The United Kingdom’s new capacity market is meant to lower electricity prices by encouraging competition and new generation. But it will actually do just the opposite, according to Tempus Energy, a startup energy retailer that has brought an appeal in the European General Court against the capacity market on the grounds that it is unfair.
“The mind boggles that you could put this together,” said Sara Bell, CEO of Tempus Energy, who represented demand-side interests in the working group for the capacity market.
Although she did have a spot at the negotiating table, Bell says that she was sole representative of the U.K. Demand Response Association and demand-side resources. The remainder of the working group consisted of traditional generators.
Demand response is used much less in the U.K. and Europe than it is in the U.S. Most demand-side resources in Europe are used for ancillary services, such as frequency regulation, rather than for shifting peak load when the grid is under pressure.
European grids tend to be more strained in winter, rather than in summertime, as in the U.S. However, capacity is increasingly needed for production shortfalls when renewable energy plants stop producing power. The U.K. and other countries are increasingly looking at capacity markets, so the need to get it right in the U.K. before other markets are built is imperative, said Bell.
“This policy is about generation,” Bell said of the new capacity market. Tempus Energy argues that the capacity market will cost consumers more, not less, over the long term. In the first capacity auction, held in December, traditional generators won the lion’s share of the bids for about 50 gigawatts.
The U.K.’s Department of Energy and Climate Change, on the other hand, hailed the first auction as a success. “We are guaranteeing security at the lowest cost for consumers,” said Ed Davey, the U.K.'s Secretary of State for Energy and Climate Change. “We’ve done this by ensuring that we get the best out of our existing power stations and unlocking new investment in flexible plants.”
Other clean energy advocates have pushed back against the auction. Dave Jones, an analyst at pro-carbon-market nonprofit Sandbag, told the website Carbon Brief, “The capacity market looks more like a subsidy scheme to keep heavy polluters on-line, rather than a mechanism to encourage new investment.”
One reason demand response could not compete, argues Bell, is that demand-side resources were only allowed one-year contracts, compared to fifteen-year contracts available to traditional generation, primarily gas, coal and nuclear.
The events that will be called to shift load are open-ended. They could last for 30 minutes, or three hours, or an entire day. “They allow for participation,” said Bell, “but they make it very hard.”
Another issue, according to Tempus Energy, is that the novel market did not allow demand response resources to participate in the four-year and two-year auctions simultaneously.
Bell was able to secure the use of a dispatch signal during the negotiations. The alternative was to use a price as proxy, which would have been a far less sophisticated way to run the market.
Demand response will participate in the market as planned while the appeal goes through, which Bell said could take six to twelve months.
Tempus Energy will start signing up customers this month. “We intend to aggressively compete on price,” said Bell. The energy supplier expects to serve residential and commercial customers, but sees a sweet spot with small businesses that have some flexible load, such as food and hospitality services or office spaces. Large commercial entities, on the other hand, tend to be on long-term contracts, so signing them up can take more time.