Monday 20 June 2016

Guest Blog: Alan Little – Capacity Market

Before we discuss the Capacity Market (CM), it is essential we highlight the current issues the UK faces:

• Decarbonising the electricity supply
• Security of supply
• Minimising the cost of energy to consumers

So what is the Capacity Market and how will it aid these issues?

The Capacity Market forms part of the government’s Electricity Market Reform (EMR) package and ensures electricity supplies are secure by providing a payment for reliable sources of capacity, alongside their electricity revenues, to ensure they deliver energy when needed. EMR has been introduced to help incentivise much needed investment in more sustainable intermittent (wind) and low carbon (nuclear) power at the lowest cost for consumers. This will be achieved via Contracts for Difference (CfDs) and the CM.

This policy has been introduced as around 20% of the existing generating capacity is expected to shut down over the next decade. The CM however will ensure the generation of electricity from renewable sources such as wind farms are built to replace coal and older power stations.

In a sense, the CM is to provide an insurance policy whereby there is no possibility of future blackouts, ensuring the lights are always on. For instance, where there are periods of low wind generation and high demand, the CM will ensure consumers still continue to benefit from reliable electricity supplies at an affordable price.

The CM functions by giving all capacity providers the opportunity to receive a steady and predictable revenue stream on which they can base their future investments. The cost of the CM will be met by consumers via the supplier levy on electricity companies. However this cost will be minimised due to the competitive nature of the auction process required from providers. This process will also ensure the lowest cost provision of capacity to meet the expected level of security for the determined supply. In return for their capacity payments, the providers must provide energy during periods of high demand or risk penalties as a result.

Overall, by buying more capacity, the UK will be aided in managing the increased risks it is and will be facing over the next decade as the nation begins to turn away from coal and old power stations. This shows an increased resilience without necessarily building extensive new generation plants.

The CM has been designed to encourage new investment and maximise the UK’s current generation capabilities as well as support the development of more active demand management in the electricity market.

STC’s Perspective

We believe the introduction of the CM highlights the importance of reducing energy usage in peak times and the need for demand response and demand side management. This will create opportunities to assist businesses with analysing their energy usage and look at ways of moving consumption away from the peak times, which are: 4pm – 7pm, Monday to Friday between November and February. However peak times can vary by region.

This also adds to the importance of validating invoices as this is yet another element on the invoice to check.

Alan Little is the Energy Expert and Business Development Manager at STC Energy – a specialist energy management consultancy and leading provider of bureau services in the UK.

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