PROVIDING CAPACITY
213. In recent years, National Grid has continually
reported reserve margins of 21 to 23%.[316]
To date, this has been generally viewed as a sensible margin in
terms of the grid's "ability to keep the lights on".[317]
However, a number of factors may affect this view going forward.
For example, if in the future, the market moves to a different
balance of flexible versus inflexible plant, this will have to
be reflected in the costs of the balancing system.[318]
Because of the intermittency of wind power, the large projected
increases in wind generation in coming years will require an increase
in back-up capacity from elsewhere, to be brought into service
on low-wind days. Also National Grid points out that its current
system is set up to withstand the instantaneous loss of 1,320
megawatts of power. If new nuclear plant is built that is larger
than this level—which is a definite possibility—then
additional system operator costs would have to be incurred to
secure against the loss of a larger station. National Grid estimate
this to be in the region of £50 million to £80 million.
214. Factors such as these could, in future, push
up the required capacity margin for the market, at a time when
plant closures are potentially decreasing it (although, as noted
earlier, it is unclear by how much). In their evidence, National
Grid speculated that "they would look to see whether some
sort of capacity payments mechanism … could encourage people
to bring generation forward so that we can protect the margin",
and hence electricity customers from volatile prices.[319]
Dr Dieter Helm gave evidence to us suggesting the same. Whilst
he acknowledged that the previous capacity arrangements were poorly
designed under the Electricity Pool trading arrangements, he argued
strongly that the current market did not provide an incentive
for generators to invest in excess capacity.[320]
We put this view to Ofgem, who argued equally strongly that this
is not the case. They pointed to evidence that 40% of current
capacity has been built since privatisation of the industry in
1990. They also noted that power companies would not have an incentive
to create a crisis in the electricity market by failing to invest
in new capacity, as this would only lead to political and regulatory
intervention in the industry that could otherwise have been avoided.[321]
215. The issue of a capacity market is somewhat tangential
to the arguments for or against nuclear power, although clearly
an additional form of price certainty, which such a system would
provide, would give greater clarity on the returns to all forms
of generation, including nuclear power. As such, we would argue
that the Government and Ofgem should continue to monitor the capacity
margin and the market's response to changes in it over time, to
determine whether intervention may be needed in the future.
216. There is a possibility that a proportion
of the UK's existing nuclear power stations may receive life extensions
over the coming years. If this is the case, then the potential
'energy gap' faced by the Government will not be as severe as
that which the current Energy Review assumes. Whilst we accept
that the long lead time on nuclear build requires a decision soon
if new capacity were to come on stream before the end of the next
decade, we question the haste with which the Government is seeking
to conclude its current Review, especially given the short timeframe
it has allowed for consideration of certain key pieces of evidence.
Changes in the energy mix, such as increased wind power and potential
new nuclear build, will in the future increase reserve capacity
requirements. Developments in this area will require close monitoring
by the Government and Ofgem as, if there is any sign of market
failure, a swift policy response—perhaps in the form of
some capacity payment—will be necessary.
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