6th May 2016 16:11
LONDON (Alliance News) - The UK government on Friday said it plans to bolster the country's energy security through a package of reforms to the capacity market as the state tries to tighten and improve the all-important auction system.
The capacity market allows electricity generators to bid for the opportunity to supply standby power throughout the year, covering any unexpected power cuts or to cater for periods when electricity usage hits its peak, usually in winter.
Essentially, the government pays electricity generators to keep extra power on standby through the capacity market auctions, but the amount of extra energy that the UK has on standby has dwindled over recent years - prompting the government to take action.
"We face a legacy of years of underinvestment which has left us more open to the risk of any quickening in the pace of plant closures. To address this we need to ensure the right incentives are in place to bring on new capacity as it is needed, largely expected to be gas, to guarantee our energy security in the 2020s," said the Department for Energy & Climate Change.
The majority of plant closures in the UK are of plants that burn coal, which the government is hoping to eradicate in the UK by 2025.
The government held a consultation back in March, and said Friday the reforms that will be made to the capacity market have been confirmed. However, the proposed changes will have to be laid before parliament before being enforced.
The Department for Energy & Climate Change said the industry and other key stakeholders showed "clear support" for three key reforms to the capacity market during the consultation, with 161 organisations filing responses.
"The clear message from industry and investors that we heard as part of the review was that the capacity market mechanism retains their confidence; is the best available approach to our long-term security of supply; that regulatory stability is of crucial importance," said the DECC.
The first and second key reforms to be enforced will lead to the UK government buying more electricity than it has previously, and also buying it earlier than it did before. As a result, the UK government said it plans to hold an auction to purchase the standby energy needed for the winter of 2017-18.
That means the capacity market auctions have been brought forward by one year. The first capacity market auction was held in 2014, which was related to the standby power needed for the 2018-19 winter, meaning the upcoming auction unveiled Friday is related to power that will be needed before then.
The third reform will clamp down on the sanctions for companies that go back on their capacity market agreements, meaning electricity generators that fail to supply power when it is needed will face tougher sanctions.
"This will better safeguard our energy security, so we can protect families and businesses from spikes in energy costs in the future," said the DECC.
"We heard concerns that we must do more to protect against delivery risks; that we need to tighten the incentives on those with agreements to honour those agreements; ensure that the full range of delivery risks are accounted for in our procurement decisions; and that we must avoid the risk of under-buying, or buying too late ? which would mean that new plant had insufficient incentive to come forward and get built in time," the DECC added.
The last auction, for the winter of 2019-20, which was the second ever to be held, secured 46.35 gigawatts of capacity, with the government paying a clearing price to generators of GBP18.0 per kilowatt. However, there was an expectation for the prices paid under the capacity market auctions to increase as part of the government reforms.
The DECC said the clearing price paid to generators will rise as the volume of power being purchased will increase.
That means generators will receive higher payments for the energy they supply on standby, with more of that energy being purchased sooner - a boost to UK utility companies such as Drax Group PLC, Centrica PLC and SSE PLC, alongside non-listed generators.
By Joshua Warner; [email protected]; @JoshAlliance
Copyright 2016 Alliance News Limited. All Rights Reserved.
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