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The diesel dilemma: “dirty” generation in the capacity market

January 30, 2016

By Paul Homewood

 

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http://utilityweek.co.uk/news/the-diesel-dilemma-%E2%80%9Cdirty%E2%80%9D-generation-in-the-capacity-market/1210222#.Vq0JCdCjL7z

 

As we have all known for a while, the UK is becoming increasingly reliant on small scale diesel generators to provide back up capacity for when the wind forgets to blow.

We already know that the cost is high and we have regular debates about how “dirty” it is. (No names, no pack drill, Peter!)

 

But this article from the energy specialist news site, Utility Week, really is an eye opener. It underlines just how self contradictory UK energy policy has become. It also highlights how government intervention can make things much worse:  

 

 

“Dozens of dirty diesel generators”. Hardly the headlines the government was hoping for when it set up the capacity market. Yet, when the second auction came to a close this winter, it once again became clear that small scale diesel generators had ended up among those subsidised. The cost this time? £176 million on small scale diesel generation over 15 years – even more than the £109 million in the first auction. Experts have told Utility Week that without changes to the market it could be even worse in the next round.

 

 

   

While the primary purpose of the capacity market may be to ensure security of supply, it doesn’t exist in isolation. It wouldn’t be necessary if the government wasn’t also trying to cut carbon emissions. The government’s dilemma is that, in trying to achieve one of those objectives, it is apparently compromising the other. On the one hand it’s committed to closing all of the UK’s coal fired power stations by 2025. On the other, it’s subsidising one of the few forms of generation that is as carbon intensive in order to replace lost capacity.

Jimmy Aldridge, senior research fellow at the Institute for Public Policy Research (IPPR), told Utility Week there are “…more bill payers’ subsidies going to the dirtiest form of generation available at the same time that the government were over in Paris trying to negotiate a climate deal, and doing good work towards that end. From our perspective that’s a step in the wrong direction, in trying to come up with a sustainable energy policy.”

Small scale diesel generation produces 1010gCO2/kWh according to figures from IPPR. By comparison the combined cycle gas turbines which the government was hoping to contract in the auction produce a mere 378gCO2/kWh.

So how did this happen? It isn’t because diesel generation is itself especially cheap. As Tom Porter, partner at consultancy firm LCP, explained: “In a competitive market we would not expect diesel generators to be as cost efficient as new gas generators.”

Instead, it’s the multiple sources of revenue they’re able to take advantage of which have made diesel generators competitive.

There is, of course, the capacity payments themselves; £18/kW in the most recent auction. There’s also contracts for National Grid’s Short Term Operating Reserve (STOR).  In his report for IPPR ‘Mad Maths: How new diesel generators are securing excessive returns at bill payers’ expense’, Aldridge calculated that for a typical set of diesel generators this could be expected to bring in £20/kW each year.

However, the most important source of revenue is triad avoidance payments. As the small scale diesel generators are ‘embedded’ in the distribution network, they are exempt from Transmission Network Use of Service (TNUoS) charges.

It means they can help energy users reduce their peak load and therefore their TNUoS charges, without incurring the charges themselves. Aldridge calculates that this could bring in yearly revenues of £35/kW.

On top of all this, diesel generators have been able to avoid several restrictions faced by others. They are small enough to be exempt from the EU’s Industrial Emissions Directive, which places limits on nitrous oxides, sulphur oxides and dust. The same is true for the Emissions Trading Scheme, which would otherwise require them to obtain allowances for the carbon dioxide they emit.

At first glance it seems like stopping diesel generators from winning capacity contracts should be simple; just ban them from entering bids. However EU competition rules mean that the capacity market must be technology neutral, and therefore particular forms of generation cannot be barred. 

Aldridge’s report suggests emissions limits are a way round this, calling on the government to, “introduce an amendment to the Energy Bill … that prevents any generator with an instantaneous carbon intensity over 450gCO2/kWh from accessing 15-year contracts.” Diesel generators would be prevented from entering bids, without explicitly banning them.

Another alternative is looking at the exemption from TNUoS charges. A joint report published by LCP and Frontier Economics calculated that triad avoidance payments make up 60 per cent of the revenue stream for a typical diesel generator.

It suggests getting rid of the exemption for the “sunk cost” element of the TNUoS charges, describing it as “wasteful and distortionary”. Without this source of income, the report says diesel generators “would require a capacity price of £55/kW” in order to be profitable, more than three times the final price in December’s auction.

