The voice of the energy industry

Capacity Crunch

As 2019 gets underway, one pressing item of outstanding business from last year is resolving the predicament caused by the EU General Court’s ruling in November that suspended - for now - the Capacity Market (CM).   

The shock of this ruling was exacerbated by its unexpected and sudden nature – after all the legal challenge had been going for some 4 years. Given the extremely serious and widespread consequences - for capacity providers, suppliers, security of supply and indeed the whole market - the initial reactions of consternation and confusion were only to be expected.

Following urgent calls from across the market for the government to set out how it plans to resolve this damaging hiatus - as articulated by a recent letter from the BEIS Select Committee – the government has been consulting on its next steps and Energy and Clean Growth Minister Claire Perry has also since responded to the Select Committee. (You can also see our response to the consultation here). 

Energy UK is supportive of the common sense approach the government has taken and I’m confident that it offers a way out of this impasse.  I agree with the government that the CM is compatible with EU State Aid rules and consider that it remains the best way to ensure security of supply as part of the orderly transition to a low carbon future. I can see no reason why it won’t be possible to reinstate the auctions and make deferred payments to generators following receipt of new State Aid approval.

The consultation also proposes to restart collection of CM payments from suppliers which again is a sensible move which would avoid a situation where, if payments end up being merely deferred, these obligations just mount up in the meantime.  It also hopefully provides some clarity for suppliers facing the dilemma of whether to carry on collecting payments from customers or not - in the face of somewhat hasty suggestions that they should just take these off bills. And most importantly, it should provide reassurance for providers that by continuing to fulfil their previous commitments under CM contracts, they won’t run the risk of doing so without being paid.        

As I’ve said before, the Capacity Market isn’t perfect but let’s not lose sight of what it’s delivered. There were plenty of sceptics at its inception but it has done what it says on the tin - kept the lights on at the lowest cost. Helped by falling demand, the annual media story raising fears of a winter blackout amidst ‘wafer thin’ margins in previous years has become a thing of the past. And it’s done so at an ever-falling cost – the CM has forced all providers to become more efficient than was thought possible and we must remember that it is the customer who pays for all this.   

What we used to call the trilemma presented an unprecedented situation for this country. The CM has been one way of addressing that but as a new and untested method, it was always going to need to evolve to keep meeting its objective and reflect the changing nature of the generation mix.      

Even within the current CM, newer capacity providers like Demand Side Response and storage have been gaining an increasing share following improvements in technology and resilience. It is right – as the five year review was starting to do – to look at ways the CM can give even more opportunity to these newer technologies.  There’s no reason why the CM can’t continue to support the transition to a low carbon future by being technology neutral and including renewables.  

Reform is infinitely preferable to upending the whole system overnight, otherwise we risk throwing the baby out with the bathwater.

I don’t need to remind anyone how important stability is when funding projects in this sector, which are often both long-term and high cost.  Yet unfortunately investors in the energy industry have faced more than their fair share of uncertainty and sudden changes in recent years. Finding that £1 billion of apparently guaranteed income, upon which both the operation of existing plants and new developments (including DSR and battery storage) are dependent on, has suddenly disappeared not only jeopardises security of supply, particularly next winter, by putting operators - and let’s not forget jobs and livelihoods - at serious risk but threatens to be something like the final straw for investor confidence.      

I firmly believe that it is the interests of all those in the energy market - and those whom it supplies - that the Capacity Market is reinstated and as such Energy UK will be supporting BEIS to achieve that as soon as possible.     

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