The perversity of the capacity market

Power generating companies received nearly £1 billion in the first capacity auction. In return they promise to supply power when the usual market fails [1]. Germany has already seen coal power stations closing because of competition from renewables and the same will happen here as renewable capacity increases [2]. Renewable power isn’t always available so there needs to be some kind of backup – but what kind of backup do we want and is the capacity market giving it to us?



There are basically three kinds of backup:

• Stored energy such as pumped hydro electric storage, electrical batteries, compressed air etc. (see Dealing with excess wind)
• Demand side response (DSR) i.e. paying people to reduce their demand on request (see'The cost of keeping lights on at peak times')
• Reliable generating capacity - which could be biomass or fossil fuel based.

As it happens the first capacity auction has mostly benefitted existing fossil fuel power stations. Suppose you own a power station now. Most of the time you have to compete with renewable energy generators and they have very low running costs. This problem gets worse and worse as renewable capacity increases because the market is then over-supplied. You can either accept a low price and run at a loss or shut the plant down altogether. A boost from the capacity market may be enough for you to keep your plant open. However, you still have a choice. You can run most of the time at a loss, and rely on the capacity fee to make you profitable, or you can shut down most of the time and just start up when there is a capacity warning.

By the way, the price paid at the current auction was £19.40/kW capacity [3]. If you are a 100 MW power station you get £1.9 million/year. If you were to run all year at full capacity, you would generate 876,000 MWh. The current wholesale price is about £40/MWh – at that rate you would get £35 million for that energy. The capacity auction fee increases your revenue by just 5% - but depending on your profit margin before that could make a huge difference.

We really don’t want you to use the capacity fee to enable you to keep going at a loss, displacing renewables and emitting more greenhouse gases. We really want you to shut down and just run the plant occasionally. The trouble is it costs money to keep the plant open and you may get just 4 hours notice of a stress event where you need to generate [4]. It takes 4 - 8 hours to start a coal plant from cold, though the time is less if it has been running recently and is still warm [5][6]. Gas power stations, even combined cycle plants, are better at this, with cold start time typically 40 – 100 minutes [7]. So, which mode do you run in – all the time or occasional fast start? Assuming you can start quickly enough, which is better for you depends on a range of factors. Some of them you should know already:

• How much does it cost to run my plant?
• How much does it cost to start my plant from cold?
• How much does it cost to keep my plant ready in case?

But others you can only guess:

• What will the normal price of power be?
• What will be the price during a stress event?
• How often will there be a stress event?

Judging by the results of the first auction, it is cheaper (or at least less risky) at the moment to keep the existing plant going rather than build new storage capacity or DSR capability. Only 8% of the winning capacity was storage (including hydro) or DSR and only 5% was new capacity [3]. We can’t know if the owners intend to use the capacity fee to keep plants going all the time or run them occasionally. The whole point of the market is to deliver the required capacity with best value for money – and it probably has achieved that goal. However, it is quite likely we are subsidising fossil fuel power stations to compete with subsidised renewable energy – a perverse position.

If our strategic aim is to develop storage and DSR capacity to support the grid, the capacity market hasn’t helped so far. It is early days and it may work better as the proportion of renewables increases and the capacity fees go up. However, in the meantime the fossil fuel plants have a shot in the arm at the expense of green entrepreneurs.

[1] The UK capacity auction made power companies merry this Christmas (Guardian) Dec 24 2014
[2] Germany shuts down coal power stations as renewables shoulder more energy demands (Positivenews.org) Nov 2013
[3] Capacity market secures some new gas while providing stay of execution to old coal (Carbon Brief) Dec 2014
[4] Capacity Market User Support Guide (National Grid) July 2014
[5] Assessment of startup period at coal‐fired electric generating units (US EPA) July 2013
[6] Flexible Coal from Baseload to Peaking Plant (National Renewable Energy Laboratory) December 2013
[7] Fast cycling and rapid start-up: new generation of plants achieves impressive results (Siemens) Jan 20111