Capacity Market ‘is failing to deliver new low carbon plants’

Auction device delivers poor value and fails to support demand-side measures

The government’s scheme to ensure a secure energy supply, the Capacity Market, is failing, despite having awarded £2.8bn in subsidies to power companies – according to a new report by the Institute of Public Policy Research (IPPR). The report says the Capacity Market – an annual auction to guarantee energy supply which was introduced in 2014 – is providing poor value for money for bill-payers, cuts across plans to reduce carbon emissions and is too focused on large power stations at the expense of more flexible demand management technologies.

Describing the current design of the Capacity Market as not fit for purpose, the report argues that it needs fundamental reform. It recommends:

• splitting the scheme into two separate auctions for old and new generation capacity;
• introducing an emissions performance standard that excludes the most polluting plants from the scheme; and
• levelling the playing field for technologies that can reduce demand at peak times.

 IPPR suggests that the current scheme is handing windfall payments to power stations that would be highly likely to be on-line anyway. Across the two auctions held so far, nuclear power plants have received payments amounting to £153mn in 2018 and £136mn in 2019, despite being almost certain to remain open then without receiving these subsidies.

Splitting the capacity market into auctions for old and new capacity would reduce or prevent these unnecessary and costly windfall payments, says the report. It would also provide greater influence over the amount of new capacity that comes on-line.

Since the Capacity Market was introduced, only 5% of subsidies have gone to new power plants in each year’s auction. The government has since announced a consultation to expand the Capacity Market to encourage more new gas-fired power, but under the current design this would unnecessarily add to the costs to consumers.

The report argues that in subsidising the most polluting forms of electricity generation, coal and diesel, the capacity market is working against other government policies designed to encourage a reduction in fossil fuel use. And, while the Capacity Market hands taxpayers’ money to carbon polluting plants to keep running, the Carbon Price Floor penalises those same plants. This means that consumers are hit by a double-whammy, says the report, paying for two conflicting subsidies.

Coal-fired plants have so far been awarded £373mn of subsidies, and diesel-fuelled plants £176mn in 2015. The report therefore recommends that an emissions performance standard should be introduced to prevent similar plants from being awarded any further Capacity Market contracts.

Finally, the report shows that the Capacity Market is preventing the UK from moving to a more flexible and efficient system in which electricity demand is actively managed at peak times to avoid the need for new supply – through demand management technologies.