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The Progressive Policy Think Tank

Government scheme to keep lights on is not fit for purpose

‘Capacity market’ unnecessarily expensive for consumers & does not meet Govt’s own objectives

Despite awarding £2.8 billion in subsidies to power companies the government’s scheme to ensure a secure energy supply for businesses and households in the UK is failing, according to a new report published by IPPR today.

The report says the government’s ‘capacity market’ – an annual auction to guarantee energy supply which was introduced in 2014 – is providing poor value for money for bill-payers, cuts across plans to reduce carbon emissions and is too focused on large power stations at the expense of more efficient and flexible ‘demand management’ technologies.

Describing the current design of the capacity market as ‘not fit for purpose’, the report argues that the scheme needs fundamental reform. It recommends:

  • Splitting the scheme into two separate auctions for old and new generation capacity;
  • Introducing an emissions performance standard that excludes the most polluting plants from the scheme;
  • Levelling the playing field for technologies that can reduce demand at peak times.

The report finds that the current scheme is handing windfall payments to power stations that would be highly likely to be online anyway. Across the two auctions held so far, nuclear power plants have received payments amounting to £153m in 2018 and £136m in 2019, despite being almost certain to remain open then without receiving these subsidies.

In the 2014 auction, a third of contracts were awarded to plants which had indicated that they did not need subsidy to stay online. Splitting the capacity market into auctions for old and new capacity would reduce or prevent these unnecessary and costly windfall payments. It would also provide greater influence over the amount of new capacity that comes online.

The report welcomes the phasing out of coal-fired power stations by 2025, which was originally recommended by IPPR last year. But it notes that the capacity market is not delivering the new gas-fired capacity that the government wants to replace them.

Since the capacity market was introduced, only 5% of subsidies have gone to new power plants in each year’s auction. The government has now announced a consultation to expand the capacity market to encourage more new gas-fired power, but under the current design this will unnecessarily add to the costs to consumers.

The report argues that in subsidising the most polluting forms of electricity generation, coal and diesel, the capacity market is working against other government policies designed to encourage a reduction in fossil fuels.

While the Capacity Market hands taxpayers money to carbon-polluting plants to keep running, the Carbon Price Floor penalises those same plants. This means that consumers are hit by a double-whammy, paying for two conflicting subsidies.

Coal has so far been awarded £373m of subsidies, and diesel was awarded £176m in 2015. The report therefore recommends that an emissions performance standard should be introduced to prevent them from being awarded any further capacity market contracts.

Finally, the report shows that the capacity market is preventing the UK from moving to a more flexible and efficient system in which electricity demand is actively managed at peak times to avoid the need for new supply. In a report earlier this month the National Infrastructure Commission estimated that new demand management technologies could save bill payers £8bn a year by 2030.

Providers of ‘demand response’ services, which can reduce the amount of electricity used at peak times, are unfairly disadvantaged in the capacity market by being unable to access longer contracts. The report recommends ending this restriction.

Byron Orme, IPPR research fellow and author of the report, said:

“The government rightly wants to secure the country’s power supply. But its primary mechanism for doing so is failing to meet any of the government’s own objectives. It is absurd that consumers are paying for subsidies to the most polluting forms of generation such as diesel and coal while in a separate policy also paying to discourage them.

"It is very wasteful to be subsidising nuclear power stations to stay open in four years’ time when they would almost certainly do so anyway. New technologies to manage demand at peak times offer the potential to reduce costs to bill payers, but cannot properly compete due to the bias in the scheme towards large power stations. The capacity market needs fundamental reform if the lights are to be kept on at reasonable cost to households and businesses.”

Michael Jacobs, IPPR’s acting associate director for energy, transport and climate, said:

“The rapid development of renewable, energy storage and demand management technologies offers a huge opportunity to achieve security of electricity supply at the same time as cutting emissions and keeping costs down. But this is not currently happening.

“Taken together, the reforms we propose in this report would align the capacity market scheme with the government’s decarbonisation objectives, protect bill payers from excessive costs, and create a genuinely secure supply of electricity into the future.”

Contact:

Sofie Jenkinson, [email protected], 07981 023031
Lester Holloway, [email protected], 07585 772 633

Notes to Editors:

The new IPPR report, Incapacitated: Why the capacity market for electricity generation is not working – and how to reform it, by Byron Orme, will be published on 31st March 2016 at 00:01 and will be available on the IPPR website http://www.ippr.org/publications/incapacitated​

IPPR recommended the government commit to phasing out the use of coal for power generation in March 2015 in our report Scuttling coal: how ending unabated coal generation can stimulate investment, cut bills and tackle carbon pollution http://www.ippr.org/publications/scuttling-coal-ending-unabated-coal-generation

IPPR’s report on diesel generators was published in December 2015: Mad maths: How new diesel generators are securing excessive returns at billpayers' expense http://www.ippr.org/publications/mad-maths-how-new-diesel-generators-are-securing-excessive-returns-at-billpayers-expense