its stated objective – preventing themost carbon-intensive forms of new genera- tion. In our view, the setting of an emis- sions limit at a level where coal-fired generation with partial CCS can still be built, balances the need to limit emis- sions against the desire to prove CCS on coal-fired plants. Proposal Three – Targeted capacity
payments to flexible plants. In order to cover for intermittent wind output, tar- geted capacity paymentswould bemade to flexible plants. Similar capacity pay- ment systems are already in use in elec- tricity markets around the world, with various frameworks for setting payment levels and ensuring capacity. In this case, the suggested option is for a central body to contract for capacity to cover any expected market shortfall via peri- odic tenders. One effect of this proposal would be to extend the capacity now available under the existing short-term operating reserve. The splitting of the market into con-
tracted and uncontracted plants, and the differing values placed on capacity pro- vided by these groups, will hinder the operation of ordinary market forces. The introduction of contracts for some
peaking capacity will remove the need for such plants to rely on peak prices to drive commercial viability, with a risk that this leads to the depression of wholesale energy prices. Given the potential effect on peak prices, there is a risk that by not paying capacity prices to existing plants that are not contracted for system support, too much uncon- tracted capacity will close as a result. This would either threaten security of supply or force the contracted part of the market to expand to fill the gap.
In conclusion We believe that under the government’s new proposals for electricity market
Deloitte 2 New Street Square London EC4A 3BZ, UK
www.deloitte.co.uk
Robin Cohen, t: +44 (0)20 7007 1824 e:
robincohen@deloitte.co.uk Neil Cornelius, t: +44 (0)20 7007 7546 e:
ncornelius@deloitte.co.uk
reform there is a substantial need for a new centralised body to offer capacity payments, to coordinate CfD auctions and to generally take charge of the power sector. The challenges for government remain
considerable, but for investors and providers, it is likely that significant risks for market players will also remain; not least because the government has yet to fully acknowledge the logical conse- quences of its own proposals.
*To read other briefings, visit
www.energyinst.org/DeloitteEnergy Briefings
PETROLEUMREVIEW APRIL
2011
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