By Tim Probert
The heads of two of Britain’s ‘Big Six’ utilities have advised the Department of Energy and Climate Change (DECC) to drop market reforms that would level the playing field for new entrants into power generation.
DECC is proposing root-and-branch electricity market reform to incentivize the estimated GBP200bn ($325bn) of investment needed by 2020 to replace Britain’s aging infrastructure.
Under its electricity market reform (EMR) proposals, DECC is considering introducing a capacity market mechanism that would reward generators not only for producing electricity, but also for having spare capacity available in times of high demand, and as back-up for wind power and other intermittent sources.
Industry analysts say a capacity market mechanism is essential to attract new entrants into a power sector dominated by the so-called ‘Big Six’ utilities: British Gas, E.ON, RWE npower, Scottish Power, EDF Energy and Scottish & Southern Energy. Yet Paul Golby, CEO of E.ON UK, said that introducing such a system, planned for 2012, would be “premature”.
Speaking at the Adam Smith Institute’s Future of Utilities conference in London, Golby said: “A capacity market is an insurance policy to keep the lights on, but there are other insurance policies like keeping our oil fired power plants running as back-up.
“We may need a capacity market eventually but I doubt DECC’s capability and capacity to work out this mechanism. I would advise DECC to focus on other market mechanisms.”
RWE npower’s CEO Volker Becker also advised the British government to drop plans for a capacity market. “The more focus there is on a capacity market, the more costs will go up. If Ofgem wants more liquidity in the electricity market, then a capacity market is not the answer.”
Oxford University’s Professor Dieter Helm, one of the UK’s most prominent energy policy advisors, said a capacity market was essential for potential new entrants into the “oligarchical” power sector, a key factor in attracting sufficient investment to build new power plants. Helm said the ‘Big Six’ loath the idea of a long-term capacity market, similar in design to the Electricity Pool dismantled in 2001, as it would open up the market to closer scrutiny.
Helm said: “A long-term capacity market would compel all generators to sell their electricity into the market. This is liquid, transparent and extremely competitive. And the generators hate it.”
Helm said the current NETA (New Electricity Trading Arrangements) market model introduced in 2001 was “brilliantly designed” not to deliver investment in power plants and warned that a business-as-usual market model would prevail despite the EMR proposals.
“After 10 years since NETA, we still haven’t found the right answer and yet another review is possible,” said Helm. “It is very hard to say the EMR proposals will credibly lead to a decarbonized power industry by 2030. This is the beginning, not the end, of the market reforms process.”