This week the Energy Select Committee has been holding hearings on the latest iteration of the energy White Paper, ‘Planning our Electric Future: Technical Update’. It’s more of a ‘here’s what we’ve decided to do on a couple of things that were not very clear in the White Paper’ document than a ‘technical update’, but that’s beside the point really. The two things they’ve decided on are:
- Who will be the system operator for the whole thing? Answer – the National Grid
- Will we set up a strategic capacity reserve of specially built plants that never produce anything except at half time in the cup final or pay people to turn up and bid? Answer: it’s the second thingy – you know: the capacity market.
Well OK, that’s clearer than before, but some will say, not necessarily in a good way, and – it is apparent from the exchanges at the Select Committee, not accompanied by much technical updating. We seem to be as far from filling in the dots on the why’s and how’s of a capacity market than we ever were, for example. And as for ‘deciding’ that National Grid will run the show, this has more of a ‘who’s standing around in the room who might fit the bill?’ feel about it than anything else. I’ve posted on what seem to be some potentially difficult problems about possible conflicts of interest, however benign National Grid are seen to be (here), and there remain some woeful gaps in clarity on things like who actually designs the contracts for difference and for capacity payments, who guarantees payments once the contracts are issued, and what happens if, say – Gazprom – decide that taking over National Grid looks like a good portfolio investment.
And as for capacity payments, there is the awkward prospect of the likely cost of the chosen alternative. RWE npower (I know, they may be biased on the subject) have estimated that the incremental cost of a capacity market would be about £7.5 billion, whereas a last resort strategic reserve mechanism (yes, the non-producing power stations) would, a little counterintuitively, come to far less – perhaps between £300 – £650 million. The estimate for a capacity market put forward by the minister in evidence is a little less – net £2.6 billion and a future saving for the customer, but still miles away from the cost of buying plant to sit in the corner.
That’s important because capacity payments of course will be met by levying producers and suppliers, who will pass the cost of the levy on to consumers’ bills. Oddly, at the moment penalties for non-performance once a capacity market agreement has been reached go to suppliers, who look able to bank it and not pass savings on in turn.
And at this point, well, yes the good old Levy Control Framework rears its rough skinned head again.
‘The Government will ensure that the overall parameters within the capacity market do not lead to an unnecessary or unaffordable impact on bills. As a policy funded through levies it is possible that the capacity market will fall within the scope of the Levy Control Framework. Should this be the case then this will provide a basis for decisions on affordability’ we are told on page 36 of the report. I think what this means is that, if the likely levy cap pushes down on the ‘imputed tax and spend’ allowed under the capacity market, then we might get the secret power stations in the corner after all.
So that’s your technical update for you. In the words of one of the witnesses to the hearing Simon Skilling, of Trilemma consulting, ‘a lot of this is close to the drawing board.’ That’s a concept that could prove to be a useful tool in judging progress. (See diagram above.) How far from the drawing board should we be and at what point? I think we need another technical update of the technical update.