Decc acts to quell energy security fears

1st March 2016


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  • Generation ,
  • Conventional ,
  • Fossil fuels ,
  • Nuclear

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IEMA

The energy and climate department (Decc) has bought forward the next capacity auction by one year to avert an energy supply crunch.

In a consultation document, Decc said that UK energy market conditions had changed considerably since 2014 when the capacity market was designed, with huge movements in global commodities prices last year making most non-renewable plant unprofitable. In addition, operators had announced the closure of several facilities, including the coal-fired power plants at Rugeley in Staffordshire and Eggborough in North Yorkshire.

Two auctions have so far been held under the capacity market. The second auction resulted in contracts being awarded for 44.5GW of existing plant, mainly gas, coal and nuclear, and only 2GW for new build. New plants awarded contracts in the two auctions will not deliver energy until 2018/19 and 2019/20. Decc is therefore proposing to hold an auction in January 2017 for delivery in 2017/18.

The auction will procure the full capacity requirement, rather than just a top-up. Decc claimed this would allow the market to operate better and there would be less price volatility. Decc will decide the precise capacity target for the auction following advice from the National Grid, but it believes that it could procure 3GW or more than would otherwise have been the case.

Decc also plans to introduce penalties for operators that renege on contracts, including banning them from participating in future auctions, raising the monitoring and reporting requirements, and increasing credit cover for projects that cannot demonstrate sufficient progress. This follows SSE deciding to close three out of four units at its Fiddler's Ferry coal-fired power plant in Cheshire, despite winning a capacity market contract to keep them open. Decc is also considering whether to procure capacity to cover for an extremely cold winter.

The results of the second auction, announced in December, were heavily criticised for awarding more than £175m in subsidies to diesel backup generators. Decc acknowledged that there is merit in complaints that diesel generation has unfair advantages over other energy technologies since it benefits from tax loopholes and is not subject to emission limits. The department plans to consult later this year on binding emission limit values on air pollutants from diesel engines for generators between 1MW and 50MW.

Energy and climate secretary Amber Rudd said: ‘By buying more capacity earlier we will protect consumers and businesses from avoidable spikes in energy costs.

‘We’re also sending a clear signal to investors that will encourage the secure and clean energy sources we need to come forward – such as gas and interconnectors – as part of our long-term plan to build a system of energy infrastructure fit for the 21st century,’ she added.

EEF’s head of energy and environment policy, Claire Jakobsson, said that the proposals represent a ‘decisive and coherent’ response that will be welcomed by industrial consumers and represent a good starting point for investment in new plant.

‘With a worsening security of supply outlook for the UK in the coming years and the first two capacity auctions failing to deliver much in the way of new build, it is essential that government acts swiftly to get hold of the situation,’ she said.

The market outlook for conventional generation has deteriorated significantly in recent years and the capacity market must adapt to these changing circumstances if it is to remain fit for purpose, she added.

The CBI also welcomed the proposals, adding that it was vital for business and government to work together to improve energy security.

Scottish energy minister Fergus Ewing complained that the capacity market discriminated against Scotland as the costs of using the grid are higher than in England.

‘Scotland cannot attract new thermal generation when in competition with alternative sites in England, yet the UK government has shown little understanding and no willingness to tackle this issue,’ he said.

The Renewable Energy Association said that Decc’s proposals failed to address any of the energy trilemma, as they will add to consumer costs, do not incentivise new infrastructure and do not promote the low carbon agenda.

Greenpeace slammed the government for supporting fossil fuel industries while removing support for renewable energy.

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