Capacity market auction brought forward at a cost to households

The next capacity market (CM) auction is to be brought forward a year by the Department of Energy and Climate Change (DECC), which will hold the competition in January 2017 at a cost to homeowners.

Following a consultation conducted throughout March, DECC has today announced that the next auction is to be brought forward to “guard against short-term security of electricity supply risks”.

The department says these risks are a result of changes in the market which have made many fossil fuel burning plants less commercially viable, triggering announcements of intentions to close. It has predicted that there is also currently not enough capacity in development to replace the gap created, causing a danger of capacity falling “below acceptable levels to meet the reliability standard”.

An early CM will therefore be held for delivery between October 2017 to September 2018, effectively bringing forward the first full delivery year of the CM by one year.

While this is intended to offset dangers posed predominantly by unprofitable coal and gas-fired power stations, DECC’s impact assessment has shown that homeowners will bear the costs of this decision.

“The gross impact of the early CM on household bills in 2018 is dependent on the cost of CM agreements. Using our calculated range of between £2 billion and £3 billion, the gross impact would be between £28-38,” it states.

This would seemingly cut against the government's cuts to the small-scale feed-in tariff, which were made in order to protect consumers from higher bills. Those cuts are expected to save roughly £6 from the average household bill each year.

Responding to this news, shadow energy and climate change secretary Lisa Nandy said: “The Tories are trying to bury this bad news. Every family’s energy bill is to shoot up to pay for these gross new handouts to the big energy companies.

“The worst part is that this scheme is a massive waste of money. It has been so badly designed it isn't getting new power stations built but instead is just lining the pockets of the Big Six and investors in highly-polluting diesel generators.”

However, there is some confusion over this cost as the £38 figure in DECC’s impact assessment claims the net impact would be considerably lower due to reduction in wholesale prices, which it says have been caused by fossil fuel prices.

It claims that compared to estimates based on projections in 2014 these falling wholesale prices will lower the average household dual fuel bill in 2018 by around £180.

Overall, the analysis shows that the implementation of the early CM would generate anything between a £1 billion net cost to consumers to a £11 billion net benefit. This equates to a range of around £38 added to annual household on bills to a positive gain of £408, depending on how much generating capacity needed replacing.

Despite the potential impact – for better or worse – on consumer bills, the continued absence of renewable technologies from the CM auctions has left commentators critical of the government’s energy policy.

Dr. Jonathan Marshall, Energy Analyst at the Energy and Climate Intelligence Unit (ECIU), said: “As a short-term measure to keep the lights on and ensure UK electricity supplies are sufficient, these reforms are good news.

“But it looks like coal plants have been thrown a lifeline. Eggborough, responsible for the emission of 11.5 million tonnes of CO2 in 2013, was supposed to have shut down, but signalled its intent to bid for capacity market contracts at the last minute. These reforms are likely to prompt other old, polluting coal power stations to do the same.”

“It’s notable too that the reforms have not created incentives for building new gas-powered generation, something that the government says it wants to do but which at present isn’t happening,” he added.

Catherine Mitchell, professor of energy policy at the University of Exeter, said that the measures highlighted the short-sightedness of energy policies and the absence of low carbon sources.

“Despite claiming to ‘remove distortion and interventions within the market’, ministers have meddled again, introducing yet another short term policy to an already confused market. The government would be better placed supporting the longer term transition taking place within the energy sector,” she said.

“The capacity market system inherently favours fossil fuel generation, damaging the environment while delaying the widespread rollout of a flexible grid based on renewables, demand management, storage, interconnection and more efficient practices, as the National Infrastructure Commission and Energy UK have recently recommended.”

On the issue of costs to consumers, Marshall added that the uncertainty over the effect on bills caused by bringing the CM forward is the latest in a series of cost-rising measures brought about by recent government policy.

“Those focusing on the cost implications of these reforms should remember that people’s bills have arguably been pushed up far more by cuts and policy U-turns emanating from the Treasury,” he said.

“As a recent select committee report found, this have made investors cautious and increased the cost of new energy infrastructure by pushing up the cost of capital.”

He concluded: “Policy tinkering is also undermining the UK’s energy security and compromising the government’s capacity to deliver on its targets for cutting greenhouse gas emissions.”