UK 'should merge CFD and capacity market schemes'
London, 25 October (Argus) — UK subsidy schemes for renewable energy projects should be merged with the country's capacity market programme to adequately account for output intermittency, the government has been told.
The feed-in tariff (FID) and contracts for difference (CFD) programmes should be combined with the capacity market before being gradually phased out, Oxford University's Professor Dieter Helm — a renewable energy sceptic — said in his review of the UK energy market, requested by the government in August.
Existing subsidy schemes for green energy projects fail to reflect the variable output that wind and solar projects provide and do not consider the additional costs that the country's power system incurs when protecting against the resulting supply intermittency, Helm said.
And he added that increased costs for the system have resulted in higher energy bills for domestic consumers. "Neither wind nor solar currently pays the full costs to the system of its intermittence," Helm said.
The capacity market scheme was introduced by the government alongside the CFD programme as part of the electricity market reform agenda in 2013. The policy is designed to ensure security of power supply by contracting enough reliable generation capacity to meet system demand, regardless of the contribution from renewables.
Combining the FID and CFD schemes with the capacity market would mean that renewable projects would have to compete directly with thermal plants for government funding. Owners of such schemes would be directly confronted with the intermittency costs they cause, in a similar way to how carbon pricing confronts emitters with the costs they create, according to Helm.
Generation capacity entered into the capacity market is calculated on a de-rated basis, reflecting each unit's likely availability over the contracted period. And the new unified capacity auctions would similarly grade each unit based on their equivalent firm power (EFP), the review said.
The EFP for wind power would be calculated by considering its average contribution to the overall de-rated supply margin, as well as the amount of reliable capacity that would be required as backup for days of low winds, Helm said.
This de-rating method would be likely to increase the incentive for renewable generators to collaborate with battery storage developers or demand-side management companies to limit their intermittency, the review said. A renewable unit's potential for financial reward under the capacity market would improve as its de-rating factor rises.
"It is much more likely that an active energy management market would develop with these incentives from a firm power auction, rather than if it is left to the system operators to determine. It would be a major spur to the energy services businesses," Helm said.
Merging funding schemes for renewables and reliable capacity would also serve to reduce the number of government energy policy interventions, which have added "complexity" to the market in recent years, the review noted. Reforming the policies should be viewed as a temporary step to abolishing them in the long-term, once renewables become more cost-competitive.
The government today welcomed Helm's report and said the findings will now be examined.