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Government sets out capacity mechanism plans in update to Electricity Market Reform

The Government will pass new laws designed to ensure that consumers will continue to enjoy reliable electricity supplies, the Department for Energy and Climate Change (DECC) has announced.19 Dec 2011

Its new ‘capacity mechanism’, which is designed to guarantee sufficient generating capacity is available when needed, will take the form of a capacity market, it said. It has also confirmed that the National Grid will manage that market as well as deliver its new programme of Feed-in Tariffs with Contracts for Difference (FiT CfDs).

The announcements were of a number contained in a technical update to the Government’s White Paper on Electricity Market Reform (EMR) (142-page / 1.8MB PDF), published in July.

Energy Secretary Chris Huhne said the update was a “milestone”.

“The UK faces a huge energy investment challenge over the coming years, with a fifth of our generating capacity coming to the end of its working life and electricity demand set to double. We want to give certainty to investors to develop the mix of clean energy sources that will power the UK in years to come,” he said.

The UK will lose around 25% of its electricity generation capacity over the next decade due to aging power plants and more stringent environmental standards. In addition, an increasing amount of the country’s power will be generated from intermittent sources such as wind.

In a report on the security of the UK’s energy supply in October this year, the House of Commons’ Energy and Climate Change Committee said that the Government should aim to “double” its energy storage capacity by 2020 to avoid exposure to supply interruptions and price spikes. The country’s current storage capacity amounts to only 14 days’ worth of gas supply compared to 87 days in France and 69 in Germany, according to Government figures.

The EMR suggested two possible approaches to a capacity mechanism, and DECC selected a capacity market over an administratively-managed strategic reserve following a consultation process earlier this year.

In a capacity market all providers willing to offer capacity, whether in the form of generation or non-generation technologies, can sell that capacity through a central auction or supplier obligation. The total volume of capacity required is then purchased. The capacity market also provides incentives for companies to invest in new capacity or to keep existing capacity operational, ensuring that sufficient reliable capacity remains available. The detailed design of the mechanism will be developed with assistance from the industry from 2012.

In a written statement to Parliament, Chris Huhne said that the introduction of a Capacity Market should have “a limited impact” on average electricity bills and could in fact lead to less volatile prices and a “small reduction as a result of avoiding very high prices in scarcity periods”.

Elsewhere in its update, the DECC said that the National Grid’s system operator business best met its criteria for administering the capacity mechanism and FiT CfDs, which will offer nuclear power stations and renewable energy sources a fixed price for their electricity. FiT CfDs will be set up between energy providers and a central counterparty, with payments made by reference to a technology-dependent ‘strike price’ and a market reference price. The payments will replace existing subsidies and incentives such as the Renewables Obligation.

National Grid’s executive director Nick Winser said that the network “looked forward” to playing its part in delivering the Government’s policies. “There is still a lot of work to do, but we believe we are well placed to deliver these changes that will help provide secure and reliable energy supplies into the future,” he said.

The report also outlined work to enable investment decisions for early projects and the new steps for the Electricity Market Reform programme, as well as setting out the arrangements for Renewable Obligation Certificates (ROCs) from 2027 onwards.

Steve Radley, policy director at manufacturing industry body EEF expressed his concern that a number of significant issues preventing investment in a low carbon economy remained unresolved.

“Manufacturers are looking to the government to make good on its commitment to ensure that its reforms do not damage the competitiveness of energy-intensive industries,” he said.

A further update on the implementation of FiT CfDs and the introduction of an annual Emissions Performance Standard (EPS) limit on carbon emissions will be published early next year, DECC said.

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