The capacity mechanism…again

A capacity mechanism is back on the table again.Did it ever really go away?Well it did for a brief time under the New Electricity Trading Arrangements (NETA).

When NETA was introduced in 2001 the generation market was massively oversupplied.There was not a need for new build or to explicitly incentivise new build.

Much has been said that NETA lead to a fall in wholesale prices,

That is debatable.For instance John Bower (Bower, 2002) argued that the decrease in wholesale prices between 1998 and 2002 was largely due to the change in market concentration.This he says was the most important variable behind the fall in wholesale prices.

An unstated aim of NETA was to make it more difficult to get backers for new build.Under NETA’s predecessor, the Pool, there was a clear price for power and an associated  forward curve  that could be used to give confidence to bankers but there was a big  unintended consequence – a dash to build gas-fired stations.

However although it resulted in new build  the Pool was easy to game by generators and resulted in investigations by Ofgem and the Government.That was one of the factors that precipitated NETA.

Now however plant are reaching the end of their life and environmental constraints eg the Large Combustion Plant Directive (LCPD) and the growth of renewables have led to a change in operation.Fossil fuel plant are running less often.And the environmental rules could result in a cliff edge in 2022 with many plant closing and there not being enough plant online to maintain security of supply.

And thanks to NETA there is not a pipeline of projects queuing up to come on stream – hence the talk of introducing capacity mechanism which would incentivise new build.

Dominic Maclaine is an EPG Associate and used to be the editor of New Power before he sold the business. He conducted PhD research into electricity supply competition in the UK and Norway at the Science Policy Research Unit at the University of Sussex. He was previously the editor of the monthly newsletter Power UK published by Platts (and previously the Financial Times). He is currently writing a book about recent developments in the UK electricity market, to be published by Routledge.

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