Fossil fuels favoured in electricity market reform, MPs find

4th March 2015

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Linden Richardson

Energy costs and greenhouse-gas emissions could rise because a policy created to meet peaks in demand favours fossil fuel generating capacity rather than technology to reduce demand, a cross-party group of MPs has warn.

In its report on the government’s implementation of reform of the electricity market, the parliamentary energy and climate change (ECC) committee criticised the government for not creating a level-playing field in its new capacity market auctions.

They argue that more effective use of demand-side response (DSR) technology, such as back-up generators and energy efficiency measures, would reduce overall demand for electricity. If this was achieved only a small number of fossil fuel plants will need to be switched on a few times each year when there is a shortfall in capacity, say the MPs.

To avoid paying for carbon-intensive generation capacity that may not be needed in the future, the committee recommends that the government should consider increasing the length of DSR capacity agreements.

Tim Yeo MP, chair of the ECC committee, said: “Only a fraction of the £1 billion pounds that will be spent keeping the lights on through the capacity market will actually provide new capacity and just 0.4% will go on demand-side response – with most of the rest going to existing fossil fuel power stations, paying some of them to stand idle for much of the year.

“Nearly a fifth of the capacity contracts already awarded are going to highly polluting coal power stations,” he added.

Sara Bell, chief executive of Tempus Energy, a supplier of both energy and demand-management technology, welcomed the report. In December, the company submitted a legal challenge to the European General Court arguing that the state aid approval for the auction scheme was unlawful.

The ECC committee also criticised the way low-carbon investment is being implemented through the electricity market reforms.

The amount bill payers contribute towards low-carbon energy generation is capped by a mechanism called the levy control framework. Payments are awarded to energy generators through contracts for difference (CfD) following an auction.

The proportion of CfDs already allocated to “expensive” offshore wind farms may disadvantage cheaper renewable energy projects winning contracts in later years, the MPs warn.

Uncertainty over the total amount of money available through CfDs after 2021 may deter investors, the committee says. It wants the government to publish annual projections of the LCF to enable developers to make investment decisions.

Dr Nina Skorupska, chief executive of the Renewable Energy Association, said that the report echoed its fears that the capacity market and CfDs are pursuing competing aims.

“The capacity market is only designed to deliver one aim of government energy policy: capacity, whereas value for money and emissions are not a consideration.

“This is in contrast to renewables procured through CfDs, which can deliver significant extra low carbon capacity, with value for money as one of the scheme’s key aims,” she said.


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