“It would level the playing field and therefore bring a result more in line with what would have been expected,” report co-author, Tom Porter, told Utility Week.

As things stand the government has yet to truly acknowledge the problem. When the energy secretary, Amber Rudd, was challenged in the Commons by shadow energy minister, Lisa Nandy, she responded: “Diesel will form a part of the future, but only in very small amounts. Let us remember that it is there as back-up and will be switched on occasionally when it is needed. The addition of the capacity market to people’s bills will be a matter of a few pounds.”

Dave Jones, policy analyst at environmental campaign group Sandbag, says the government may be hesitant to make any drastic changes: “If they’re too big the UK may need to bring the whole capacity mechanism through the European state aid case again.”

However, he believes something needs to be done: “There’s very much a kind of momentum from people suddenly realising the investment opportunity for diesel.”

Jones added: “There’s no reason this couldn’t snowball and we end up with even more being contracted in next year’s capacity mechanism.”

That’s a scenario the government will want to avoid. As ministers review the outcome of last December’s auction – watch this space.

18 Comments leave one →
  1. Curious George permalink
    January 30, 2016 9:54 pm

    At first glance it seems like stopping diesel generators from winning capacity contracts should be simple; just ban them from entering bids. However EU competition rules mean that the capacity market must be technology neutral, and therefore particular forms of generation cannot be barred.

    Good old EU.

  2. Paul2 permalink
    January 30, 2016 10:32 pm

    Blimey that’s alot of diesel generation on one site:

    http://ircp.com/sector-focus/case-study/green-frog-power.html

    • January 30, 2016 10:57 pm

      And the commentary is good!

      In October 2010, we entered discussions with Green Frog Power to invest in the provision of new standby generation capacity to National Grid. Power supply and demand dynamics are becoming increasingly complex; with the progressive penetration of intermittent generation (notably wind) there is an increasing need for balancing services like STOR. It is National Grid’s responsibility to ensure sufficient standby generation exists and, at the time, the operator was tendering long-term contracts for additional standby capacity.

  3. January 30, 2016 11:22 pm

    There used to be a saying in Singapore (I once drank a Singapore Sling at the originating hotel bar), “only mad dogs and Englishmen”. Something about tropical heat, suits, and hats. Well, this post has just repurposed it. Except even dogs are not this barking mad.

  4. dearieme permalink
    January 31, 2016 12:30 am

    If you use the diesel engines as part of a district heating scheme … ah, but then you’d have to run them continuously in winter.

  5. Graeme No.3 permalink
    January 31, 2016 1:16 am

    So with a “new system” based on wind turbines and diesel there will be reliable supply with emissions only 8% higher than a new coal fired one, or twice as much as a new CCGT gas one. All this to raise the cost of power by? (At least 20% on the figure above over an already inflated one).
    A triumph for loonies!

  6. Brian H permalink
    January 31, 2016 1:49 am

    Shooting yourself in the foot is just clumsy. Hosing your feet down/off with a flamethrower takes talent, dedication, and persistence.

  7. John F. Hultquist permalink
    January 31, 2016 3:19 am

    In my region of Washington State the main source of power is hydro. It is relatively inexpensive and thus large server-farms for the internet/cloud have found their way to a nearby town.
    My understanding is they use on-site diesel for emergency backup. Further, these units have to be tested once a week as standard operating procedure. Concern grew with the number installed.
    In any case, all these things and their maintenance have to be paid for by someone regardless of whether or not they are ever needed.

  8. January 31, 2016 8:52 am

    Industrial wind turbines are net consumers of electricity when properly measured over one year. When they are forced into the system, operators must either leave traditional heavy plant running or close it down. If they close it down they must have fast starting diesel plant to back it up. Open cycle gas plant will do the same. Both heavy emitters.

  9. Father Mike permalink
    January 31, 2016 8:57 am

    This is what Davey meant when he said, “You see, I have a cunning plan” – shades of Baldrick in Blackadder …..

  10. January 31, 2016 9:30 am

    One of the things that struck me reading the article is that the STOR operators don’t have to pay a fee to get onto the grid like all other”fossil” generators – erm … related to the provenance of the operators previous subsidy fishing antics perchance?

    I don’t know the exact detail (since it does not seem to be made explicit anywhere) – but – I’m suspecting that the STOR sets are not saddled with annoying and expensive emission monitoring and control (or even specified emissions a la “Euro 6” for trucks) … and that planning for the sites has been quietly slipped though – certainly at Beanacre in Wiltshire the locals were presented with a “fait accompli”…

    So – a lottery where the taxpayer buys your tickets and you simply have to wait for the wind to stop blowing.

