Gaming, capacity payments, and coffee loyalty cards

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You’ll have to stick with me on this one.

The House of Commons authorities have decided to follow the trend and issue ‘coffee loyalty cards’ across the various coffee outlets in the house.  Buy nine coffees and get the tenth free. Quite how that encourages ‘loyalty’ when there are no rivals on the Commons Estate is beyond me, but still.  Anyway, in Portcullis House (the new part of the estate), there are two coffee outlets. One, in the cafeterias, sells small cups of very very average coffee at 50p a cup. On the opposite side of the atrium is a new posh upmarket joint selling very good coffee in all its varieties at £1.70 a time for the largest cup. Apparently, wise customers have taken to buying nine cups of duff coffee at 50p and then finally rushing over to the other side of atrium, stamped cards in hand, to get their free cup of really nice very expensive coffee.

This and similar practices are called by the collective title ‘gaming’ by rational choice theorists and others, and it seems this is what is preoccupying DECC analysts when they approach the problem of capacity payments, now featuring as a component of the upcoming energy bill.

Here’s roughly how all the worries go (and you can read it all for yourself in the DECC Technical Update so that you can see I’m not making this up.)

  1. We will probably need to pay developers of non-renewable power stations money to ensure they build enough power stations in the future to ensure that there is sufficient reserve capacity to support a much higher penetration of variable energy sources in the future.
  2.  Hitherto, this reserve has been supplied by older plant that is now no longer competitive being ‘mothballed’ and only brought back online when there is a need for peak power  intervention, at a high price.
  3. A lot of this power will not be available in the future because of EU Directives and emission restrictions, so maybe developers will have to build new plants specifically not to run very often.
  4.  Sometimes the price at peak times can go up as high as £950 per mwh but if there is not sufficient new capacity in reserve and a far more volatile market for peak power supply, it is thought that this price could go up as high as £10,000 per mwh, a figure that Government may find insupportable, so they will seek to restrict the market below this point, which will cause developers either to ‘game’ on the highest price they can go to through scarcity, or to hedge for the likelihood that government will pull the plug below that price by pulling their plants off line.
  5. Either of these eventualities would be catastrophic, so the Government should set up an industry-wide ‘auction’ (value for money) to decide who gets whatever capacity payments are deemed necessary by Government in the long term future to keep a good reserve available and prevent ‘gaming’.
  6. An industry wide auction is preferable to a ‘strategic reserve’, because, although it is theoretically much cheaper than an auction, the call for a strategic reserve itself might be ‘gamed’ by suppliers deliberately closing their plants down so that they can get more money for new plants in a reserve.

Are you with me so far?  As you can see, that’s clear; we have in the distance, when we may need it (say 2020 or so) a government announcement that we need capacity payments and that an auction can start.

Ah, but here’s where the ‘gaming’ starts in earnest. Why?  Simply because as soon as you announce that there might be  capacity payments available, developers put off decisions to build new power stations because they (rationally) do not know whether their decisions will prove disadvantageous if they go ahead only to find capacity payments coming on stream shortly afterwards. The hold on development thus introduced creates a problem with capacity (obviously) for which the only solution is… yes, you’re on to it… bringing capacity payments forward radically.  That is, in order to solve an under capacity problem, you probably create overcapacity at great expense, as the DECC analysts ruefully observe in an obscure corner of their paper.

So that’s what we appear to be going forward with in the Energy Bill. Lucky old gas developers, I say.  Of course, another scenario might be possible.  It might just be possible that the bit of the rational choice theory that says that  operators will close plants that they are going to have to close anyway in order to ‘game’ a strategic reserve might not be correct.  It might also be that a strategic reserve purchased by a Government or government supported agency can place strategic reserve intervention OUTSIDE the market and thus obviate the ‘£100,000 per mwh’ problem.  Such a reserve could be then purchased from (mostly) existing mothballed plants at a fraction of the cost of paying industry generally to produce new low running plant.  A strategic reserve announcement in this shape would give government control of emissions from the reserve it owned or controlled; and an announcement of a strategic reserve along these lines would, almost certainly, be proof against ‘gaming’.  All possible yes, but not, apparently within the parameters of consideration.

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3 thoughts on “Gaming, capacity payments, and coffee loyalty cards

  1. Well Alan Whitehead very well put! I am not in your constituency but our paths have crossed on a few occasions in the past so I thought that I would

  2. Well the enter key defeated me yet again! See previous post, I would like to respond even though you are not my MP. It seems that a pathway should be created for new entrants into the field of energy supply. Yet it seems that the field of players and indeed the playing field is dominated by the current team so what about creating a new team? Or a new playing field? I am not vying for a place on that team but I am sure that there are many more suppliers with new ideas for sustainable energy who would like to be considered as prospects within a new playing field! Please do contact me if you would like to discuss this further.

  3. Pingback: Goldilocks and the Three (Carbon) Targets | alan's energy blog

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