Capacity mechanism

Energy Bill [Lords] – in a Public Bill Committee at 2:45 pm on 4 February 2016.

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“After Section 42 (3) of the Energy Act 2013, insert—

‘(4) Fossil fuelled generating plant granted 15 year capacity contracts under the capacity mechanism established by this section shall be subject to—

(a) a carbon price;

(b) a requirement to fit the best available technologies to mitigate air pollution, and

(c) the emissions performance standard as established by section 57(2) of this Act.””—

Brought up, and read the First time.

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Energy and Climate Change)

I beg to move, That the clause be read a Second time.

The new clause adds to the Energy Act 2013 requirements relating to fossil fuel generating plant that is granted a 15-year capacity contract. The plant must adhere to certain conditions if the contract is to be granted—the three conditions are listed in the new clause. Regarding the final condition—the emissions performance standard—hon. Members will be interested to know that section 57 of the Energy Act 2013 contains a target, or, to be exact, a formula that under subsequent secondary legislation led to a performance standard of 450 grams per kWh being established.

To what does that section refer? It clearly does not refer to gas, because new plant for gas comes in at 378 grams per kWh and is below the emissions performance standard. What it refers to is diesel coming in to the provision of electricity, particularly in the context of what has occurred in the previous two capacity auctions, whereby diesel reciprocating engines, historically installed in industrial plants for standby generation, for example, are connected to the network to provide a regular system of electricity generation.

Those diesel engines escape the provisions of the Energy Act, because individually they are below the size at which plants are caught, but in terms of their individual emissions they are the most dirty of the various electricity generation devices. I mentioned that the combined cycle gas turbine plants being considered for commissioning come in at up to about 378 grams per kWh. Coal, which the Government are consulting on taking off the system entirely by 2015, comes in with existing plant above the energy performance standard at 930 grams per kWh. The carbon intensity of diesel generation sets is more than 1,000 grams of CO2 per kWh, so they are probably the dirtiest generating systems possible. However, in the last two capacity auctions, virtually the only type of plant to have obtained a 15-year capacity payment to develop is diesel; virtually every other plant that put in for such a payment failed to clear the auction. Because diesel is exempt from present EPS levels because of the individual size of the reciprocating sets, it has cumulatively obtained a substantial proportion of long-term capacity payments coming into the system.

Perhaps we should dwell for a moment on the supposed purpose of the capacity auction system, which is to bring new generating plant on to the system. The interesting thing about the first two auctions is that they signally failed to bring on to the system any new generating plant that looks likely to be built. From the earlier capacity auction, one plant, Trafford, looks like it will probably not be built, and in the most recent auction there were no plants at all except, mainly, for those small diesel generation sets. The net policy outcome of capacity auctions over the last two periods is that no new plant has come forward. Yet diesel generating sets have run in under the wire and have got a considerable amount of cumulative capacity, which I will come to in a moment, despite being the dirtiest form of generation. That is a completely perverse outcome compared with what one might have thought would be the case with both capacity auctions and the Government’s policy of taking coal off the system in the longer term.

Of course, one reason that diesel sets have been able to get into capacity auctions is that they have succeeded in coming under the clearing price for the capacity auction. When the clock auction comes down to the point at which the right amount of capacity has been procured, everybody under that point gets that payment, and diesel sets have been able to get under the clearing price whereas other plants have not. It is not because diesel sets are particularly cheap to run; it is, at least in part, because they already receive a substantial underwriting from HM Treasury through enterprise investment scheme payments for the establishment of those plants. Originally, it appears, the payments were set to encourage the plants to be established for standby purposes, but they have been used for other purposes in the capacity auction.

Although that route has been changed in the autumn statement, the most polluting generating plants have managed to get two lots of subsidies for generating and have got in through the capacity auction process as well. That is not only bad climate policy but bad public policy in general, and it is certainly a perverse outcome of the capacity auction process. I am sure the Minister agrees, if not publicly then certainly in private, as she is a sensible person. She might even agree publicly; it would be really helpful if she did.

Photo of Andrea Leadsom Andrea Leadsom The Minister of State, Department of Energy and Climate Change

I absolutely agree with the hon. Gentleman and I can tell him that the loophole has been closed. An HMRC amendment to the Finance Bill has excluded reserve generating activities from eligibility for tax reliefs under venture capital schemes from 30 November 2015, and it has subsequently been announced that all electricity generating activities will be excluded from eligibility from 6 April 2016. We are now considering whether any consequential changes to the capacity market are needed to ensure that this position is reflected adequately. I am grateful to the hon. Gentleman for that point.

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Energy and Climate Change)

Indeed, the Minister confirmed what I said: that the EIS loophole was closed in the autumn statement. I am interested to hear, and I previously understood, that the Department was actively considering ways in which the capacity auction could be amended. I am not surprised that the Department is doing that, because so far the capacity auction has completely failed to fulfil its purpose, which was to bring forward new plant. The Department will have to think rather carefully about how it amends the capacity auction process.

It does not seem to me that the EIS loophole has been closed and that that in itself removes diesel sets from future capacity auctions. Although one would hope that the Government, when they look carefully at capacity auctions, will ensure that that happens, it is by no means certain. I remind the Committee that we are not talking about a small amount of generation that has already come on to the system. In the first auction, 375 MW of diesel set generation were given 15-year contracts; in the second auction, 650 MW of diesel sets were given room in the auction. In case we have any difficulty in scaling that, I point out that the one gas-fired power station that is presently under construction and that might produce energy in the near future will come in at an overall capacity of 880 MW. In fact, we have more than one new gas-fired power station’s worth of diesel sets in the capacity auction. That is a substantial amount indeed, even though the diesel sets themselves are fairly small.

