UK: Capacity market auction slows decarbonization process

The results of the U.K.’s second capacity market auction have been published, and for the second year in succession simply serve to highlight the hyprocrisy in the government’s energy stance.

The results of the U.K.’s second capacity auction, run by the National Grid – the company that owns and manages the electricity grids – show that 46,353.569 MW were awarded contracts out of a total of 57,724.948 MW that entered the auction. The awarded capacity agreements need to be delivered in 2019/20.

Furthermore, the auction cleared at £18 per kW a year a day ahead of schedule, a lower price than last year’s £19.40 per kW when 49.26 GW of capacity was contracted.

Andrea Leadsom, a minister at the U.K.’s Department of Energy and Climate Change (DECC) welcomed the auction results, writing on Twitter that "capacity auction result is a good deal for customers. Fierce competition has driven down costs, securing capacity at lowest price possible."

However, this alone is not what the capacity market mechanism was designed to achieve. Leadsom should be reminded that in introducing the Electricity Market Reform (EMR) in 2014, (part of which is the capacity market), DECC argued that the EMR aims to “decarbonize the electricity generation, keep the lights on and minimize the cost of electricity to consumers.” Yesterday’s auction, like last year’s too, has utterly failed to achieve DECC’s aim, bringing a shameful blow to the country’s policy-makers.

Decarbonization halted

Participants in the auction are not required disclose fuel type, but Sandbag, an environmental think-tank, has published an analysis splitting the awarded plants by fuel type. "This split is fairly robust, except for the split of embedded generation between gas and diesel, which is hard to judge, and therefore should be viewed as an approximation," said Sandbag.

According to Sandbag’s estimate, inefficient small gas (512 MW) and diesel (575 MW) generators were awarded £138 million and £159 million of public money respectively to deliver capacity in 2019.

"A tax loophole – the Enterprise Investment Scheme – is funding super-profitable new diesel plants to be built, which evade carbon pricing and strict emissions limits, and although they are cheap to build, they are expensive and polluting to run," said Dave Jones, policy analyst at Sandbag.

The U.K.’s Renewable Energy Association (REA) added that the capacity market results show the U.K. is supporting high carbon power at the expense of renewables and energy storage.

Specifically, the REA argues "many renewable technologies could have provided better value, lower carbon options". However, the REA welcomed that "approximately 450 MW of demand side response successfully cleared the auction, more than double last year’s auction," although "the lack of new-build energy storage shows that the design of the mechanism needs to be adjusted to better incentivize greater investment in energy storage and demand side response capacity".

Putting these figures into perspective, Sandbag stressed that only 1% of the capacity contracted was demand response, with a very small amount of this considered "proven" (8 MW out of 456 MW).

Failing to attract new investments

The second goal of the EMR and the capacity market mechanism is to provide a solution to the so-called "missing money" problem. Utilities are complaining that the energy prices were not high enough to build new generation units and that the problem became even larger due to renewable power plants pushing conventional power units out of operation.

The U.K.’s EMR was designed on the basis that it solves the “missing money” problem but the auction (like last year) failed massively to attract investments in new power facilities.

Based on the results published by the National Grid and the Sandbag analysis, no new large-scale natural gas plant was awarded a capacity contract and the majority of the contracts were won by old coal, gas and nuclear facilities that DECC aspires to replace with new low-carbon gas plants.

It is evident that the capacity market auctions cannot stimulate the gas sector and attract new investments. On the contrary, Sandbag points out that "£139 million will being paid to subsidize old coal power stations in 2019, despite the government announcing a coal phase-out."

In December 2014, the only new plant that had won a capacity agreement was a gas power station in Trafford (1,656 MW), but the project is still struggling to secure financing to ensure it will be built.

The capacity mechanism has massively failed to achieve the EMR goals and the government is obliged to reform it after only one year of implementation. This is a rather shameful blow to the U.K.’s energy policy and DECC’s vision for a centralized energy system that belongs to a past era.