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UK capacity payments ‘cannot work’ in single electricity market

24 Jan 2012 18:59:16 | edem

UK lawmakers were warned on Tuesday that one of the central pillars of the government's electricity market reform programme, the proposed capacity mechanism, "cannot work in a single European market".

The capacity mechanism is intended to ensure adequate dispatchable power generation to guard against sudden losses from wind power and other intermittent renewable production sources.

"The government is aspiring to establish a process of resource adequacy and to fix a security margin within the UK to ensure we have a more secure system," Simon Skillings, director at consultancy Trilemma UK, told parliamentarians.

"They have not explained how that is compatible at all with a single market in which you may be connected to a neighbouring market which has no security margin."

The EU's long-term aim is to develop a single electricity market with adequate interconnection between nations to allow price coupling. But healthy margins in one country could pull down prices in neighbouring markets, leading to generation capacity across borders being decommissioned to support prices, Skillings said.

He described it as "running to stand still", adding: "It can't work in the single market."

'Significant risks'

University of Cambridge economics professor David Newbery said increased import and export capacity is essential, because the UK is spearheading its push to meet renewable energy target through the mass development of the offshore wind sector.

But he labelled EU regulations "unsatisfactory", saying they are "not helping our building of more interconnection".

The capacity mechanism warning was not the first time policy makers have been cautioned against taking unilateral action to decarbonise the country's power generation sector.

Last year, experts said another of the central pillars of the reform programme, the controversial carbon price floor, would raise the issue of carbon leakage within energy-intensive industry if wholesale power prices climbed to unsustainable levels (see EDEM 25 May 2011).

The comments came as the parliamentary department of energy and climate change (DECC) heard evidence regarding the capacity payment regime, details of which were presented by DECC in December.

"We face significant risks to security of electricity supply in the medium term," the DECC document said. "Given the importance of ensuring we have adequate levels of reliable capacity, the government will legislate for a capacity mechanism."

The regime will offer a fixed revenue stream to power producers in return for them ensuring the availability of their generation capacity. Producers will bid into an auction overseen by system operator National Grid (see EDEM 15 December 2011). JS

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