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Capacity Market failing UK businesses says new report

5 July 2017

The Capacity Market is undermining the UK’s Industrial Strategy, resulting in hundreds of millions in extra costs to decarbonise the energy system, a new report by the Association for Decentralised Energy said today.   

New modelling and analysis performed by the ADE found that building combined heat and power (CHP) units instead of less efficient, power-only gas plants would help save between £656 million to £774 million on energy bills a year by 2030, while saving the equivalent carbon emissions of taking 1 in 14 cars off the road.

The Government scheme designed to encourage investment in “more sustainable, low-carbon” electricity capacity, called the Capacity Market, has to date secured commitments for 8 GW of inefficient and higher carbon gas and diesel engines. Although less efficient power plants are potentially cheaper up front, their higher fuel costs pushes up the costs of energy bills when they run.

Supporting inefficient plant through the Capacity Market unnecessarily increases consumer bills over the long term and directly undermines the Industrial Strategy’s aim to increase productivity, drive economic growth and improve living standards. 

Combined heat and power is up to 30% more efficient than traditional forms of energy production. CHP can be very flexible and uses natural gas and renewable fuels such as biomass, biogas, and hydrogen. 

The ADE’s new report demonstrates how CHP can help lighten the costs of transitioning to a low carbon energy system and meeting the UK’s decarbonisation targets, while also strengthening the global competitiveness of British businesses.

More than 2,000 businesses across the UK already use CHP, helping to support more than 110,000 jobs by controlling energy costs. By using CHP these businesses already deliver more than £375 million a year in cost savings to the UK economy, while removing more than 6.7 million tonnes of carbon, the equivalent of taking 1 in 10 cars off the road.  Yet of this existing capacity over 50% is not currently competing in the Capacity Market. 

Business energy costs have risen by as much as 119% since 2004, and electricity network costs, balancing costs and capacity costs now make up a third of UK electricity costs, or £11 billion a year. 

With the opportunity to strengthen both industrial and energy policy, the ADE’s report calls on the Government to set a clear ambition to ensure as much as pos sible of the 14 GW of new gas generation that is currently considered necessary, to be highly efficient combined heat and power.

To achieve these benefits, the report calls for:

  • Continuation of the Carbon Price Support tax and for CHP’s benefits to be fully rewarded under the tax
  • Assurance that distributed generators are fairly rewarded for the benefits they provide to the transmission and distribution networks
  • Better recognition in the Capacity Market for higher-efficiency and better value power plants

ADE Director Dr Tim Rotheray said:

The economy depends on competitive business. Those businesses need to decarbonise cost effectively to remain competitive in the future. Today’s report provides Government with a clear answer on how to support industrial competitiveness and deliver a significant carbon reduction.

Efficient combined heat and power, like much of efficiency policy needs a clearer focus. Wasted energy costs all consumers and the economy.

By installing CHP, thousands of businesses across the UK could help lighten the load of the cost of the energy transition while delivering much needed new capacity, helping to balance the grid and reduce network investment costs.

To enable a more competitive energy economy, it is vital that policies including the Capacity Market, carbon taxes and network charging arrangements recognise and reward CHP’s long-term value to consumers and the environment. Enabling CHP gives real potential to make a user-led energy revolution a reality.

Notes to editors

The Capacity Market is designed to ensure sufficient, reliable electricity capacity by providing payments to encourage investment in new generation. However, it does not reward the most efficient power plants.

Combined heat and power currently supplies around 6% of the UK’s electricity requirements from 5.5 GW of capacity. There is an untapped economic potential to install a further 8 GW by 2030 if CHP is fairly rewarded for the benefits it provides to energy and the economy.

The Government aims to support the UK businesses’ global competitiveness while decarbonising the economy. These two goals can create tensions, with the need for increased investment in infrastructure and services.

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