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Government opts for Capacity Market for when the “wind stops blowing”

Green policy news - by GreenWise staff
15th December 2011
The Government will introduce a market-wide mechanism to ensure there is enough electricity capacity as the UK switches to greener forms of energy generation.
The Secretary of State for Energy Chris Huhne announced today the Government will legislate for a 'Capacity Market’ to ensure the UK can meet electricity demand at all times as he published more details about the Government’s White Paper on Electricity Market Reform (EMR). The White Paper is a wide-reaching set of reforms to meet the challenges of decarbonising the UK’s energy market over the next decade. Huhne also confirmed today that the National Grid will deliver the Capacity Market as well as new forms of subsidies, known as Feed-in Tariff Contracts for Differences (FiT CfDs), aimed at incentivising investment in new low carbon energy projects.

National Grid
A spokesperson for the Department of Energy and Climate Change (DECC) said the National Grid, through its System Operator, had been chosen to deliver the Capacity Market and the FiT CfDs because it "came out on top" against the criteria set out in the White Paper. The criteria included accountability, independence, value for money, credit-worthiness, technical expertise and financial and commercial skills.

Capacity Market
The Capacity Market will enable different providers, including potentially renewable power plants, to bid to deliver electricity capacity at times of high demand. The Government believes such a mechanism will be less expensive than relying on 'back-up’ power plants and will avoid the higher prices that could result from tight capacity margins. It said it would act as an "insurance" against blackouts as old coal power stations are decommissioned and new, cleaner, but less reliable forms of energy, such as wind, come on stream. It will also open up the market to non-generation solutions such as demand side response (when for example energy-intensive companies reduce their demand from the electricity network in response to overload), the Government said.

"A capacity mechanism provides an insurance policy against the risk of a capacity shortfall. Current estimates suggest that a problem could emerge in the medium-term - although accurate forecasting far ahead is difficult. That is why we need to put in place our insurance policy now; so we are covered against all possibilities and can respond as and when we need to," Huhne said in a written Ministerial Statement. 

"Having considered the responses to our consultation on possible models of capacity mechanism, and undertaken subsequent analysis on the relative merits of the different options under consideration, the Government intends to legislate for the establishment of a Capacity Market."

The Department of Energy and Climate Change (DECC) points out that the Capacity Market is not a replacement for the electricity market, but runs alongside it. However, it acknowledges that it is a "major intervention" in the market. As such it has published an impact assessment alongside today’s Technical Update, which calculates that the Capacity Market will have a "limited impact" on average electricity bills and could even lead to a small reduction on bills. 

Keeping costs down
Keeping costs down for consumers is one of the central aims of the EMR. The Government estimates the scale of the investment needed to transform the electricity market while "keeping the lights on" will cost £110 billion. This is because it needs to attract investment in an array of new low carbon electricity sources, including new nuclear, gas, renewables and carbon capture and storage.

But its plans have raised criticism from some quarters, which believe them to be too expensive and unachievable. Earlier this week, the Adam Smith Institute and the Scientific Alliance published a report that claimed the Government's "unrealistic" reliance on wind, solar and other high-cost renewable energy technologies would lead to an energy crisis by the middle of the decade.

However, today Huhne said the Government was making "rapid progress" and urged developers to get in touch with DECC to discuss early low carbon electricity generation projects. The Technical Update provides a timeframe of up to June 2013 for developers to submit an expression of interest to DECC.

Today’s paper also sets out in more detail the arrangements for Renewable Obligation Certificates (ROCs) from 2027 onwards. ROCs are the current system of subsidies for large-scale renewable energy projects.

The Government did not provide any further details, however, on the FiT CfD, which are set to replace ROCs for any new projects, or on the Emissions Performance Standards (EPS). The latter sets limits on the amount of CO2 any new fossil fuel power plant can emit. Instead, DECC promised to publish more details on these measures early next year.

"Today marks a milestone in delivering the reforms we need to move to a low carbon economy while keeping the lights on and costs for consumers down," Huhne said.

The Government aims to introduce legislation on electricity market reform in May 2012 with a view to projects moving forward with CfDs in 2014.

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Government opts for Capacity Market for when the “wind stops blowing”
The Government has chosen National Grid to deliver parts of the EMR
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