Sunday, 21 April 2019

Why the UK's capacity mechanism should be scrapped in favour of a decentralised energy system

The UK's capacity mechanism (CM) is supposed to ensure that we have sufficient 'reserve' capacity to supply electricity whenever we need it. Under the system money is given to large power stations in proportion to their generating capacity just to carry on being 'available' for generation.  In reality the CM is a major barrier in the transition to a 21st century renewable energy and energy efficiency based 'new energy economy'. It is giving billions of pounds of subsidies to a centralised power supply system which delays the development of a cleaner, cheaper, more flexible decentralised energy system. The CM should be scrapped as soon as possible.

The overall reason why it should be scrapped is that the very concept of propping up the 20th century model of centralised power plant delivering power through a vertically integrated system, which is what the capacity mechanism (CM) supports, is fundamentally wrong. The misplaced notion behind the CM is that the state needs to intervene to provide an additional signal (besides existing power markets) to ensure that conventional power plant  are brought into to balance the load of so-called 'intermittent' renewable energy sources. Policymakers have mainly identified as combined cycle gas turbines, CCGTs, or nuclear power plant, as supplying the needed 'firm' capacity. This traditional system of course is run by the utilities, whose policy advice the Government have swallowed whole.

But the advent of a new range of techniques and actors  means this model has become regressive. The new techniques, besides the variable (note: the output is predictable, not unpredictable as 'intermittent' implies) renewable energy sources include digitalisation, demand side response and battery storage. The new actors are companies able to manage these resources and techniques together with distributed fossil generators such as gas engines to contribute to, 'virtual power plant' services.

This way of doing things is much more compatible with increasing quantities of renewable energy resources which can be encouraged by the issue of Government backed long term power purchase agreements (called 'contracts for difference', CfDs). This decentalised market led way is much more flexible and. crucially, involves much less fossil or nuclear generating capacity than is presently needed. Virtual power plant can, and is already to some degree, providing 'firm' capacity. Giving large subsidies to existing power plant (which is what the CM mainly funds) makes the system much less flexible and produces higher carbon emissions. Nuclear power plant already get the benefit of carbon taxes whilst the CCGTs, which form the majority of the plant given subsidies under the capacity mechanism respond inefficiently to system balancing requirements compared to decentralised plant. Indeed gas engines linked to local district heating systems can be replaced, in time, with large scale heat pumps and hot water storage systems that can store renewable energy supplies.

I discussed some of the 'disruptor' companies that form part of the new energy economy in a recent post - see I mentioned Gridserve, Social Energy and Zenobe who are developing networks of energy consumers, renewable energy, and storage services. Other well known companies in this sector include Limejump, Flexitricity and also Tempus energy. Tempus, who specialise in demand response services, were successful in forcing the UK Government to seek permission to give state aid (from the European Union) for the CM. And there's plenty of state aid. The UK has so far pledged some £5.6 billion of aid going mainly to conventional fossil and nuclear power plant that already exist.

But not only is this money wasted to prop up power plant that would be replaced by virtual power services at no subsidy, but the CM subsidies actually make it more expensive for the 'new energy economy' services and companies to operate. That is because they act to depress market signals that allow the flexibility services, that is mixtures of renewables, storage, electric vehicle storage and demand response, to provide the firm power that is traditionally provided by centralised power plant. These technologies can make use of greater variation in system power prices to buy and sell electricity to get greater value for renewable energy supplies. As I argued earlier,, such services could eradicate the need for a third of (non-renewable) generating capacity in the medium term. That could be done in the context of supplying over 90 per cent of electricity from renewable energy sources.

It is quite possible that the Government could negotiate some better terms for demand side response for companies like Tempus Energy in a revised CM - currently demand side response is heavily discriminated against by the CM arrangements. But this would be only a quarter measure that would still leave the dead hand of unnecessary tens of GWes of centralised power plant online (and attendant pollution)  being backed by large state-handouts instead of flexible new energy economy technology.

In short, the Capacity Mechanism must be scrapped!

Some useful references:

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