Capacity market needed "urgently" to prevent energy shortfall, suppliers say

EnergyUK, which represents over 80 energy providers including the 'Big Six', has written to Energy Secretary Ed Davey before the Energy Bill returns to the House of Commons next week. The letter, a copy of which has been seen by Out-Law.com, sets out the need for a "stable, long-term energy policy framework" in order to "make the investments required across the electricity sector" and "bring on new capacity".

In the letter, EnergyUK chief executive Angela Knight said that existing power stations could make a "cost effective contribution to maintaining security of supply". However, delaying the introduction of a 'capacity market' to incentivise both the building of new gas power stations and the retention of existing capacity could prevent generators from taking investment decisions, she said.

The Energy Bill proposes a new system of financial incentives for power companies, designed to ensure that low-carbon forms of electricity generation can compete fairly in the marketplace. These will be backed by a 'capacity market', aimed at ensuring that consumers continue to benefit from reliable electricity supplies at an affordable cost. The measures are set to be introduced as one fifth of the UK's existing power generation capacity nears the end of its life, while an increasing amount of the country's power will be generated from intermittent sources such as wind.

As proposed by the Government, the capacity market will enable the National Grid in its role as system operator to purchase the total volume of generation capacity it requires through a central auction, including all providers willing to offer capacity. It will also be able to offer incentives for energy companies to invest in new capacity or to keep existing capacity operational. The Energy Bill, if approved in its current form, will allow the first auctions to take place from 2014. However, guaranteed capacity will not be expected to be made available until the winter of 2018-19, according to the Bill.

The letter referred to previous reports from the National Grid and energy regulator Ofgem warning of potential energy shortfalls in 2015/16. EnergyUK said that evidence of shortfall by this date was "credible". Older facilities were coming to the end of their allowable 'running hours' under EU emissions rules earlier than expected, it said; while "policy uncertainty" and current wholesale market prices were discouraging companies from further investment.

"A capacity market should reduce price spikes and provide a reliable income stream that investors can base decisions on and so provide the additional capacity," the letter said.

The Department for Energy and Climate Change has previously said that it is "alive to the challenge" of guaranteeing the UK's future energy security.

"The Bill before Parliament will set the conditions for the investment needed to keep Britain's lights on in the long term," Energy Minister John Hayes said in response to similar concerns raised by SSE chief executive Ian Marchant in March.

"We are not complacent about this, which is why we have an insurance policy - the capacity market. We're considering how and when this can best be used to bring about any necessary increase in supply or reduction in demand. We are confident in our approach and in the responsiveness of the market in providing secure power supplies," he said.