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WP 1702 Capacity Market

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WP 1702 Capacity Market The development of the Capacity Market for electricity in Great Britain Matthew Lockwood EPG Working Paper: 1702 Abstract: A Capacity Market (CM) for electricity was introduced in Great Britain in the early 2010s, with the first auctions being held in 2014. The CM has been controversial in its design and effects. In particular it has been seen as benefitting existing, often high-carbon, capacity and large incumbent generators, rather than new entrants and technologies, such as demand side response. More broadly, it is seen by some as working against, rather than for, the development of a low-carbon flexible future energy system. This paper traces the development of the Capacity Market as a policy process, with a particular focus on the influence of incumbents in that development. It is based on interviews with participants in and close observers of that process, and on a close reading of the policy process documentation, such as consultation submissions. The study of corporate influence in this case is complicated by the confluence of incumbent interests and political incentives facing government actors to keep the lights on. In the main decisions regarding the CM, including the decision to adopt a mechanism in the first place, and in deciding to have a market-wide approach, the incumbent lobby was split. However, in both these cases, the government’s decisions were in line with the wishes of, and used the arguments of the majority of incumbents. There is also evidence that incumbents lobbied effectively against a more supportive design of the CM for demand side response providers. The paper concludes with some reflections on what can be learned from this case about how to minimise the role of corporate influence in energy policy making. Keywords: incumbents, Capacity Market, governance, electricity, policy process, demand side Contact: [email protected] Date: October 2017 Contents List of Acronyms ..................................................................................................................... 4 Executive Summary ............................................................................................................... 5 1. Introduction ................................................................................................................... 13 2. The economic theory of capacity markets ..................................................................... 18 3. The Capacity Market in GB: identifying the issues ......................................................... 21 3.1 How does the GB Capacity Market work? ................................................................... 21 3.2 Criticisms of the GB Capacity Market .......................................................................... 23 3.3 The evolution of the Capacity Market policy process ................................................... 26 4. The Capacity Market policy process and theories of corporate influence ....................... 29 4.1 Two views of the Capacity Market policy process ....................................................... 29 4.2 Theories of lobbying and corporate influence .............................................................. 31 4.3 Research focus and questions .................................................................................... 36 5. Methodology and data sources...................................................................................... 37 6. Corporate interests ........................................................................................................ 40 6.1 Corporate actors ......................................................................................................... 40 6.2 The context ................................................................................................................. 42 6.3 The construction of corporate interests in relation to a capacity mechanism ............... 45 7. Institutional mediation of influence ................................................................................. 51 8. Deciding to have a capacity intervention ....................................................................... 61 8.1 The evolution of the decision ...................................................................................... 61 8.2 Ideas deployed by corporate actors ............................................................................ 63 8.3 Alternative ideas in the debate .................................................................................... 71 8.4 Influence on the decision ............................................................................................ 74 8.5 Summary and conclusion ............................................................................................ 79 9. Moving from Strategic Reserve to Capacity Market ....................................................... 81 9.1 The evolution of the decision ...................................................................................... 81 9.2 Ideas deployed by corporate actors ............................................................................ 83 9.3 Alternative ideas in the debate .................................................................................... 89 9.4 Influence on the decision ............................................................................................ 91 2 9.5 Summary and conclusion ............................................................................................ 94 10. Setting the reliability standard .................................................................................... 95 10.1 The evolution of the decision..................................................................................... 96 10.2 Ideas deployed by corporate actors .......................................................................... 98 10.3 Alternative ideas in the debate ................................................................................ 104 10.4 Influence on the decision ........................................................................................ 106 10.5 Summary and conclusion ........................................................................................ 109 11. The treatment of demand side response (DSR) ....................................................... 110 11.1 The evolution of decisions ....................................................................................... 110 11.2 Ideas deployed by corporate actors ........................................................................ 115 11.3 Alternative ideas in the debate ................................................................................ 118 11.4 Influence on the decision ........................................................................................ 122 11.5 Summary and conclusion ........................................................................................ 126 12. Deciding not to differentiate capacity ....................................................................... 127 12.1 Carbon intensity ...................................................................................................... 127 12.2 Flexibility ................................................................................................................. 130 12.3 Summary and conclusion ........................................................................................ 132 13. Conclusions ............................................................................................................. 133 Annex 1 – Interviews .......................................................................................................... 144 Annex 2 – Meetings with Ministers ..................................................................................... 145 Annex 3 – Evolution of official capacity margin forecasts .................................................... 155 Annex 4 – 2010 EMR Consultation Responses .................................................................. 161 Annex 5 – 2011 Capacity Market Consultation responses .................................................. 161 References ......................................................................................................................... 162 3 List of Acronyms BCSE Business Council for Sustainable Energy CBI Confederation of British Industry CCGT combined-cycle gas turbine CD Collaborative Development (process) CEGB Central Electricity Generating Board CfD Contract for Difference CM Capacity Market DECC Department for Energy and Climate Change DSR Demand side response ECCC Energy and Climate Change Committee EMA Electricity Market Assessment EMO Energy Market Outlook EMR Electricity Market Reform FTE Full time equivalent GB Great Britain GW gigawatt HMT Her Majesty’s Treasury IA Impact Assessment IEA International Energy Agency IED Industrial Emissions Directive IGG Independent Generators Group LoLE Loss of load expectation LCPD Large Combustion Plant Directive LRMC long-run marginal cost MW megawatt MWh megawatt-hour NOx Nitrogen oxides NPV Net Present Value OCGT open-cycle gas turbine PTE Panel of Technical Experts RAP Regulatory Assistance Project SBR Supplementary Balancing Reserve SR Strategic Reserve SRMC short-run marginal cost SSE Scottish and Southern Energy plc STOR Short Term Operating Reserve VoLL Value of lost load 4 Executive Summary This paper investigates the evolution of the Capacity Market for electricity in Great Britain, and in particular
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