The European Commission had a busy day yesterday. They put forward a target to improve energy efficiency by 30% as part of a package of climate and energy policy for 2030. They also announced that the UK could go ahead with its system of contracts-for-difference which will provide payments to low-carbon generators. Much less reported was the announcement of the commission’s approval of the UK’s capacity mechanism.
This is really bad news for the process of decarbonisation across Europe – it effectively gives a green light for countries to openly subsidise fossil-fuelled power.
The capacity market provides payments to coal and gas generators to make sure that they stay online and are able to deliver power when the grid needs it. It has come about because the UK government were nervous that the market was not attractive enough for anyone to build new power stations and because an increasing amount of intermittent renewable energy on the system means that we need back-up for when the wind isn’t blowing.
It is true that we need some sort of mechanism for ensuring demand is met but there are many ways of achieving this without throwing billions of pounds of consumer money at old coal-fired power stations. For a start, we could be making much better use of the demand-side of the power system – so rather than assuming that levels of demand are fixed we could be using smart metering and contracting to shift the times when power is used. We could be encouraging increased use of storage technologies so that power is stored when there is an excess and then used when renewables aren’t providing. We could also increase the capacity of our interconnectors with Europe so that we can use their power rather than maintain high-carbon power stations in the UK that hardly ever run.
If all these options are maximised then we may need a top-up of generation to ensure the lights stay on. But within a context where we are trying to decarbonise the energy system surely it would make sense for this generation to be as low-carbon as possible. It is perverse that coal generation, which is by far the most polluting, should be receiving subsidies to stay online. And we’re not talking about small numbers here. A 2GW coal plant could be paid £100 million per year from the capacity market, on top of the money they make from selling their power.
The inclusion of coal generation within the capacity market is the result of a massive lobbying effort by the big utilities that operate these plant. The UK is seen as a test case for how a capacity market will operate and the huge European utilities saw that pushing for old fossil-fuelled plant to be included would set a precedent across Europe. So they have pushed extremely hard, and because the design of the market is so complicated their expertise has been drawn on at multiple points by the poor civil servants who have to make this thing work.
This is a major flaw of policy making in the UK at the moment. The government are having to respond to changes in the system as new technologies come forward and we try to decarbonise. There are multiple interacting policies that are all complicated and the only people that truly understand it all are the very well resourced utilities. They have an informational advantage over everyone else including the government and so when new policy is being designed their expertise is drawn on. This gives them an opportunity to shape how policy works and they are masters of bringing it round to their own advantage.
This is exactly what has happened with the capacity market. The utilities saw that it was an opportunity to capture subsidies for their plant in the UK and thereby set a precedent for receiving subsidy across Europe. And the UK government fell for it.