Mad maths: How new diesel generators are securing excessive returns at billpayers' expense

Last year the government introduced a new energy policy which has awarded £109 million in subsidies, paid out of consumers’ energy bills, to new diesel generators, which are the dirtiest form of energy generation available, worse even than coal. That subsidy will increase in a second auction to be held in early December, by up to £434 million. At the same time, the government is slashing subsidies for green energy: solar subsidies, for instance, are set to be reduced by 87 per cent.

Together with revenues from the energy market, this increasing subsidy is allowing the owners of small diesel generators to earn pre-tax returns of up to 23 per cent. And that estimate may be conservative, because many of the generators have been able to finance their projects through a tax relief scheme, which could increase returns by a further 10–15 percentage points. As a result, we are seeing a rapid proliferation of diesel generators, and this will continue unless new projects are prevented from accessing further subsidies.

This situation has developed because the government introduced a scheme (called the capacity market) to ensure there are enough power stations online to meet demand. Ed Davey, the energy minister who introduced the scheme, stated that it was never intended to support diesel generators. The role that diesel provides could be fulfilled by other means, using smart technologies to manage electricity demand more efficiently and without emitting CO2 and air pollutants that are harmful to human health.

Therefore, we recommend that diesel gensets should be prevented from entering the capacity market, and that constraints should be placed on those that already exist or have secured capacity contracts.

To achieve this, the government should introduce an amendment to the Energy Bill – which will return for its second reading in the House of Commons in the new year – that prevents any generator with an instantaneous carbon intensity over 450gCO2/kWh from accessing 15-year contracts. This change is technology-neutral but aligns the capacity market with the government’s decarbonisation objectives.

Units that have already received 15-year contracts should be subject to the following:

• a requirement to fit best-available technologies to mitigate air pollutants, in line with European standards for medium combustion plants (EC 2015)
• the emissions performance standard, as established in the Energy Act 2013. This should also be tightened over time for units over 450gCO2/kWh to ensure that running hours are restricted.