Lawrence Slade argues that the Capacity Market is a necessary measure to maintain both supplies and investor confidence. The current hiatus should be seen as an opportunity for reform – not the end of the measure
The winter blackout story, a staple of previous years, accompanied by warnings over thin capacity margins has become a thing of the past.
This is worth remembering as the government works with the European Commission to get the Capacity Market (CM) back on track following the legal challenge that led to its suspension last November. Despite the scepticism which some greeted its introduction, it has delivered its primary objective – keeping the lights on at lowest cost to the customer.
Of course, the imperative to maintain sufficient capacity has not existed in isolation – it has had to work alongside the drive to decarbonise our power supply. As the legal challenge shows, not everybody has agreed with how the CM has operated but providing affordable security of supply while we undergo the energy transition has been fundamental to maintaining confidence and support for the whole process.
It has not been perfect but that is not a realistic expectation for a new policy tool brought in to deal with an unprecedented challenge. Despite the enormous strides we have made in reaching the point where low carbon accounts for over half of electricity generation, the practical reality is that there remains a need for thermal plants. As elsewhere, they remain subject to emission reduction measures such as the EU Emissions Trading System (ETS), the Industrial Emissions Directive (IED) and those introduced in the UK to tackle pollutants – particularly NOx – produced by medium-sized thermal plants.
Not every policy initiative in the energy sector has worked as it might have done in recent years but credit is due where the CM and the Contracts for Difference have combined competition and certainty to deliver the desired outcome, at low cost to the consumer.
And it is the damage to certainty that – along with the risks to security of supply which will increase the closer we get to next winter – is one of the most significant ramifications from the suspension.
In recent years, investors in this sector have faced more than enough uncertainty and the last thing they – and we as a country – need is another dose that could prove terminal not just for individual operators but to overall confidence. The overnight removal of £1 billion of apparently guaranteed income not only jeopardises some (particularly smaller) capacity providers, putting jobs and livelihoods at risk, but could also give investors yet more cause to consider putting their money outside the UK.
The existing plants and new developments that depend on this income includes newer players like DSR and battery storage, gaining more of a share as the respective technologies develop. It is clearly important that the CM evolves and increases the opportunities for newer participants – which is something the five-year review should address.
There’s no reason why the Capacity Market can’t continue delivering its aims, supporting decarbonisation through a technology neutral auction which includes renewables plus technology such as DSR and meets State Aid rules. It remains the best way of ensuring security of supply through the energy transition which, to repeat the point, is an essential element of securing confidence in the UK’s energy policy going forward.
Building on and reforming the CM is a far better approach than a Year Zero approach signalling a death knell for projects, threatening security of supply and investor confidence and pushing up costs for customers – who, lest we forget, pay for all this – at a time when bills are already rising.
Following the understandable initial shock and uncertainty, we have been reassured by BEIS’s practical and commonsense approach to getting the CM back on track. As I write, we await its response to the recent consultation, which set out plans not just on obtaining renewed State Aid approval but also resuming collection of payments. This gives an important signal that if providers continue fulfilling their commitments under the CM, renewed approval will allow the release of deferred payments and ensure they won’t be left out of pocket. Such a move also provides clarity for suppliers who had been left in limbo as to how they should respond.
Concerns certainly have not been allayed yet but these steps in the right direction show government has listened and appreciated what a crucial matter this is for our industry. We will remain on the case to ensure that, in spite of other ongoing issues, the government and the EC remain focused on reopening the market as soon as possible.
First published in the February 2019 issue of New Power Report