Consultation on Reforms to the Capacity Market, March 2016

Citizen's Advice responded to government proposals to reform the capacity market.  312 KB  Consumers clearly have an interest in secure electricity supplies and the adequate reserve capacity that entails. However, that interest does not and cannot extend to supplying them at any price, and consumers should not be obliged to pay more than necessary in order to provide them. The more the capacity market is tweaked to force up the auction clearing price, the more strained will be the claim that the policy is entirely within consumers’ interests.

In general, markets are good at finding creative solutions to open-ended questions. What they are not good at is delivering a pre-ordained outcome in an orderly way. The largely unanticipated outcome of significant volumes of diesel generation prevailing in the first two auctions demonstrate the inherent unpredictability of markets. The consultation document makes clear that the government is measuring the success of the capacity market by its ability to bring forward new gas capacity. What it does not do is adequately explain why gas capacity should be more desirable than less expensive alternatives. Nor does it explain why, if new gas capacity is the only outcome that will satisfy government that the policy has succeeded, the policy bothers with also routing money to other forms of new and existing generation. If the government really wants new gas capacity, would it be more affordable to auction funding for constructing new gas power stations directly, than to go through the rigmarole of a supposedly technology neutral auction that in practice must deliver a pre-ordained outcome in order to be politically tolerable? There is a risk that in combining the processes of a market with the decision-making characteristics of a central plan, we will end up with the worst of both worlds, satisfying nobody.

It is particularly troubling that the consultation specifically cites the desires of industry and investors that the government buy more of their products and guarantee them higher prices and thus better returns, without providing a countervailing view of those who will be required to pay. Under-buying is a risk in capacity auctions, but so is over-buying. Given inescapable political risk resulting from undersupply and possible curtailment - no minister will ever want to see disruptions or blackouts on their watch - it is already likely that capacity assessments will err on the side of caution and over-procure supply. While some of the proposals here are reasonable (see part 2 of this response), we are concerned that in the round this consultation is a statement of intent to err even more fully on the side of increased procurement, which will ultimately drive up costs for consumers.