It is imperative that we close the loophole properly, and that is what the new clause would do. If the Government are thinking about how they can amend the capacity auction, they should regard the new clause as very helpful, because it would sort that out straight away and get us on a very good footing for future capacity auctions. That would allow us to concentrate on whether we can get any new gas-fired power stations. I assume that that is one of the things that the Minister will be particularly keen to achieve in future auctions.

Photo of Andrea Leadsom Andrea Leadsom The Minister of State, Department of Energy and Climate Change 3:00, 4 February 2016

New clause 13 would introduce additional capacity market eligibility criteria for new-build capacity accessing 15-year capacity agreements based on a carbon price, a requirement to fit the best available technologies to mitigate air pollutants, and the emissions performance standard. As the hon. Gentleman says, the new clause targets his concerns on the potential growth of diesel engines participating in the capacity market. Although I do not accept the new clause, I am not unaware of or unsympathetic to his concerns.

I will explain the steps being taken on the issue, but first I point out that we are in this situation in large part because of the long history of inadequate emission controls, which we inherited. Also, there has been a lack of investment in future energy sources over a very long period—that is a matter of record. I assure Members that small-scale diesel and gas generators can offer big security of supply benefits, as they can help to meet peak demand quickly by producing electricity when it is most needed. I know that the hon. Gentleman, who is expert in these matters, knows that that is the case.

As it stands, diesel engines represented just 1.5% of the capacity procured in the capacity market auction that concluded last December. Like other forms of capacity, they will be paid a clearing price of £18 per kW. The capacity market will oblige participants to run in response to stress events, when the electricity system is otherwise tight. Those events are likely to be infrequent and may not occur at all in some years. The generators are there to switch on very quickly at times when we urgently need to meet shortfalls, because of issues such as the intermittency of renewables, unexpected downtime on traditional power plants and so on.

The emissions impact from diesel engines is often assumed to be larger than it is in reality. In fact, they have a relatively small impact on overall CO2 emissions because of the short hours that they run. They are typically used as peaking plant, running for less than 100 hours a year, whereas larger fossil fuel plants will run for 2,000 hours or more. In addition, per unit of generated electricity, diesel emits around 30% less CO2 than coal. Because they start up more quickly than bigger generators, diesel can emit less CO2 than larger gas plants when used for these short periods. The controls proposed on CO2 are not appropriate and are not likely to be effective.

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Energy and Climate Change)

I take the Minister’s point that diesel sets can be used for very rapid start-up under peaking conditions, but does she agree that they are by no means the only device that can do that? There are other opportunities for quick start-up under peaking conditions, including, under certain circumstances, wind. Wind can start up and ramp very quickly. Historically, diesel sets have been used not for peaking purposes but for reserve purposes, should every other system go down; that has been the main use. It is their introduction into the main generation system as a peaking device under the recent capacity auction arrangements that is new, and it is that use we should be disturbed about.

Photo of Andrea Leadsom Andrea Leadsom The Minister of State, Department of Energy and Climate Change

I do not disagree with the hon. Gentleman. Wind can ramp up very quickly and it will often be the first choice, but it cannot always be controlled—the wind does not always blow. Unfortunately, diesel generators still have their place. The concern about diesel engines is more relevant in the context of local emissions, particularly oxides of nitrogen, or NOx. I am fully aware of that and I emphasise that we are actively looking into that issue. Diesel engines typically run for under 100 hours a year, so we need to start by improving our evidence base on exactly what their local emission impact is.

I want to set out the steps that are being taken. First, DEFRA will begin transposition of the medium combustion plant directive into legislation this year. The directive sets limits on the levels of nitrogen dioxide that small, sub-50 MW generators can emit, because they fall below the minimum threshold for existing controls. DEFRA will provide more details when it consults later this year and is already building its evidence base to fully understand the risks from diesel engines so that it can take action accordingly.

Secondly, Ofgem is aware that many people are concerned that there may be a level of embedded benefit for these generators and is looking into whether action is needed. In particular, the transmission charging regime has been brought to my attention, as it can account for a significant share of revenues for small generators and so would be partly responsible for encouraging their growth.

Thirdly, we are looking at whether any further direct steps could be taken if there is evidence that future capacity market participants are at risk of subsequently contributing to breaches of local air quality limits. However, as I am sure the hon. Gentleman realises, any measure would need to have state aid clearance, which requires that the capacity market does not discriminate against types of technology. We need to ensure that we do not do anything that creates security of supply risks by depriving the electricity system of a fast, flexible form of capacity before there are reliable and viable alternatives.

For those reasons, I cannot accept the new clause. We need to ensure that we are taking the right action in the right places, where there is clear evidence that it is needed, and without placing our energy security at risk. I hope he is reassured by my explanation and will be content to withdraw the new clause.

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Energy and Climate Change)

Because it is a Thursday afternoon and because the Minister gave me a little bit of reassurance, I will speak briefly. I still think we need to get to grips with this soon rather than later, but if the Minister undertakes the actions she has set out with some alacrity, so that they are done well in advance of the next capacity auction, we may make some progress. In those circumstances, I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.

New Clause 14