Gensets Help National Grid To Ensure Secure Supplies Of Power

The role that gensets play as peaking plant is important, as it helps National Grid to ensure secure supplies of power (although there are many other options available for providing the same service). However, the proliferation of diesel is affecting the dynamics of the capacity market such that longer-term security of supply may be harmed.

The low capital costs of gensets, coupled with the access to cheap investment capital through EIS funds, has meant that they are able to bid into the capacity market at low prices and thus bring down the price that the market clears at. This has contributed to a lower-than-expected clearing price, which in turn has meant that new-build CCGT has been priced out (Stokes and Spinks 2015). The government has made clear that they want to see investment in large amounts of gas capacity in order to ensure security of supply, but at present this is being undermined by an increasing amount of diesel capacity befitting from the capacity market – the very mechanism designed to incentivise new CCGTs.

Removing diesel from the capacity market would mean the market clears at a higher price. Although this increase would fall on consumers, it would make it more likely that the government would be supporting the investment they want to see in new-build CCGT. It would also give providers of demand-side services a much better chance of securing capacity contracts (although they are additionally disadvantaged because they cannot access the 15-year contracts available to generators). In early 2016 IPPR will publish a report on the potential of demand-side resources and how that potential can be realised.

?

This briefing seeks to highlight three significant concerns about the proliferation of diesel gensets.

    In terms of the cost to consumers, diesel gensets are not providing good value for money. Returns of 23 per cent are higher than those permitted in other parts of the sector, including for renewable technologies, which have recently seen tariffs cut or removed entirely. Although access to EIS funding has now been stopped, this has allowed a proliferation of double-subsidised gensets at the expense of the taxpayer and billpayer.

    In terms of decarbonisation, diesel does not pose a significant threat to carbon budgets if it runs at the levels that are currently expected, but there are few constraints in place to prevent that usage climbing in the future. There are alternatives available to National Grid to manage the fluctuations in supply and demand that would emit far less CO2.

    In terms of security of supply, gensets are pricing out both the new CCGT generation that the government wants to see built and the demand-side load-shifting and load-reduction alternatives, which have great potential.

Our view is that the level of diesel generation being constructed in the UK and the returns that investors have been able to secure are having a negative impact in terms of the wider objectives of energy policy: affordability, decarbonisation and security. It is an unexpected development that results from the design of the capacity market and loopholes within tax relief schemes.

We recommend that diesel gensets should be prevented from entering the capacity market, and that constraints should be placed on those that already exist or have secured capacity contracts.

To achieve this, the government should introduce an amendment to the Energy Bill – which will return for its second reading in the House of Commons in the new year – that prevents any generator with an instantaneous carbon intensity over 450gCO2/kWh from accessing 15-year contracts. This change is technology-neutral but aligns the capacity market with the government’s decarbonisation objectives.

Units that have already received 15-year contracts should be subject to the following:

    a requirement to fit best-available technologies to mitigate air pollutants, in line with European standards for medium combustion plants (EC 2015)

    the emissions performance standard, as established in the Energy Act 2013. This should also be tightened over time for units over 450gCO2/kWh to ensure that running hours are restricted.

Few people within the energy sector expected diesel capacity to increase at the rate that it has. By taking the steps above, government could prevent its further proliferation, limit the distorting effect it has on the capacity market, and protect billpayers from excessive costs.