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“It strikes me as rather like announcing that you are going to concrete over the Somerset Levels to a height of six feet and then proclaim that ‘a flood prevention strategy is now fully in place’. It really is such a silly long-term policy that I cannot believe it will last for the time it will take to procure all this capacity.”
So says Alan Whitehead MP, on Decc’s announcement last week that the first capacity auction, to be held in December, will procure 53.3GW of capacity, or more than 80 per cent of the UK’s peak demand. This is a huge amount of power, and the cost to the consumer and distortion of the wholesale market will reflect that.
National Grid arrived at this number for a variety of reasons. The system operator is by definition cautious. As Decc’s own panel of technical experts points out in the report also published last week, it is working on assumptions that are risk averse in the extreme: for example, failing to factor in power coming from interconnectors in times of system stress.
There is a fundamental contradiction in the design of the capacity market, and the broader Electricity Market Reform (EMR) of which it forms a key part, that is now coming to the fore. EMR is an uneasy compromise between a competitive wholesale market and a government-controlled central energy buyer. It’s a cut-and-shut, and the more speed it gathers, the shakier it looks.
Decc is already using contracts for difference (CfDs) to decide the energy mix, favouring one technology over another. Now it is effectively taking over 80 per cent of the energy market. Where does that leave the wholesale market? And perhaps more importantly in the current political climate, where does that leave the bill payer? Decc has already had to “clarify” its radically downgraded forecast that the capacity market will add £2 to the average consumer bill. In fact, it has admitted, the average household will pay £13 a year towards keeping power stations open. That is not going to play well with the media or voters.
Fundamental reform of the energy retail market is practically certain, when the 2015 election is safely out of the way and the Competition and Markets Authority reports back. It looks increasingly likely that wholesale market reform will accompany it. The government of the day will have to choose: central control or a competitive market?
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