By Gerard Wynn
LONDON Oct 3 The European Commission's ambition
for a single energy market conflicts with aims in Britain and
other countries to boost their own national energy security by
paying investors to ensure gas-fired power capacity is available
several years ahead.
The EU wants to achieve a single, liberalised energy market
by 2014, to cut prices and carbon emissions while boosting
security of supply.
Meanwhile, Britain plans to pay gas-fired power plants under
a capacity mechanism that it is due to announce before the end
of the year.
Such schemes work by allocating and paying for future power
generating capacity, for example through competitive tenders,
and as such are centralised, public efforts to plan future
capacity rather than leave that entirely to energy market price
The Commission, in a draft communication to member states
and the European Parliament, says it prefers alternative
approaches to ensuring security of supply, such as use of
interconnectors to pool countries' power generating resources,
and a greater role for efficiency.
Both are right: it is true that gas-fired power is the best
back-up for renewable power and capacity payments are a good way
to ensure it is built, but focusing on national security will
distract from increasing cross-border transmission capacity.
The UK and Commission positions are not irreconcilable: both
agree that capacity payments work better if they are available
to energy efficiency projects as well as power plants, and
Britain's impact assessment published last December appears to
agree that they are a time-limited solution.
Britain will lose about a fifth of its generating capacity
over the next decade as older and more polluting plants retire,
prompting near-term anxiety about capacity and blackouts.
The European Commission draft says that it will conduct a
consultation, "aimed at ensuring (capacity mechanism)
interventions are as limited as possible in scope and time."
Draft Commission memo on internal market:
However, the European Union executive goes further, making
clear it views capacity mechanisms sceptically and prefers
Under its goal of creating a single EU energy market, the
Commission wants to do away with price regulation and
concentrated ownership of transmission and generation assets,
and drive greater cross-border power and gas connections and
It is concerned that national capacity mechanisms, where
governments contract for national capacity years into the
future, will interfere with such cross-border links.
Capacity markets already exist in Spain and certain U.S.
states and have new impetus in Europe as a result of support for
renewable energy, which is eroding peak power prices and so
undermining market incentives for gas-fired power, vital as a
back-up for intermittent wind and solar.
The Commission draft states that plans for capacity markets
are likely to fall under the EU's single energy market directive
and possibly state aid rules, a reminder which appears
calculated to enforce new criteria for approval.
"In view of this, member states should not introduce
capacity mechanisms before carrying out a full analysis of the
existence and possible causes of a lack of investment in
generation," says the draft, "Making the internal market work",
dated Sept. 7.
"Moreover, member states should analyse the necessity and
the impact of their planned intervention on neighbouring member
states and on the internal energy market."
"They should examine alternative approaches such as
peak-shaving measures, increased imports through appropriate
interconnectors, and facilitating demand-side participation in
the market of industrial as well as retail customers."
Britain may not welcome the draft communication.
It has already prepared an impact assessment which explains
the investment case but makes no mention of impact on
The investment case follows from a growing role for
intermittent renewable energy in supplying peak power demand,
meaning that flexible gas-fired power plants must earn returns
over shorter time periods, implying far higher power prices than
historically when wind and solar power are unavailable.
The argument runs that investors may not trust governments
to allow peak prices to rise so high, and so need an alternative
incentive - provided through a capacity mechanism where they are
paid a certain amount per megawatt of capacity simply to be
"A capacity mechanism reinforces signals from the
energy-only market to ensure there will be sufficient flexible /
despatchable capacity to meet peak demand," it says.
However, the British assessment makes no mention of the
impact on neighbouring countries.
In addition, it confirms that low-carbon energy would
probably be ineligible to compete for capacity payments, because
renewable energy, nuclear power and carbon capture and storage
would be guaranteed a minimum power price under a separate
"contract for difference" scheme.
That appears to confirm European Commission concerns that
capacity mechanisms will be a tool to support fossil fuels.
"Capacity mechanisms are likely to favour fossil fuel
generation sources over more variable renewable sources and may
therefore contradict decarbonisation objectives and go against
the optimisation of available EU resources," the Commission
The Commission's arguments on decarbonisation appear
illogical, given that a capacity mechanism is a policy tool
precisely meant to deal with a rise in intermittent, low-carbon
And such schemes can cut carbon emissions further by
creating a market in and thereby motivating non-generation
technologies, for example allowing industrial companies to bid
to reduce their power demand by a certain amount, or to lower
their consumption at times of peak grid demand (demand side
response, or DSR).
"A capacity mechanism helps to support the decarbonisation
of the power sector by ensuring the a decarbonised power sector
is still able to deliver security of electricity supply," says
the UK assessment.
"Moreover if a mechanism helps enable greater DSR then it
has potential to aid decarbonisation by reducing the need for
peaking plants to be built and then only run in exceptional
However, given the central purpose of a capacity mechanism
is to ensure self sufficiency at a national level, it may
directly undermine incentives to build out interconnectors, and
the Commission is right that potentially it will raise costs and
lead to greater energy price differences at an EU-level.