UK electricity capacity market to add average £2 to UK bills.

FT: “A British government scheme to reward energy companies for keeping power plants available for back-up electricity generation will put £2 on the average annual household fuel bill, according to the minister in charge of the measure.”
“The disclosure to the FT, by Ed Davey, energy secretary, highlights the extent to which government policies designed to keep the UK’s lights on are producing higher energy costs for consumers.
Mr Davey stressed in an interview that the competitive nature of the scheme, in which companies bid for capacity payments in an auction, will minimise the cost to households.
He denied that the payments amount to a transfer of funds from consumers to the “big six” energy suppliers, who have come under fierce attack for their pricing policies. They were last week referred by the regulator Ofgem to the Competition and Markets Authority for a full investigation.
“A lot of the capacity out there is not owned by the big six but by independent generators,” he said. “On the generation side, there has always been more competition [than in retail].”
Part of a package of reforms of Britain’s electricity market, the capacity mechanism is intended to ensure enough gas-fired power generation is available to act as a back-up when the energy system is being stretched to the limit – such as on still days when wind farms are not working.
It is seen as crucial if the UK is to avoid a looming energy crunch. The country is due to lose a fifth of its generating capacity in the next few years as ageing coal plants and nuclear reactors are retired. Ofgem has warned that the cushion of spare power capacity over demand will fall to as low as 2 per cent by the winter of 2015-16.
The capacity market is supposed to provide energy companies with the incentive to fill the gap by building new gas-fired plant. New and existing power stations will be able to bid for capacity payments in special auctions, in exchange for which they commit to delivering energy when needed – or face penalties.
The scheme requires state aid approval by the European Commission before it can go ahead.
Mr Davey said 50.4 gigawatts would be auctioned this December for capacity that will be in place by the winter of 2018. He said that, in total, the government would procure a total of 53.3GW for the winter of 2018-19. That is higher than peak winter demand last winter, which stood at 50.7GW.”