Paying Peanuts: Will the British Capacity Market Deliver Security of Supply?

12 October 2015
By Sean Gammons and George Anstey

Policymakers around the world have subjected electricity markets to imperfect and partial deregulation.  Governments have liberalised and privatised electricity generation and supply, but have subsequently intervened to prevent price spikes and load-shedding.  Subsidies for intermittent renewable electricity have pushed down average prices and made regulatory risk endemic, further reducing the ability of operators to invest in new capacity and raising the prospect of insufficient supply and, potentially, blackouts.

Governments, including that of the UK, have turned to additional interventions—Capacity Remuneration Mechanisms—in an attempt to ensure that adequate generating capacity is available.  The UK government hailed its first Capacity Market auction, in December 2014, a success, primarily based upon the low prices achieved for capacity.

We argue that this low cost may not represent good value, and low prices may instead be the result of flaws in the design of the market.  These deficiencies may lead to security of supply falling short of target during the 2018-19 delivery period, as suggested by recent press reports that some declared operational or contracted capacity may not be available in practice.  The British experience illustrates the potential pitfalls of intervention to fix earlier interventions, especially the risks of continual policy uncertainty and regulatory capture by incumbents, and thus provides lessons for policy-makers elsewhere in Europe and around the world who are contemplating similar interventions.