  11. January 31, 2016 11:05 am

    So in the UK at least: the more renewables there are in the system, the more diesel generators you need.

    Will this obvious absurdity ever end?

  12. martinbrumby permalink
    January 31, 2016 11:54 am

    Please don’t forget that Sandbag was set up by the fragrant Bryony Worthington, now Baroness Worthington. It was she, the airhead English Lit grad and Fiends of the Earth activist, that Gordon Brown, Hillary Benn and the Milibands set on to write the Climate Change Act 2008.

    So, anyone described as:- “Dave Jones, policy analyst at environmental campaign group Sandbag” starts off with an enormous credibility gap, so far as I am concerned.

    I only wished I could believe that, one day, all these malicious, thieving, lying fantasists would be held to account.

    But, no doubt, all “Too Big To Fail!”

  13. Bloke down the pub permalink
    January 31, 2016 12:19 pm

    Christopher Brooker has a couple of good articles in his column in today’s Sunday Telegraph. Pity that in his obit. of Bob Carter, they printed his name as Bob Clarke alongside the photo.

  14. A C Osborn permalink
    January 31, 2016 12:38 pm

    Paul, it is looking more and more like Nuclear Deals are not likly to happen any time time soon.
    There are 2 article at gwpf, one Telegraph & one Times
    http://www.telegraph.co.uk/finance/newsbysector/energy/12128405/Hinkley-Point-nuclear-fiasco-spooks-Hitachi-boss.html
    http://www.thegwpf.com/nick-butler-uk-policy-implications-of-another-nuclear-delay/

    The UK Asylum really is being run by the inmates.

  15. January 31, 2016 4:54 pm

    Paul you spend all your time showing us just how silly the climate scientist are, and for the most part I agree 100%. These climate scientists all think CO2 drives the climate which is not true, even just a tiny bit. Are you a luke warmer who thinks CO2 controls the climate, but not just to the extent stated or do you believe CO2 has nothing to do with climate. I ask this because yet again this article contains lots of misleading information that in any other context you would challenge. But are you are failing into the trap of putting up an article that confuses pollution (NOx CO, HC, particulates including sulphur compounds) with CO2 output which is directly related to fuel burn and nothing else and is not a pollutant.

    The article shows a medium speed diesel installation, which will NOT be part of any STOR installation and such installations play a tiny part in powering the grid. As has been noted all the STOR installations I have seen are of Automotive derived high speed diesels that are highly regulated and don’t fail into the EU’s Industrial Emissions Directive. All these high speed engines if new are near zero for NOx and particulates and the EU’s Industrial Emissions Directive doesn’t even come close to those figures. What’s more the fuel high speed diesels run on is low sulphur, so SO2 does not even come into the equation. There is no other fuel available where as medium speed engine can run on strait crude if necessary (although I doubt anyone would be stupid enough to do that these days).

    There is no way you can install a medium speed installation and make it pay even with the eye watering rates available for STOR.

    This article just shows yet again how the confusion of regulations and the complete lack of technical acumen results in bollox.

    This is disappointing because it is quite obvious our government has made a complete hash of our energy policy. But this article is not on the attack vector that is going to get them to take notice because its confused.

    It may in concept point out some idiotic economics, but the bits about pollution are rubbish.

    • February 1, 2016 7:40 pm

      However, the most important source of revenue is triad avoidance payments. As the small scale diesel generators are ‘embedded’ in the distribution network, they are exempt from Transmission Network Use of Service (TNUoS) charges.

      It means they can help energy users reduce their peak load and therefore their TNUoS charges, without incurring the charges themselves. Aldridge calculates that this could bring in yearly revenues of £35/kW.

      On top of all this, diesel generators have been able to avoid several restrictions faced by others. They are small enough to be exempt from the EU’s Industrial Emissions Directive, which places limits on nitrous oxides, sulphur oxides and dust.

      The same is true for the Emissions Trading Scheme, which would otherwise require them to obtain allowances for the carbon dioxide they emit.

      Looks like desperation in the contract qualifying conditions since as I understand it they didn’t get anybody to commit to either CCGT or OCGT new plant – because the Green Blob tail is wagging the dog.

  16. BLACK PEARL permalink
    January 31, 2016 6:47 pm

    Strange how Non of this reaches to the Goggle Box for all of Joe public to see ……….

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