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First UK energy 'capacity market' brought forward to 2017

Out-Law News | 02 Mar 2016 | 4:42 pm | 2 min. read

The UK's first 'capacity market', allowing the National Grid to obtain backup power or demand reduction at short notice, could take place one year earlier than planned, the government has announced.

Under plans set out in a new consultation, the government would procure power for delivery in winter 2017/18 through an additional auction in January 2017. The consultation, which closes on 1 April 2016, also proposes tougher new penalties for companies that fail to deliver on their commitments.

Energy minister Amber Rudd said that the proposals for reform would encourage the construction of new energy infrastructure, in particular new gas-fired power stations. Successful bidders on the government's capacity auctions receive regular payments to ensure that they are able to provide backup power or demand reduction when the need arises.

"Ensuring that our families and businesses have secure energy supplies they can rely on now and in the future is not negotiable and I'll take no risks with this," Rudd said.

"The capacity market has driven down costs and secured energy at the lowest possible price for bill-payers, but I'm taking further action to tackle the legacy of under investment and ensure our country's long-term energy security ... We’re also sending a clear signal to investors that will encourage the secure and clear energy sources we need to come forward – such as gas and interconnectors – as part of our long-term plan to build a system of energy infrastructure fit for the 21st century," she said.

Introduced under the 2013 Energy Act, capacity market auctions are intended to boost UK energy security in the medium term until the government's full electricity market reform (EMR) infrastructure investment strategy begins to take effect. Energy sources and generators are able to bid to provide a share of capacity when the system needs it, and will receive a regular revenue stream to ensure that they are able to do so.

Capacity auctions have already been conducted to guarantee backup generating capacity in the winters of 2018/19 and 2019/20, and the auction for winter 2020/21 is due to take place in December. The government intends to purchase "materially more capacity than might otherwise have been the case" in this auction, before holding a new auction to procure capacity for winter 2017/18 the following month, according to the consultation.

The consultation follows a review of the current capacity market mechanism which the government conducted last year, in association with industry and investors. The government said that respondents to the review said that the capacity market mechanism was "the best available approach to our long-term security of supply", but that the "overarching message" was that "the volume of capacity procured needs to rise and the clearing price needs to increase as a result in order to provide the appropriate incentives for the market to bring forward new gas capacity".

The government has also indicated its intention to "take action" so that the capacity market mechanism does not provide diesel generators with "unfair advantages". A further consultation will be published by the Department for the Environment, Food and Rural Affairs (Defra) later this year and include "binding emission limit values on relevant air pollutants from diesel engines", it said.