Government policy must be much better integrated if the mechanism is to achieve its aims of securing Britain’s electricity supply.
“Right now, there is a limit to what the capacity auction can achieve,” said Baringa energy retail and networks partner Phil Grant. “Regulation, incentives and subsidies flowing from other policy frameworks muddy the waters, creating risk and undermining investment opportunities.”
Grant said the fear that significant numbers of small-scale diesel generators will win contracts in this year’s auction, as they did in past years, is “overstated”. Ofgem is considering changes to network charging arrangements to curtail the embedded benefits that come with being connected to a distribution network and the Department for Environment, Food and Rural Affairs (Defra) is planning to introduce new emissions limits for smaller plants. Both pose a “material risk” to the revenues of small-scale diesel generators “making them far less competitive”.
Nevertheless, Grant said having “dozens of diesel plants in the running” could drive down auction clearing prices, jeopardising the success of large gas plants – in particular the combined cycle gas turbines (CCGTs) which the government wants built.
“This market distortion is created by the interaction of other mechanisms within the capacity market,” added Grant. “We need to see better policy integration across market design, incentives and charging arrangements if the auction is to achieve what it set out to do: to ensure we have sufficient capacity to maintain security of supply.”
The latest four-year-ahead (T-4) capacity market auction entered its second day of bidding earlier this morning.