What if I told you the UK Government plans to hand out just under $1 billion to energy companies in exchange for the promise that they will carry on producing dirty coal and diesel-fired power? Well, they and governments across Europe are doing just this, so hold on to your outrage while I take you through the very boring sounding ‘capacity mechanisms’, their instrument for doing this.
First things first - what are capacity mechanisms?
Capacity mechanisms are all about ‘keeping the lights on’. Through capacity mechanisms, governments pay power companies for their ability to produce electricity (nuclear, gas, coal, hydro, and in some cases solar, wind and energy storage), or for shifting energy use to times when demands on the grid are low, known as demand-side response. The idea is that a stable income (independent of electricity produced or sold) will prevent the shutdown of existing power plants and incentivise investments in new power projects for the future.
Capacity mechanisms aren’t new, but have recently had somewhat of a renaissance across the EU. This is linked to the increase in wind and solar power, driven by EU governments’ commitments to reduce greenhouse gas emissions. The weather-related ‘variability’ of these sources of electricity has raised concerns about balancing the grid when there’s not enough sunshine or wind – or when there’s too much. To manage fluctuations from wind and solar in the national grid, there is a growing need for highly flexible producers that can rapidly dial up or down the power they supply.
OK, so if capacity mechanisms could mean more wind and solar, why should we care?
Capacity schemes can have significant implications for the future power mix, and therefore also for future greenhouse gas emissions. The traditional approach to capacity mechanism design — which rewards the capacity to produce power — has failed to value flexibility and carbon intensity, and is therefore no longer suited to address today’s challenges.
If coal and gas power plants continue to bag most of the money, as they have done in the past, these payments will fly in the face of the government’s stated commitments to tackle climate change and phase out fossil fuel subsidies. Where they keep old, inflexible power plants running, capacity mechanisms even fail on their main ‘security of supply’ objective.
Here are some of the more troubling developments related to capacity mechanisms:
- The UK’s capacity auctions in 2014 and 2015 led to large payments estimated at £658 million ($966 million) to the most polluting of power producers: diesel and coal-fired power. For an in-depth analysis of the UK’s capacity market see IPPR’s new report Incapacitated.
- Germany proposed a new capacity reserve entirely made up of high-carbon, brown coal-fired power, even though such power plants can’t be quickly switched on when needed. The reserve, which will cost the government an estimated €1.6 billion ($1.7 billion), was introduced after plans for a climate levy penalising heavy polluters were dropped. RWE, Germany’s second largest electricity producer and ardent opponent of the climate levy, enjoyed a 6.4% jump in its share prices after it was announced that brown coal would be included in the scheme.
- France’s proposed capacity mechanism has the stated objective of promoting low-carbon, flexible demand side response. Yet the dominant position of EDF and the complexity of the scheme could bar many smaller clean energy companies from participating. The French plans could yet face a challenge, as the European Commission has launched an in-depth investigation into the scheme.
Considering the urgent need to move towards zero-carbon energy, governments must not be allowed to side step their climate commitments under the guise of ‘keeping the lights on’. Instead of the short-term, narrow focus on reliable supply, governments should take a system-wide approach that supports, rather than undermines, decarbonisation. They should look again at how energy markets work, wind down high-carbon, inflexible coal-fired power plants, and grow our capacity for demand-response, energy storage and the transfer of energy across borders, known as interconnection.
We now have a small window of opportunity to influence the future of capacity mechanisms and power markets in Europe. The European Commission’s interim report on the subject is open for public consultation until 6 July 2016. The results will feed into its proposals for electricity market redesign for the end of 2016. Join me in letting them know that while we all want the lights to stay on, this should never be an excuse to let dirty coal in through the back door.