A cross-party group of MPs this week heard that the government’s plans to reform the electricity market were “shot full of holes” and that “a lack of coherent policy” would deny investors long-term security.
Giving evidence to the Energy and Climate Change Select Committee, energy reform expert David Newberry criticised the Department of Energy and Climate Change’s decision to opt for a capacity mechanism. “I’m not clear what decision has been made. There are so many holes. The key challenge is flexible and dynamic response as much as, if not more than, pure capacity,”
he said.
“The way I read it is we are not far off the drawing board and we will be back there fairly soon.”
Also giving evidence, Simon Skillings, director of consultancy Trilemma UK, warned that the current proposals could undermine investor confidence.
“There is a lack of coherent policy that is sufficiently in line with climate objectives but flexible enough to take advantage of opportunities,” he said. “Consequently, no-one believes the government won’t make changes. That doesn’t tie in with a clear long-term policy that gives investors a sustainable framework.”
Committee members questioned the choice of system operator National Grid as the body to act as the “delivery institution” for the capacity mechanism. But Skillings dismissed concerns about conflicts of interest between the delivery role and National Grid’s power transmission investment interests. He said regulatory business separation was “well trodden” and there would be no need to force the system operator to make divestments.
However, he did stress the need to reinforce the advice the delivery institution might give to government. “How do we know we are getting good advice and not just easy answers in line with previous practice? It is difficult to imagine that the government will not need expert advice to counterbalance the system operator’s advice,” he said. “For example, the Climate Change Committee could give an independent review to ensure advice is consistent with legislative targets.”
Newberry warned that the policy as it stood failed to ensure that the system operator contained the costs of capacity payments. “The missing element is we should be delivering renewable targets at the least cost, including not just the cost of whatever renewables are built but also the transmission and reserves and various mechanisms for handling constraints,” he said.
“It comes down to the design of the contracts. If they offer the same price regardless of location, it will build up huge problems in co-ordinating transmission investment and location.”
He said transparent contracts were needed that allowed different prices at different places, “then you can get a least cost combination of transmission and generation”.
by Trevor Loveday