In pursuit of a complete failure to understand the problems with its own ‘capacity market’ Ofgem seems about to make things a whole lot worse by reducing capacity margins – by taking away the incentives to a lot of small scale generators whose existence helps to keep the electricity sector running. Ofgem runs on a piece of fantasy theory that the capacity market will work better if the ‘distorting’ benefits to so-called ’embedded;’ generators are taken away. In fact the opposite it the case. Ofgem’s concern that proposed big gas power stations cannot win bids at sufficiently low prices to put them into business partly because of the small generators is total nonsense. Without the small generators the price at which the required capacity will be supplied by the big power stations will increase not fall. The problem has to do with the principles and practice of the capacity market, and has nothing to do with the small generators who currently provide a valuable service. Ofgem’s actions are akin to destroying a table leg in order to save the table. The central problem is that future prices for electricity that the power stations could sell on the wholesale power markets are very uncertain, and quite likely to fall. Given this it will require very high capacity market prices (which will put consumer energy bills up by large amounts) to evince the capacity that Ofgem wants from gas fired power stations.
Dave Toke’s Blog 26th Sept 2016 read more »