How to make money from the lights going out

What might you do as an energy company faced with a promise from the government that, if capacity availability for power generation looked a little tight over the next few years, you might get paid for delivering capacity, either from new or existing plants? That promise has, of course been made through proposed mechanisms for a capacity market in the Energy Bill, due to come back to the House of Commons for its report stage very shortly. The government will have a careful look at capacity margins four years out from say – 2014, and will, if it is deemed necessary, provide the wherewithal to hold a ‘capacity’ auction, so that the winners of the auction undertake to provide the capacity necessary to keep margins healthy and the lights on.  The size of the wherewithal – just how much money will be in the auction pot (paid for by consumers in the end) will be a central part of the process.

So if , let us say, those margins were to look really dreadful in 2014 and for some years to follow, you might expect the pot size to be large, and the money going to companies to keep the lights on by agreeing to provide capacity quite substantial.  You would, I imagine want to secure as much of that pot as possible to underwrite your generation.  And if the capacity payment might be available simply if you guaranteed to supply, whether or not you actually built new plant, then you might be tempted to pull some of your existing plant off-line for a time, so that margins would look tight, and then bring it back online once more once the capacity payments started flowing. You might even put  some of your plants into ‘deep mothballing’ with a suggestion that, unless things got better you would certainly knock them down in due course, but you might just be persuaded not to do so by a large enough pot in a capacity auction. And then, assuming all that happened, the lights would not go out, capacity margins would look much better, the wisdom of the auctioning system would be acknowledged, and life would continue, except some people would have got a lot of money for doing what they may well have done anyway.

I know, it sounds theoretically possible but a bit improbable, doesn’t it? Surely something as close to ‘gaming’ as that wouldn’t happen, just as the Government gears up to finalise the details of its capacity auction programme?  Well I merely report the occurrence of what looks remarkably like that scenario, in the announcement at the end of last month  by SSE that they intend to  deep mothball some plants, reduce capacity radically at another, and delay the next construction moves at other plants until ‘at least 2015.’ Oh, and by the way, suggesting  in the same announcement, that there ‘is a very real risk of the lights going out’ as a result of the ‘capacity crunch’ that may be arriving.

Now I’m sure that there are some very good reasons – spark spread, investment conditions, uncertainty around the wider implications of electricity Market Reform etc. for taking the decisions that SSE have around their gas plants over the next few years.  And I’m sure that one of the solutions put forward in the announcement – that the Government brings forward capacity payments for existing plant to 2014 from the present projected 2018 is a reflection of that and nothing to do with the putative gaming of the upcoming capacity auction market.

But just in case I’m wrong, I am after all going to pursue the idea of an amendment in the report stage of the Energy Bill that gives the Minister the power to bring forward a ‘strategic reserve’ system of margin maintenance, quite possibly through literally buying up those mothballed or delayed plant and holding them outside the market for the rescue of tight margins at a later date.  Studies show, by the way that such a programme could be much cheaper to undertake than the possible huge amount of money that might be need to be thrown at capacity auctions if the system becomes seriously ‘gamed’ in the way I have described.  It would be nice to think that the government could switch to a ‘strategic reserve’ way of keeping margins healthy if it turns out that  auctioning isn’t quite the way forward some people think it is. Or alternatively, if we are to have auctions, and only auctions, we might hope that they will proceed cheaply and efficiently, without anyone trying to rig the process to obtain advantage thereby.  I wonder which one might be the more prudent course of action?

This article was first published in Business Green

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One thought on “How to make money from the lights going out

  1. Pingback: alan's energy blog | I’m not here, and maybe power stations aren’t either.

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