Lessons for Australia from UK electricity market mistakes

Lessons for Australia from UK electricity market mistakes

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The UK electricity market offers convincing evidence that capacity markets aren’t needed, and we should focus, instead, on supporting technologies – like battery storage.

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The UK capacity market has cost consumers billions of dollars since it was launched four years ago, but such subsidies – by our lights – may no longer be needed.

The market mechanism in question rewards power producers simply to be available to supply electricity. Bidders are paid regardless of whether they ever generate any electricity.

It allows utilities and other generators to commit to keeping coal, gas, nuclear and hydropower plants open for contract terms of either one or four years into the future.

Critics of the arrangement have noted that it rewards companies to keep their plants open even if they had intended all along to do just that anyway.

It isn’t too late to dial back the scheme and instead focus on supporting emerging modern technologies such as battery storage, as IEEFA recommended last year.

When the capacity rules were introduced in 2013, generators and utilities were painting a bleak picture of the UK’s future electricity market.

SSE, one of the so-called Big Six UK energy companies, warned at the time that the country was in a “critical period” that included the risk of blackouts.

Centrica, another UK energy major, went so far as to say blackouts could occur by 2017 and ran a campaign saying it would not build another gas power plant without a capacity market in place.

Fast forward four years and it’s clear that those warnings were over the top. While gargantuan sums have been paid out in capacity subsidies to existing generators, no new large power plants have been built – as was implied would happen.

Further, prices declined in the latest capacity auctions, called T-1 and T-4 for contracts going one year and four years into the future (see the chart below), an indication that adequate power supplies aren’t really an issue.

One would expect rising prices if the electricity system was short on capacity and needed new generation.

One can find various explanations for falling prices: support in the program’s early years that led to the construction of a wave of very small generators; the prospective build-out of sub-sea interconnection into Europe; rising running times of gas power plants as coal power units have shut down; and reforms to the UK cash-out markets that reward power plants that can respond quickly to supply shortfalls and that penalize those that fail to perform as promised.

Growing evidence that capacity markets aren’t needed.

Beyond this, there is growing evidence that capacity markets, pitched by proponents as a necessary means of balancing rising amounts of variable generation, simply aren’t needed.

A report we published last week details many successful examples of markets around the world that have managed to integrate high levels of variable wind and solar power into their electric grids without resorting to capacity markets.

The study—“Here and Now—Nine Electricity Markets Leading the Transition to Wind and Solar” – shows major grid reliance on wind and solar ranging from 14-53 percent of total generation. Only one of the nine markets, Spain, has a comprehensive capacity market.

It turns out that countries with far higher levels of so-called variable renewables are doing without capacity markets, finding other measures (investing in transmission capacity, reforming power markets and requiring renewable energy technologies to play a bigger role in meeting power demand) to be sufficient.

Perhaps it is time for the UK to follow some of the examples occurring in these markets.

Gerard Wynn is a London-based IEEFA energy finance consultant.

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  1. Roger Brown 3 years ago

    Lesson 1 , don’t build a Nuclear Power $tation !

    • RobertO 3 years ago

      Hi Roger Brown. You’re not listening to Cori Bernardi or to George Christensen. “We must have Nuclear” or “We must have new HELE coal, and when the message comes “We must have capacity payments to keep going” by the RWNJ in the COALition (abbott and kelly and co), I hope you continue (not to listen).

  2. Roger Franklin 3 years ago

    Why on earth would we start listening and learning from other countries experiences? Even other States experiences are quickly dismissed as “We are Different”! Lets re-invent the wheel and waste a few billion here and few billion there – no problem!

    • Hettie 3 years ago

      That’s one of the things Australia does best, especially with a coalition Gov’t.

    • Andy Saunders 3 years ago

      Why wouldn’t we learn (intelligently) from other countries? Cheap and easy way to reduce risk. Stupid if we don’t, in fact.

  3. MaxG 3 years ago

    From a system level view: It is called neoliberalism — completely normal… privatise profits, privatise cost.

    • Joe 3 years ago

      Max ,should not it read ‘….socialise cost’ ?

      • MaxG 3 years ago

        Thanks, of course, corrected… 🙂

    • Brian Dooley 3 years ago

      Which exactly the RET does. inflates profits to operators of non viable wind farms etc and punishes poor folk greeny

      • Mike Westerman 3 years ago

        If you had half a wit to understand how the market works you would realise everyone receives the highest bid set by OC gas.

        • Brian Dooley 3 years ago

          Exactly greenie there should be no subsidises answer this greenie why did we have the lowest power prices in the world before the RET and we now have the highest then again greenies don’t work so it doesnt affect them.

          • Mike Westerman 3 years ago

            Why don’t you stretch your feeble mind and read why? Or like a dog to vomit you prefer it stupid but simple?

          • Joe 3 years ago

            Mike, best ignore this Brian dude. Me thinks he is a stooge for The MCA or a Trolli….maybe both?

          • My_Oath 3 years ago

            Nah – not the MCA. He and the MCA are both stooges from the same source.

          • My_Oath 3 years ago

            Cool. Remove the subsidies. Including the ones on coal. Start with costing the coal properly instead of giving its pollutants a free ride.

        • Brian Dooley 3 years ago

          By the way Westerworld Al Gore has been found to be a fraud by the highest court in Britain and subsidies dont work Westworld Mike

          • Mike Westerman 3 years ago

            That would be the Britain paying 92pound a MWh for nukes while wind cost a quarter of that? Yeah I’d like a piece of that!

  4. itdoesntaddup 3 years ago

    Reading this article you would not know that batteries were awarded 158MW of the t-4 accepted bids, nor that batteries with 4 hour duration secured a 96% capacity factor despite being used for other FCAS type duties. Nor would you know that “small generators” are for the most part diesel. Whether the capacity turns out to be adequate or not remains to be seen – the buyer of capacity was the National Grid, which decided how much to procure. There is no guarantee they will prove correct. What the auction did achieve was shutting further coal plants, so the margin will get tighter if there is any growth in demand – no chance of a significant EV fleet. This at a time when EU countries are busy shutting down coal and nuclear plant and leaving themselves exposed to shortages of their own. What the auction also showed was that if more capacity was required, the clearing price starts escalating sharply.


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