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Govt Awards Capacity Market Contracts

December 19, 2014

By Paul Homewood




The Telegraph have joined the “let’s show backlit water vapour and pretend it’s black smoke” campaign.

They report:


Consumers will pay an £11.40 annual energy bill levy to help keep the lights on from 2018, ministers have announced, amid fears the policy could inadvertently increase the risk of blackouts before then.

The Department of Energy and Climate Change said on Friday that it had provisionally agreed to pay £990m in subsidies to power plants to guarantee they could provide enough electricity to meet demand from 2018.

The sum is less than had been feared, but experts warned that the controversial scheme could backfire. Some of the power plants that were deemed surplus to requirements for 2018 may actually be needed to keep the lights on in the intervening years – and could now be at risk of closure after failing to win the subsidies.

Phil Grant of Baringa Partners said the economics could be “very challenging” for these plants and unless market conditions improved “some plant may opt for mothballing”. If this were to happen, National Grid would have to intervene with emergency measures “to ensure the lights remain on as capacity margins would then become very tight indeed”, he said.

The new subsidy scheme, called the capacity market, offers retainer-style payments to energy companies to ensure their power plants are available – even if they don’t actually end up generating.

The majority of the subsidies, which were awarded through a reverse auction, will be paid to existing coal, gas and nuclear power plants, while dozens of very small new and polluting generators have also won contracts.

Just one big new gas-fired power plant, the proposed Trafford station, is likely to be built as a result of the auction. The project confounded expectations by securing a contract, despite a low subsidy level that experts thought would not make investing in new plants sufficiently profitable.

Most other planned new gas plants – including SSE’s Abernedd, ScottishPower’s Damhead Creek 2, Centrica’s King’s Lynn, Intergen’s Spalding and Gateway and the independent Thorpe Marsh Power Ltd projects – will not go ahead this year, after missing out in favour of cheaper options to keep existing old plants running.

Critics have suggested the policy is turning out to be poor value for money as it will hand vast subsidies to old nuclear plants that would have kept running anyway, and to old coal plants that are simultaneously being subjected to environmental taxes designed to force their closure.

Consultants Cornwall Energy said: “If the policy objective was status quo at a higher consumer cost, it’s a triumph.”

Ed Davey, the energy secretary, said: "This is fantastic news for bill-payers and businesses. We are guaranteeing security at the lowest cost for consumers. We’ve done this by ensuring that we get the best out of our existing power stations and unlocking new investment in flexible plant."



My thoughts:

1) The Telegraph should have pointed out that £990 million equates to £37 per household, which is more relevant than the £11 figure they quote.  

2) The real issue is that only one new plant is being built as a result. In the meantime, the older coal and nuclear plants, which were going to keep running for a few years longer anyway, still have capacity to fill the gap. As a result, they can afford to offer standby at a much lower price than a new built plant could.

The real crunch comes in the early 2020’s, when these are shut, and unreliable wind power is supplying a much greater part of the mix (and therefore will need a much greater backup). To cover this gap, we will need a huge investment in new gas power plants, which in turn will mean that capacity payments then will many times greater than this one.

3) The reference to very small new and polluting generators must be the standby diesel generators we often hear about.

4) Davey’s comment that “We are guaranteeing security at the lowest cost for consumers”, ignores the fact that we could have had total security at no extra cost but for his policies.

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