Government set to triple energy subsidies to prop up old, inefficient power plants

Wednesday 5 October 2016

This December’s ‘capacity market’ auction, designed by the government to guarantee winter power supply from energy companies, is likely to cost consumers three times as much as last year’s, finds a new report by the think tank Green Alliance[1].
In an effort to secure supply the government has expanded the size of the auction to ensure new large-scale gas plants (CCGTs) win contracts.
But this will not be money well spent: it will subsidise old, inefficient plants, rather than driving investment into the flexible technologies required as the UK modernises its energy system.
The National Infrastructure Commission concluded earlier this year that flexible energy technologies such as demand side response, energy storage and interconnection are ‘no regrets’ options, which could save consumers up to £8 billion by 2030.
Green Alliance argues that the way government policy is currently designed is hindering investment in these resources[2].
The report reveals two problems with the government’s current strategy:
1.      Flexibility is undervalued. To keep the lights on, the UK’s power system needs to flex in response to changing demand and supply. But government intervention via the capacity market gives long term contracts for the amount of generation, ignoring the question of how quickly it can respond to changing conditions.
2.      Technology focus is too narrow. The government’s preference for combined cycle gas turbines (CCGTs) is distorting the market and putting a high burden on consumers. Recent reforms to the capacity market mean that costs to consumers could rise threefold compared with the previous auction: to £2.6 billion in 2016, from £833 million in 2015[3]. And new CCGTs risk becoming stranded assets as carbon constraints begin to bite in 2030 and as they get out-competed by other technologies.
Green Alliance says that the capacity market’s remit should be expanded: as well as procuring a certain quantity of resources, the capacity market should differentiate based on the quality – i.e. the flexibility – of resources. Its analysis shows this would ensure the right amount and type of gas was bought, alongside newer, cheaper and lower carbon flexibility technologies. This would cut excessive ‘deadweight’ payments to power plants that don’t provide the necessary services.
Amy Mount, lead author of the study, said:
“Everyone seems to like the idea of a smart energy system, but current policy isn’t very smart. It is asking consumers to pay three times more than they did last year to old, inflexible power plants which won’t match what the power system really needs.”
Amy Mount, head of Greener UK Unit, Green Alliance (available for interview), 020 7630 4515 / 07813 474986

[1] The report, Smart investment: valuing flexibility in the UK electricity market, is published today by Green Alliance.
[2] System security is about maintaining two conditions. The first is resource adequacy ie enough power generating capacity to meet demand, and the second is flexibility adequacy, ie the system’s responsiveness to changing conditions, for example, an unexpected plant shutdown, a lull in wind speed or an up-tick in demand in the minutes after the FA Cup final. In the past, resource adequacy has been the dominant security concern. But the structural shift to variable renewables, along with inflexible nuclear plants, is making flexibility adequacy a more pressing question.
[3] Green Alliance analysis, based on data from Cornwall Energy
[4] Green Alliance is a charity and independent think tank focused on ambitious leadership for the environment. Since 1979, it has been working with a growing network of influential leaders in business, NGOs and politics to stimulate new thinking and dialogue on environmental policy, and increase political action and support for environmental solutions in the UK.