Britain’s dinosaur capacity market will worsen energy ‘trilemma’
Catherine Mitchell, IGov Team, 19th December, 2014
Tomorrow, the government will begin spending up to £4bn per year on power stations some of which we do not need. In doing so, it risks compromising all three of the objectives that energy policy is supposed to deliver: security of supply, affordability and low-carbon energy.
The capacity market auction will pay companies to keep existing nuclear, coal and gas-fired power stations running and to build new gas-fired units. Just over 50GW of capacity will be funded, at a maximum price of £75 per kW. The power stations will receive this money simply for existing; when they generate, they will also be paid for the electricity they sell.
The capacity market was conceived as a way of “keeping the lights on” at a time of increasing renewable generation, and when old coal, gas and nuclear stations were set to close.
However, it is designed around the out-dated and over-simplistic notion of 100 per cent renewables back-up: that every 1GW of wind power capacity, for example, needs 1GW of coal- or gas-fired capacity on standby. It is demonstrably untrue; but the myth persists, and the government has bought it, despite advice from legions of experts and counter-examples from more enlightened countries.
A far more sensible way to solve the energy “trilemma” lies in the modern, flexible, smart grid. It has low-carbon generation at the core, supplemented by interconnectors and storage (partly in the batteries of electric vehicles), and uses demand side measures as much as supply side.
The US experience disproves the notion that security of supply comes only through building more power stations. The Arctic chill of last January put 20 per cent of generating stations feeding the grid of PJM, the largest grid company in the north-eastern US, out of action at a time of record demand. Yet the lights did not go out, as PJM implemented demand-side contracts agreed with industrial and domestic consumers and took advantage of interconnections to neighbouring grids.
German industry is also entirely happy with demand management. There, network-operating companies pay companies to run non-time-critical processes only when supply is abundant, and reduce those companies’ bills accordingly. It is a business transaction that rewards both parties.
Yet here, demand-side measures are seen as unimportant. As a result, the government has set aside only about 1.5 per cent of the capacity market for demand-side providers. This is despite evidence from the US showing that it regularly meets 10-12 per cent of peak demand, and a recent study by Sustainability First putting the UK potential at about 30 per cent.
Costs and carbon emissions from using demand-side measures are of course substantially lower than those associated with running extra fossil-fuel power stations. NERA Consulting estimated that including demand-side management in the capacity market to its maximum potential would save UK customers £359m in the first year alone.
Britain already has four interconnecting cables with other countries, and should more than double the figure by 2020. The National Grid estimates that this will save UK customers about £1bn a year. Other analysts conclude that an 8-fold increase in current capacity would save Britain about £4bn per year between 2020 and 2030.But interconnection is excluded from the first round of the capacity auction.
Environmentally, the results of the capacity market could be disastrous. It could end up financing the refurbishment of 12GW of coal-fired generation; having refurbished, those stations would then meet EU criteria on air pollution and so could remain open as long as operators want. And this at a time when the declared policy of all three main parties is to end the use of coal, the most polluting fossil fuel.
As Centrica Chief Executive Sam Laidlaw observed in October, it is a paradox that “old, dirty coal stations will be paid extra to stay online for longer” as a result of the capacity market, noting that “the cost will be levied on customers’ bills, alongside the cost of the carbon price floor, which is designed to encourage switching away from coal.”
Alternatively, the capacity market may fund construction of new gas-fired power stations and support them with 15-year contracts. This year’s auction pays for capacity from 2018, which would mean the gas-fired units running until 2033. Yet according to the Committee on Climate Change, the most efficient pathway to Britain meeting its legally-binding climate change target involves virtually decarbonising the electricity sector by 2030. So the capacity market would still be subsiding gas-fired power stations even as another arm of government policy is supposed to be shutting them down.
The auction will not be positive for energy security, given that Britain depends on imports for both coal and gas. Money, meanwhile, will flow in the other direction. EDF, for example – mainly owned by the French government – is bidding all of its coal and nuclear stations into the auction, and could emerge £2.6bn richer over three years – including payments for nuclear power stations that are going to stay open anyway.
The government could have chosen a better way, by prioritising measures that really do solve the energy trilemma – incentivising interconnection, treating demand-side management as a priority, encouraging storage through building the electric car fleet, and supplementing all of that with a strategic reserve scheme to provide a small amount of guaranteed gas generation. This would keep bills down, improve security of supply, and be the first step to building the flexible low-carbon grid that we will need by 2030.
Instead we will have higher bills, reduced security of supply and higher carbon emissions, and will breathe new life into a way of thinking about the electricity system that really ought to go the way of the dinosaurs.
This Opinion Piece first appeared on Business Green on 15th December 2014: http://www.businessgreen.com/bg/opinion/2386742/britain-s-dinosaur-capacity-market-will-worsen-energy-trilemma