A Government scheme to keep the lights on could lead to unnecessarily high energy costs because it favours fossil fuel plants over smart technology which cuts demand, MPs have said.
The “capacity market”, which aims to ensure there is enough power generation in the system to meet peak demand, could also result in higher carbon emissions because it is skewed towards paying coal fired power plants over reducing electricity demand.
The market provides payments for power plants that would otherwise be closed or mothballed to stay online, as well as for new generating capacity and “demand-side response” schemes that cut demand when supplies are tight.
Demand side responses could include shifting business operations, such as factories, to a different time of day, or powering down or switching off electricity to reduce demand, using smart meters and grid systems to do so.
But the lion’s share of the payments, which come from consumer bills, are going to keeping existing power plants – such as polluting coal – on the system, paying them to stand idle for much of the year, the Energy and Climate Change Committee warned.
The design of the capacity market has not provided a level playing field for demand-side response providers, skewing the system in favour of fossil fuel plants, a report by the ECC committee said.
Of £1 billion of payments already committed, just 5% is set to go to new gas generation, while 0.4% is going towards demand-side response schemes. A fifth of the contracts already awarded will go to polluting coal power stations, the report said.
Tim Yeo, chairman of the committee, said: “Every consumer in the country is currently subsidising spare electricity generating capacity that may only be used for a few hours each year.
“But smart technology has now made it possible to reduce unnecessary electricity demand at peak times, thereby reducing the number of polluting power stations that need to be switched on.
“This could mean we can reduce the total electricity generating capacity that has to be maintained in future, bringing down costs for consumers while enabling us to reduce consumption of fossil fuels.
“Yet this promising new demand-side response technology has been disadvantaged in the auctions under the Government’s capacity market – meaning costs and emissions could be higher than necessary.”
The ECC committee report also called for greater clarity on future funding for energy from consumer bills, controlled through a system known as the levy control framework, to give investors certainty to push ahead with new developments.
And the MPs warned that much of the money available under the levy control framework up to 2021 had gone on early contracts to renewables including an “excessive proportion of very expensive offshore wind”, pre-empting cheaper schemes which could come forward in the next few years.
They also called for the Energy Department (Decc) to look at how the system could work better for smaller companies and community energy schemes, as the auctions for contracts for low carbon power favour bigger players.