Utility Week

8 | 23RD - 29TH NOVEMBER 2018 | UTILITY WEEK News "Given the serious financial implications for capacity providers as well as the need for investor certainty and security of supply, this issue needs to be resolved as soon as possible" LAWRENCE SLADE, CHIEF EXECUTIVE, ENERGY UK "Suspending the capacity mar- ket, and with it capacity pay- ments for existing agreements, poses grave questions about the future security of sup- ply, threatening the closure of plants without the certainty of new generation to replace it." DAVID OLIVER, ENERGY EXPERT, INENCO "BEIS is seeing this as a chal- lenge, but actually the court has presented it with a massive opportunity to constructively rethink a measure that while keeping the lights on is working against other government aims on cost and decarbonisation." RICHARD BLACK, DIRECTOR, ENERGY AND CLIMATE INTELLIGENCE UNIT "There have always been flaws in the capacity market, not least that it solves a problem which doesn't yet exist… The suspen- sion of the capacity market at a time when the mechanism was coming under review anyway provides an opportunity to address some of these flaws." SEBASTIAN BLAKE, HEAD OF MARKETS AND POLICY, OPEN ENERGI "The capacity market is flawed and needs restructuring with a balanced approach to all technologies… However, the way this point has been made and the resulting suspension of the capacity market is potentially damaging to investor confidence." MARK HOLLANDS, HEAD OF ENERGY STRATEGY, BRITISH SOLAR RENEWABLES gest winners of capacity contracts for DSR. Founder and chief operating officer Alistair Martin says the suspension of the mecha- nism will leave a sizeable dent in the com- pany's revenues. Nevertheless, he welcomes the ruling: "One doesn't normally expect the little guy to win. It only usually happens in the movies." Martin says the disruption the industry now faces is the fault of the government for failing to address the concerns of DSR aggre- gators for years on end: "The government has been vulnerable for this whole time because the capacity market was pushed through in a bit of a rush and they le this vulnerability in there". He says the persistent refusal to resolve the problems "baked into the design" le few alternatives to such a challenge: "I'm not going to point the blame at Tempus because the solution is in the government's hands and has been for a long time." Now its hand has been forced, Martin hopes the government will grab the opportu- nity to finally make the necessary changes to put DSR on an even footing with generation. He worries it will merely return to the European Commission with "essentially the same capacity market", preventing its rein- statement: "That will be a classic case of it taking longer to do things quickly." In the meantime, Martin wants "urgent clarity" over what will happen to existing contracts: "This industry doesn't run on massive margins and the place where the margins are thinnest is oen around these sorts of areas. There's a hole right now and the industry needs to know what the govern- ment is going to do about it." He continues: "Once state aid approval is achieved, then what happens for the pay- ments that were due for this year? The mar- ket needs to hear clear statements from the government on these points." Quick restart essential Tim Rotheray, director of the Association for Decentralised Energy, shares Martin's desire to see more equitable treatment of DSR within the capacity market But he says many companies with decen- tralised energy portfolios have managed to build business models around the mecha- nism, despite its flaws: "If a substantial income stream like the capacity market is brought to a halt then that has got to put those businesses under considerable finan- cial strain. "I don't know if it will put companies' survival at risk; that probably depends on how long this hiatus lasts. "If it's quite quick then I think that might be okay. But I'm concerned this might be a lengthy hiatus of many months, which will put significant pressure on businesses." As much as he would like to see reforms to the capacity market, on balance he con- siders it more important to get the scheme up and running as soon as possible. Once revenues have begun flowing once more, the government can then set about resolving any remaining issues. Rotheray hopes the situation will spur ministers to match their stated ambitions with "real action". He says they have lacked a strong "sense of urgency" up until now and this needs to be "ramped up". Thomas Edwards, senior consultant at Cornwall Insight, says there is "no reason" why the capacity market should not ulti- mately be reapproved. The government is committed to the mechanism and the UK is not the only country in the EU to operate one. He is more concerned about how genera- tors will respond to the loss of capacity pay- ments in the meantime. Edwards believes it is unlikely to cause problems for security of supply over the cur- rent winter. Generators have already spent a lot of money to remain on the system and will want to claw back as much of these sunk costs as possible through other markets. He says the more important question is what will happen in the next winter and beyond. Large transmission-connected generators have to pay for transmission entry capac- ity in April. If there is still no clarity on the situation by then, Edwards says, some power stations – coal plants in particular – may consider shutting down: "If you've got a big outage planned why bother coming back? "Why spend the money if there's no sig- nificant clarity on what the future of the capacity market is and your future agree- ments will be." "There is probably a risk that some of the older coal and gas units that might need some tender love and care might decide not to come back," he adds. Edwards says new-build projects yet to begin construction or just starting out may also be at risk, with implications for security of supply and wholesale power prices. Weijie Mak, GB power market lead at Aurora Energy Research, says its model- ling indicates that 15GW of capacity will be dependent on capacity market payments to stay open in 2018/19. "I think that most coal plants wouldn't be able to continue in the market without capacity market payments," he explains. If this amount closed, wholesale power prices could soar to as much as £150/MWh. He says some of the 15GW would likely stick around to capture the higher prices, but not much; an indication of the imminent return of the capacity market would be better an encouragement to stay online. Clearly the stakes are high. Unless the government can provide the industry with some reassurance over when the scheme will be reinstated and whether the payments due for this year will be returned to con- tract holders, the UK could soon be facing a capacity crisis. continued from previous page

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