Monday, 26 September 2016

Ofgem action against small generators threatens to destabilise capacity market

In pursuit of a complete failure to understand the problems with its own 'capacity market' Ofgem seems about to make things a whole lot worse by reducing capacity margins - by taking away the incentives to a lot of small scale generators whose existence helps to keep the electricity sector running.

Ofgem runs on a piece of fantasy theory that the capacity market will work better if the 'distorting' benefits to so-called 'embedded;' generators are taken away. In fact the opposite it the case. Ofgem's concern that proposed big gas power stations cannot win bids at sufficiently low prices to put them into business partly because of the small generators is total nonsense. Without the small generators the price at which the required capacity will be supplied by the big power stations will increase not fall. The problem has to do with the principles and practice of the capacity market, and has nothing to do with the small generators who currently provide a valuable service. Ofgem's actions  are akin to destroying a table leg in order to save the table.

The central problem is that future prices for electricity that the power stations could sell on the wholesale power markets are very uncertain, and quite likely to fall. Given this it will require very high capacity market prices (which will put consumer energy bills up by large amounts) to evince the capacity that Ofgem wants from gas fired power stations.

A big part of the problem of course is that increasing parts of electricity supply are being paid for outside of the wholesale power markets, through the Renewables Obligation or contracts for difference. This will only increase in the future, especially if Hinkley C comes on line (whenever that may be). Note: this has nothing to do with so-called renewables 'intermittency' , it is to do with 'liquidity' being siphoned away from the wholeslae power markets to pay for low carbon energy sources - which has to be done of course, otherwise they will not come on line.

The answer to all of this is to offer new generators firm long term contracts so that they can have income guarantees in the future - this may involve some sort of 'take or pay' scheme for all generators at least, in the form of a contracts for difference arrangement as applied to the generators.   - But this approach is bound to end up being a lot cheaper than the Government's current approach which consists on the one hand of giving the capacity payments to every generator and on the other hand (in these proposals) of driving the small generators out of business by taking away the income they need to provide capacity to the whole of the system.

The problem has a lot to do with ideology. Ofgem and civil servants seriously believe that somehow in a world of decarbonisation you can run wholesale power markets according to some imaginary free market trading arrangement. People must learn to be more pragmatic and tear themselves away from economic models that have little bearing on the real world.
For the story on Ofgem's proposals see

1 comment:

  1. As a result of the Energy Act 2013 the governing authorities have completely lost sight of the price of CO2 emissions to the consumer.

    The Hinkley Point C deal sets the future electricity retail price somewhere between 20 and 30 pence per kWh (in todays money). The current retail price of electricity is about 15p per kWh.

    Our house (for example) requires around 11000 kWh per year for heating, cooking and hot water. Using a condensing boiler this results in around 2 tonnes per year in CO2 emissions. Worst case using electricity from a basic open cycle gas fired power station at 33% efficiency, 6 to 8 tonnes of CO2 are emitted.

    If moving from gas fired electricity to new nuclear electricity (on the Hinkley Point C model) the price of carbon emitted is somewhere between £69 per tonne CO2 and £275 per tonne CO2. The price of carbon to the consumer for combined cycle gas turbine between 50 and 60% efficient being higher.

    If consumers are forced by government to move from a gas condensing boiler to new nuclear electricity for home heating etc., the cost of CO2 emissions rises to the order £825 to £1100 per tonne emitted.

    This is extreme path specific pricing for CO2 emissions, that is every path to reducing emissions has its own particular price and unique regulatory environment. How can anybody (including eminent energy economists) predict the effects and side effects this will have on our economy?

    At the moment the main aim of the capacity market so far has not been to reduce CO2 emissions; it is there as a sticking plaster (along with other supply side mechanisms) to make sure that the electricity supply grid still works as new nuclear and renewable generation is added and old coal and gas fired plants are removed.