Major changes to capacity market and distribution charging regime proposed

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Energy secretary Amber Rudd: We can manage winter but we need more power stations.The department of energy and climate change (Decc) has outlined sweeping changes to the capacity market, the mechanism intended to ensure the UK has sufficient power over winter peaks.

Significantly, Decc also flagged plans to change the distribution charging regime for embedded generators, which industry experts have warned could have serious consequences for UK industry.

More power, more collateral, more cost

Decc wants to buy more power, earlier, and will bring the start date for the mechanism forward a year. Capacity providers – both power stations and demand response units – will now start delivering power if needed from winter 2017/18. That will mean business energy bills increase sooner than anticipated. The capacity mechanism charge could add several percentage points onto bills, analysts believe.

Government also wants to make it harder for companies to get out of contracts, a move being mulled by SSE should it decide to close Fiddler’s Ferry despite having a capacity contract in place. Higher contract termination fees have been mooted. Decc also plans to increase credit cover requirements for those bidding for capacity contracts.

Diesel destruction

Decc wants to incentivise the building of new gas plant, which the capacity market in its current form has failed to do. What it has rewarded are rafts of small scale diesel generators. The effect of those diesel farms is to undercut new gas power stations.

So Decc intends to make life harder for diesel generators via tougher emissions legislation that Defra will consult on later this year. However, head of the Association for Decentralised Energy, Dr Tim Rotheray, has warned that the move could inadvertently penalise back-up generation.

The new rules would not simply limit operating hours but would apply to diesel generators (or aggregators of diesel gensets) from 1 MW to 50 MW, irrespective of their number of hours of operation during any given year.

“The mention of this Medium Plant Combustion Directive could land hospitals, data centres, industrial users with back-up generation with very significant costs,” said Rotheray. “[Decc] is absolutely right to stop diesel farms, but diesel back-up has a role to play to ensure security of electricity supply to those sites. The proposals for the MPCD need more thinking through.”

Demand-side response

The department has also outlined changes for demand-response providers. Proposals mooted include only allowing demand-side response from load shifting into the transitional capacity auctions, as opposed to allowing small generators to bid. Or specifying a minimum amount within each auction that comes from demand reduction. Decc also plans to lower the minimum entry size from 2MW to 500kW.

Distribution disaster?

Significantly, Decc also flagged plans to change the distribution charging regime for embedded generators, which experts warn could have serious consequences for UK industry.

“Decc is right to look at security of supply and new diesel farms are a bad thing,” said Rotheray. “But the mention of the embedded benefit [within the consultation] is completely inappropriate. It has nothing to do with capacity or security of supply. If the embedded benefit were to go, we would see industrial plants shutting. It would be very significant.”

Rotheray said the proposal was “a fundamental change” to the principles of electricity charging. “With that particular proposal an outcome has been decided upon, and every possible rule is being twisted to achieve that outcome. That is extremely harmful, especially given the work that has been done by the industry over the last two years [on embedded benefit].”

Rotheray believes that government is plotting the changes purely to incentivise new gas. “And they are finding whatever possible route to new gas that they can.”

See the consultation here.

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