UK Market Supports Have Outlived Their Use: IEEFA

The UK capacity market has “cost consumers billions of dollars since it was launched four years ago, but such subsidies… may no longer be needed,” an energy think-tank said February 23.

In its note, the Institute for Energy Economics and Financial Analysis (IEEFA) says that critics see capacity payments as rewarding firms to keep their plants open that they meant to keep open anyway. The Ohio-based think-tank says that when UK capacity rules were introduced in 2013, generators and utilities painted a bleak picture of Britain’s future electricity market, with Centrica claiming that blackouts could occur by 2017 and saying it would not build another gas-fired plant without capacity payments.

“Fast forward four years and it’s clear that those warnings were over the top,” writes IEEFA's Gerard Wynn in its latest analysis: “While gargantuan sums have been paid out in capacity subsidies to existing generators, no new large power plants have been built – as was implied would happen.” Among factors for this, he cites the planned build-out of subsea power interconnectors to Europe, and the rising running times of gas-fired power plants now that coal-fired ones have shut down. He also points to the steep fall in support prices paid to generators under latest UK capacity auctions.

UK-based Wynn, a former Reuters reporter, also argues that there is growing evidence that capacity markets are not needed to balance out rising amounts of intermittent, often renewable, generation. A week earlier, IEEFA published a report listing ten countries or regions where it says the electricity market has managed the transition to wind/solar, of which it says only one – Spain – has a capacity market.

At a gas session at London's IP Week, February 21, both Shell's Integrated Gas exec vice president Clare Harris and Total research manager for gas Maria-Luisa Berlose spoke of how another policy initiative, the UK's minimum carbon tax, had improved the competitiveness of Britain's modern gas-fired power plants, versus coal. Harris said that coal is now generating less than 5% of UK electricity, whereas in 2015 it was more than 20%, while Berlose said that whereas in recent years the feedstock split for UK thermal power was 40%-60% between gas and coal, now the ratio was 80%-20% in gas's favour. In contrast, Berlose pointed to the still marginal role of gas in Germany's power generation mix, where no minimum CO2 price exists. Total backs carbon taxation, she said.

The EU has approved electricity capacity arrangements, covering most of the EU's population, under its state aid approvals process – but accepts that different countries will operate different market support regimes. This in turn distorts the so-called single energy market.