Reform capacity market to help DSR

The Government’s Capacity Market is designed to cope with the supply of electricity to meet with peaks in demand. However it could result in higher energy costs and increased emissions because it focuses on fossil fuel generation rather than more efficient sources. The analysis was published by the Energy and Climate Change Committee.

Tim Yeo MP, Chair of the Energy & Climate Change Select Committee said:

"Every consumer in the country is currently subsidising spare electricity generating capacity that may only be used for a few hours each year. But smart technology has now made it possible to reduce unnecessary electricity demand at peak times, thereby reducing the number of polluting power stations that need to be switched on. This could mean we can reduce the total electricity generating capacity that has to be maintained in future, bringing down costs for consumers while enabling us to reduce consumption of fossil fuels.” “Yet this promising new demand-side response technology has been disadvantaged in the auctions under the Government’s Capacity Market – meaning costs and emissions could be higher than necessary. Only a fraction of the £1 billion pounds that will be spent keeping the lights on through the Capacity Market will actually provide new capacity and just 0.4% will go on demand-side response – with most of the rest going to existing fossil fuel power stations, paying some of them to stand idle for much of the year. Nearly a fifth of the capacity contracts already awarded are going to highly polluting coal power stations."

The Department for Energy and Climate Change is yet to provide a “demand side response” (DSR) in the Capacity Market. To avoid paying for carbon-intensive generation capacity that may not be needed in the future, the Committee says the Government should consider increasing the contract length of DSR capacity agreements.

Yeo continued:

"The results of the first CfD auction for long term low-carbon contracts show that small companies or community energy projects are in danger of being shut out. The fact that the final strike prices were cheaper than the administrative price is a very positive result, but it casts further doubts over the value-for-money of the early contracts for renewables under the Levy Control Framework."

“The Government deserves to be congratulated for meeting the challenging timetable of EMR implementation, but important concerns about coherence, value-for-money and market accessibility remain. As it stands, the Capacity Market and CfDs are in danger of pulling UK energy policy in opposite directions, rather than complementing each other."