The UK government’s Capacity Market is undermining the UK’s Industrial Strategy, resulting in hundreds of millions in extra costs to decarbonise the energy system, a new report by the Association for Decentralised Energy (ADE) has found.

The government’s flagship scheme to secure Britain’s electricity supplies risks missing out on savings of £750m a year by ignoring combined heat and power technology, according to the report.
BEIS UK government department
New modelling and analysis performed by the ADE found that building CHP units instead of less efficient, power-only gas plants would help save between £656 million to £774 million on energy bills a year by 2030, while saving the equivalent carbon emissions of taking 1 in 14 cars off the road.

ADE Director Tim Rotheray said the government needed to be mindful of the costs involved in ignoring the technology, saying, “Efficient combined heat and power, like much of efficiency policy needs a clearer focus. Wasted energy costs all consumers and the economy.”

Around 2,000 factories and businesses have so far adopted CHP to cut an estimated £375m from their total annual bills. But despite these savings the Government has blocked CHP from its capacity market auctions, putting the brakes on further benefits.

The Government scheme designed to encourage investment in “more sustainable, low-carbon” electricity capacity, called the Capacity Market, has to date secured commitments for 8 GW of inefficient and higher carbon gas and diesel engines. Although less efficient power plants are potentially cheaper up front, their higher fuel costs pushes up the costs of energy bills when they run.

Supporting inefficient plant through the Capacity Market unnecessarily increases consumer bills over the long term and directly undermines the Industrial Strategy’s aim to increase productivity, drive economic growth and improve living standards.

Combined heat and power is up to 30% more efficient than traditional forms of energy production. CHP can be very flexible and uses natural gas and renewable fuels such as biomass, biogas, and hydrogen.

The report asserts that giving CHP the same support as traditional gas plants could more than double its capacity from around 5.5GW to 13GW in a major boost for the UK’s bid to secure investment in low carbon energy and boost post-Brexit productivity.

The ADE’s new report demonstrates how CHP can help lighten the costs of transitioning to a low carbon energy system and meeting the UK’s decarbonisation targets, while also strengthening the global competitiveness of British businesses.

The UK uses CHP for only 6pc of the energy mix but in European countries including Denmark and the Netherlands CHP makes up between 30-50pc of energy demand.

Business energy costs have risen by as much as 119% since 2004, and electricity network costs, balancing costs and capacity costs now make up a third of UK electricity costs, or £11 billion a year.

With the opportunity to strengthen both industrial and energy policy, the ADE’s report calls on the Government to set a clear ambition to ensure as much as possible of the 14 GW of new gas generation that is currently considered necessary, to be highly efficient combined heat and power.

To achieve these benefits, the report calls for:

  • Continuation of the Carbon Price Support tax and for CHP’s benefits to be fully rewarded under the tax
  • Assurance that distributed generators are fairly rewarded for the benefits they provide to the transmission and distribution networks
  • Better recognition in the Capacity Market for higher-efficiency and better value power plants

ADE Director Dr Tim Rotheray said: “The economy depends on competitive business. Those businesses need to decarbonise cost effectively to remain competitive in the future. Today’s report provides Government with a clear answer on how to support industrial competitiveness and deliver a significant carbon reduction.


“By installing CHP, thousands of businesses across the UK could help lighten the load of the cost of the energy transition while delivering much needed new capacity, helping to balance the grid and reduce network investment costs.”

“To enable a more competitive energy economy, it is vital that policies including the Capacity Market, carbon taxes and network charging arrangements recognise and reward CHP’s long-term value to consumers and the environment. Enabling CHP gives real potential to make a user-led energy revolution a reality.”