The aim of the UK's Capacity Market, which opened on 16 December, is to make sure that there is enough capacity available to meet peak electricity demand in future years when there is expected to be a large but variable renewables component on the grid
The government is seeking to procure 48.6 GW for delivery in 2018/19. The auction has now closed but it has not proved popular with commentators outside the main power providers.
Think tank The Institute for Public Policy Research has branded the government's capacity market a free handout of consumers' cash to energy companies. Its analysis of the outcome of the £1 billion capacity market auction shows that 95% of the subsidies, which ultimately will come from bill-payers, will go to energy companies to run power stations that would probably operate anyway. £660 million of the total goes to the 'Big 6' energy companies.
The main objective of the capacity market was to incentivise investment in new gas plants to help keep the lights on. But the analysis shows that only £47 million of the available sum went to new capacity. It is the old power stations, including coal plants, that have benefited most from the subsidy - effectively crowding out much of the new investment.
Of the £956 million available for 2018 'capacity payments', paid through a levy on consumer bills, £153 million will go to old nuclear power stations, £451 million to old gas stations, and £173 million to old coal plants including some biomass. Estimates vary but each household will pay at least £10 at the start, and maybe as much as £14 per year for these payments. .
Measures that use smart technology to match electricity demand with available supply, which are the cheapest and lowest carbon option for keeping the lights on, have received just 0.5% of the total pot.
With 9 GW of existing coal-fired power stations receiving subsidies from consumers there is a real danger, says the IPPR, that the government's own carbon reduction targets will be missed. Coal emits more than twice the carbon pollution of any other fuel. The Committee on Climate Change have said that the most cost-effective strategy for reducing Britain's carbon emissions is to stop emissions from coal by the mid-2020s. The announcement of a £173 million subsidy for coal in 2018, and £292 million over 3 years, will make that more difficult and more expensive for consumers.
Jimmy Aldridge, IPPR Research Fellow commented: "With the auction being comfortably oversubscribed and then clearing at such a low price there are genuine questions over whether this exercise was required at all. Carrington, the one new gas station being built in the UK currently, is going ahead without receiving any payment from the capacity market.
But there was at least one applicant pleased with the result. Carlton Power is 'delighted' to have secured a 15 year contract. The outcome of the auction will enable Carlton to proceed with the development of its 1.8 GW Trafford Power project in Greater Manchester.
The Trafford project incorporates GE HA gas turbine technology to deliver high efficiency and high flexibility, essential to supporting intermittent renewable generation in the UK market. Carlton expects to start construction of the scheme in the middle of 2015.
Carbon tax floored
Another plank of the UK government's policy to attract widespread condemnation is its 'carbon floor' tax, also funded by consumers, who will have to pay higher energy bills to fund policies that 'simultaneously tax coal plants to the brink of closure and then pay them to stay open', the head of Britain's biggest energy supplier has warned.
Sam Laidlaw, chief executive of British Gas owner Centrica, warned as long ago as October that there was an "inherent paradox" in government policies, which risked being neither green nor affordable.
Yet, he said, at the same time another policy, the capacity market, is being introduced to ensure there are enough reliable fossil fuel power plants to keep the lights on and act as back-up for intermittent renewables. The policy was initially regarded as a way of encouraging a new "dash for gas" by aiding construction of new gas plants. But in practice 'it is primarily expected to result in subsidies being paid to existing coal, gas and nuclear plants - including coal plants that were otherwise at risk of closure from the carbon tax.'
He warned: "The cost of this will be levied on customers' bills, alongside the cost of the carbon price floor, which is designed to encourage switching away from coal. There's an inherent paradox here." The Treasury's "carbon price floor" (CPF) came into effect on 22 December and official estimates say it will add £5 to household energy bills in its first year, rising to about £50 by 2020.
The tax, which taxes companies for burning fossil fuels, is intended to provide an incentive to invest in new wind farms and nuclear plants by making it more expensive to run coal and gas plants that emit carbon dioxide. But Tony Cocker, chief executive of E.ON UK, attacked the policy on the eve of its implementation, arguing that it simply "pushes up the price for electricity" and should be scrapped.
He told UK newspaper The Sunday Telegraph: "The carbon price floor is a tax and it's pretty close to a stealth poll tax. It's not based on ability to pay, it's based on the requirement to keep warm and light your house. "It was put in place with the stated objective of encouraging investment in low-carbon energy but it certainly doesn't achieve that objective - it's just a tax for the Exchequer."
He echoed previous remarks by Keith Anderson, chief corporate officer of ScottishPower, who argued that Britain's unilateral carbon tax should be scrapped before it causes blackouts, pushes up household bills and makes the UK uncompetitive. He warned that the CPF will make Britain's remaining coal plants "largely uneconomic by around the middle of the decade".
With Britain's spare power margin already forecast to fall as low as 2 % by 2015, the carbon tax will force more closures and "threatens to make us even more vulnerable to the risk of blackouts", he warned.
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