A Critique of the UK’s Capacity Market Proposals
This policy brief outlines a number of concerns regarding the design of the proposed Great Britain capacity market and, more generally, over the Department for Energy and Climate Change’s (DECC) decision to opt for a market-wide capacity remuneration mechanism (CRM) rather than a strategic reserve. Had more appropriate assumptions been made about generator availability and the contribution to be made by interconnection and demand-side response (DSR), the need to lock into 15-year contracts for new gas generation could be avoided. No planning process is perfect and that is not the standard to which we are proposing the UK government be held. However, we believe that sufficient evidence exists concerning generator availability and DSR and interconnector contribution in situations where capacity is scarce for DECC to reasonably conclude that the need for new fossil generation capacity at this point in time has not been established. Many capacity mechanisms in comparable competitive electricity markets have been designed and successfully executed with much shorter commitment periods – typically no longer than one year – precisely to allow for this type of uncertainty and to avoid undue distortion of competitive markets. Overall, we believe that DECC have made the wrong choice and that the decision to introduce a market-wide CRM that will commit electricity consumers to underwrite 15-year contracts for capacity, is simply not supported by the available evidence.