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UK energy secretary considers capacity payments for low carbon power generation

1 February 2010 – UK energy secretary Ed Miliband has told the Times newspaper that his government is drawing up plans for wholesale reform of Britain’s energy markets to incentivize low carbon generation.
 
In an interview with The Times, Ed Miliband, the Energy and Climate Change Secretary, said that Britain’s existing, highly liberalized market regime, introduced under Labour in 1998, was failing to deliver the investment needed to cut UK carbon emissions by more than a third by 2020.
 
A market structure was being designed to boost long-term investment in low-carbon sources of electricity, including wind parks, nuclear reactors and fossil fuel stations equipped with carbon capture and storage (CCS) technology.
 
Miliband said: “We are going to need a more interventionist energy policy to deliver the low-carbon investment we need.”
 
Miliband said that changes being considered included: reform of Ofgem, the energy regulator, to improve care for consumers; an overhaul of Britain’s existing new electricity trading arrangements (Neta), which have been in place for more than ten years; and the introduction of “capacity payments” to guarantee returns to developers of low-carbon sources of power.
 
Miliband said that big reforms would be essential to deliver the estimated £170 billion of investment to meet its goals of huge carbon cuts. The Neta system, in which electricity is traded via contracts between buyers and sellers or power exchanges, does not give sufficient guarantees to developers of wind turbines and nuclear plants.
 
He said that one alternative would be a return to “capacity payments” — in which power station operators would be paid for the electricity they generate and also for capacity made available. The idea of such payments is to give greater certainty to investors in renewable and nuclear energy. They would help to bolster the reliability of a grid that was more heavily reliant on power generation from wind farms.
 
He said: “This is very different from the current system, where you get paid for the electricity you produce and are not given any guarantees in advance. In future you could say ‘We need a certain amount of low-carbon capacity’ and generators would say how much they can provide.”
 
Such a move would be one of the biggest changes in Britain’s energy market since the 1989 Electricity Act, which began deregulation. It would also represent a return to some of the principles of the system before 1998. The Electricity Pool, which Neta replaced, had capacity payments but was criticised for being too inflexible.
 
Miliband said that details of the reforms would be in a document to be published in April called Roadmap to 2050, published with the 2010 Budget. He said that the changes were essential to help Britain to prepare for a doubling of electricity demand by 2050, driven by other policy objectives such as a growth of electric cars and a move from gas to electricity for heating.