UK capacity market undermines demand-side response, says Yeo

The UK’s energy and climate change select committee has criticised the government’s upcoming capacity market saying it favours the development of new generation over the use of demand-side response options which could save consumers up to £359 million per year.

Chairman Tim Yeo said the committee has “serious and legitimate concerns” over the structure of the capacity market auction which offers those developing new generation capacity contracts of up to fifteen years, while those offering demand-side response (DSR) options could at best secure a one year contract.

Yeo said the design of the capacity market could “encourage the construction of expensive new power stations” at the expense of “cheaper and greener alternative”.

“It would be far more cost-effective to facilitate the use of DSR, where rapidly evolving technology is opening up new opportunities,” Yeo said in a letter to energy minister Matthew Hancock, adding that analyst estimates show potential savings of £359 million could be missed.

Those developing demand-side response receive shorter contracts than generators, as well as the possibility that that the contract could be cancelled if agreed through the ‘transitional arrangements’ (TAs) regime.

Yeo said the transitional arrangements are a welcome inclusion “because they will help DSR providers to participate in the enduring regime” but added that “DSR providers are currently being forced to choose between participating in the enduring Capacity Market auctions or in the TAs. This enforced choice could severely limit the development and future potential of DSR.”

Yeo also voiced concerns that the bias may be due to National Grid’s vested interest in increasing transmission capacity to bolster profits.

“It is impossible for National Grid to give objective advice to Government on this issue since the profitability of their regulated United Kingdom business is directly linked to the construction of new transmission capacity,” he said.

Yeo urged the government to reconsider the concerns of the DSR sector.

“With the right policy framework, this disruptive technology could catapult the UK’s energy sector into the 21st century,” Yeo added.

Yeo’s letter echoes calls from UK thinktank IPPR which earlier this week called on government to consider “major reform” of its energy policy, shifting its support from a centralised utilities-based model to one which backs ‘smart’, distributed electricity technologies.

The government is expected to announce how much capacity has been bid into the upcoming capacity market auction in October.