On February 14 Toshiba announced that it was no longer willing to take construction risk on the Moorside nuclear plants. This puts thousands of new nuclear jobs in the rural Cumbrian constituency at risk -anything but a Valentine’s Day gift.
Copeland is possibly one of the only places in the country where energy policy has the same level of importance as health and education in the minds of voters and Toshiba’s decision could just play a role in the outcome of the close by-election currently being fought there. It might even feature in the footnotes of future political histories if, as some are predicting, the campaign results in the first by-election gain by a governing party since 1960. However, beyond these local problems, it also highlights a wider issue: the UK’s dwindling pipeline of new power generation.
The country’s energy supply currently faces two challenges. Firstly, our existing fleet of coal, gas and nuclear generators are coming to the end of their life cycle. Secondly, the rise of renewable energy generation presents challenges in balancing supply and demand. The government introduced the capacity market in 2014 to try and combat these twin challenges. But so far it has failed to secure the innovative new capacity the country needs.
Under the capacity market, the government awards payments to capacity providers in return for an assurance that they will deliver energy at times of system stress. Contracts are awarded through annual auctions. So far there have been three main auctions where participants bid to provide capacity for four years in the future (a fourth auction was held at the start of the year but was only open to bidders able to provide capacity one year ahead, thereby making it unviable for new build to bid). These three auctions have cost consumers around £4bn. However the vast majority of these payments have gone to existing conventional generation, including heavily polluting coal and diesel. Indeed, in the most recent auction a mere 4GW of the 52.4GW awarded went to new build capacity.
The main reason for this market failure is that the capacity market is a blunt instrument. It is technology-neutral and fails to take into account external factors such as emissions or the embedded benefits associated with new build and innovative technology. In an auction based entirely on price, new build has no chance of competing with decades old generating stations which recovered their construction cost years ago.
If the government wants to encourage new build and new technologies, it will need to refine the auction. It could do this by permitting different prices for new build and existing technologies or introducing stricter environmental prequalifications.
No one is advocating that the government “pick winners”. But in forcing capacity providers to compete on price alone, the capacity market is tilted overwhelmingly in favour of the status quo. As the UK moves towards a more flexible, responsive and smart 21st century system, the government’s continued support for 20th century solutions will be damaging both to the environment and our economic competitiveness.
Clyde & Co Partner Clare Hatcher and Associate Owen Williams