Utilities criticize UK power market reform proposals

The proposed introduction of capacity payments to encourage the construction of back-up power plants has raised concern among industry executives in the UK, reports the Financial Times.
 
Under this proposal, generators would be given money to maintain power stations that are not generating electricity to ensure back-up capacity to deal with surges in demand. Nick Winser, director of transmission at transmission system operator National Grid, said the case for capacity payments had yet to be made, because the proposal seemed to pre-judge how much balancing of the market between types of generation would be needed.
 
“Whilst payment of some sort of fossil [fuel] standby plant may well be useful, it may well be that they constitute very little of the balancing need in the future,” he said, noting that storage of electricity and greater interconnection with Europe held great potential.
 
Dorothy Thompson, CEO of Drax, which runs Britain’s largest coal fired power station (4 GW), said the preferred option of having a “targeted capacity market” whereby the government would target specific types of generation, “could cause more problems than it solves”. Any structure that was agreed needed to consider how such an approach would deal with intermittency of supply.
 
Paul Golby, CEO of E.ON UK, also warned that while under the capacity mechanism the country would be spending “extra money to have that capacity”, the government should not ignore those fossil fuel plants that were already up and running.
 
“We have got a substantial amount of insurance in our existing oil plan. It just seems that in trying to balance [the market] it would be absolutely crazy to prematurely close out those plants that give us that capability.”
 
The executives were divided about the merits of a second proposal, where the government would agree long-term contracts with low-carbon generators, under which they would be entitled to top-up payments if wholesale prices fell too low to make a profit. If wholesale prices rose above a certain level the companies would have to return money to consumers.
 
The government has said it would prefer this to premium feed-in tariffs, under which generators would receive a fixed payment on top of the variable wholesale price, so the companies would still be taking on the market price risk.
 
The executives agreed, however, that the proposals would inevitably lead to a less liberalized market. Mr Golby noted that they would mean “a far more managed market”. He added: “That has implications for competition, for our companies and for the government”.
 
Chris Huhne, secretary of state for energy, said the intention “has been to use market mechanisms to the maximum extent possible”. “This is another type of market taking on board other objectives, including low carbon energy security,” he said.

The consultation lasts until spring, when recommendations will be published in a white paper.

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