Five years after passing the Energy Act 2013, the government of Great Britain is conducting a review of the capacity market introduced by this legislation. The evaluation serves to determine whether the capacity market is still necessary and whether it is meeting the stated aims of ensuring cost-effective, secure supply. Government officials are also considering whether these continue to be appropriate objectives and whether they can be achieved with less regulation.

The Regulatory Assistance Project responded to this request for feedback suggesting that, overall, the introduction of a capacity market in Great Britain was a solution to a capacity problem that did not exist at the time. This is evidenced by the auctions held to date being oversubscribed with low auction clearing prices.

At some point, new investment will be required to replace aging and polluting fossil-fired plants. However, this investment would best be secured by continuing and accelerating the energy market reform embodied by Ofgem’s Electricity Balancing Significant Code Review. In fact, by reinforcing the energy market’s “missing money” problem, the capacity market undermines Ofgem’s reforms and could make the need for a capacity market self-perpetuating.

We recommend, therefore, that the government clearly state that the capacity market is viewed as a temporary measure, to be withdrawn once the appropriate energy market conditions have been established. Policymakers should also set out what those conditions are and how they are to be achieved.

In the interim, the capacity market should be reformed to improve consistency with the decarbonisation agenda and to support the development of technologies necessary to meet that agenda. This would include moving away from just procuring capacity, recognising the value of flexibility, and removing some of the many barriers to the participation of flexible technologies such as demand-side resources.