward – buy more capacity and count on more gas being amongst the power plants to win contracts. While this might be successful, it is also likely to lead to higher payments than necessary being made to power plants that would have been open anyway.

Instead, to deliver security of supply in the long term, the government needs to take advantage of new technologies like demand response which reduce the level of demand for electricity at peak times and limit the number of new power plants that need to be built as a result. Electricity storage can also help to balance supply and demand and is developing rapidly – it could provide 1.6GW by 2020 if the government puts the right framework in place.

And if demand response and storage were integrated within a smarter grid better able to make use of higher levels of renewables and balance supply and demand in real time, the benefits could be significant – a recent Imperial University study for the Committee on Climate Change said greater flexibility could lead to savings of £3 billion a year by 2030 as the electricity supply is decarbonised. While some new gas capacity may be needed to replace retiring power stations, relying on an old model of delivering security of supply through building more large fossil-fuelled stations is looking increasingly outdated. The electricity system is going digital and it is important that the government’s policies keep up with these technology-led changes.

Ultimately, that will require deeper policy shifts than the government have been able to deliver today. The Capacity Market still doesn’t take into account the need to decarbonise (especially following the ambitious agreement reached in Paris) and is still working against other government aims, such as phasing out coal. The reforms announced today may get the government some of the gas that they want, but won’t deliver the flexible, efficient, low carbon electricity supply that the UK needs.

One of the positives of the announcement this morning is that it included proposals to try and tackle a problem that IPPR highlighted in a report published in December of last year – highly polluting diesel generators being awarded millions of pounds in subsidies from consumer bills. The proposal is to limit the emissions they can produce by January 2019 at the latest.

That report showed that diesel generators are the most polluting form of electricity generation available, at over 1010gC02/kWh. Coal, the most polluting form of large scale electricity generation clocks in at 930gCO2/kWh, and a large gas plant at about 378gC02/kWh. Given that DEFRA are again today being threatened with a law suit from ClientEarth due to the UK’s failure to meet air pollution limits, the government may want to put some serious thought into how quickly the emissions limit they plan to place on diesel generators comes into place. These diesel generators were able to get deliver profits of up to 23 per cent to those installing them. Given the scaling back of support for low carbon support, this is difficult to justify.

Restricting diesel generation is a welcome move which will be good for air quality, good for reducing C02 emissions and good for bill payers. But deeper changes to the way the government tries to deliver security in the UK’s energy system are still needed.

Byron Orme is an IPPR research fellow in the energy, transport and climate team.