This weekend sees the introduction of capacity payments in the UK for the first time since the Electricity Pool was replaced by the NETA new trading arrangements in 2001. As of Sunday, some 50 GW of the country’s existing generation, plus interconnection and new capacity, will be paid to guarantee availability on request of system operator National Grid. The government’s aim, prompted by the failure of the wholesale market to provide an investment signal, is to ensure security of supply by keeping existing power stations available, while encouraging construction of new ones. The mechanism is seen as contentious because of its likely deadening effect, over time, on scarcity pricing in energy-only markets. Criticism of this regulated approach is that capacity mechanisms have a tendency to over-procure capacity, exacerbating the “missing money” problem they seek to address. This is worsened by allowing mechanisms to run on year after year, with investment decisions increasingly focused on capacity fees, irrespective of wholesale market signals. This then creates a “missing market” problem, killing innovation in new products to deal with the flexibility needs thrown up by the transition to renewables.
Platts 29th Sept 2017 read more »