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WWF said that the Governments plans could extend payments to old and polluting coal fired power stations until 2033, putting the UK's power sector decarbonisation goals at risk and potentially pushing up people's energy bills. The proposals also favour electricity generation over others means of boosting efficiency, such as increased interconnection or demand reduction programmes.

Jenny Banks, energy and climate change specialist at WWF-UK said: The capacity market risks pushing up bills and holding up progress towards a decarbonised power sector by throwing money at the UK's old, dirty coal plants.

"It's hard to believe that a country which has just reaffirmed its commitment to tackling climate change by committing to the fourth carbon budget is about to introduce a policy which could lock in vast payments to its oldest and dirtiest power stations until the 2030s.

"The capacity market is skewed in favour of large existing generators while side-lining valuable sources of flexible capacity such as interconnection, demand reduction and response and electricity storage. Allowing these technologies to compete on a level playing field could push down prices and help integrate renewables into the UK electricity mix."

Coal

DECC's new capacity market threatens to hand out 15 year contracts which guarantee large payments to old and polluting coal fired power stations (and other generators) until 2033 [1]. This will directly threaten the UK's power sector decarbonisation goals and is likely to push up bills for consumers.

A capacity market contract will be worth up to £150 million a year to a 2 gigawatt coal fired power station [2]. A 15 year contract will be worth up to £2.25 billion over the life of the contract. This is on top of revenues earned through selling electricity. Revenues from the capacity market may well exceed the costs of compliance with forthcoming pollution legislation and therefore encourage coal plants which might otherwise have closed to extend their lives. [3]

Demand side capacity and Interconnection

The capacity market is designed in a way which favours electricity generation. Current rules do not allow interconnected capacity to participate. They also side-line demand side response and restrict demand reduction to a small pilot. The cost of the capacity market is likely to be higher as a result. [4]

ENDS

Notes to editors:

1. A standard capacity contract lasts for only one year. Therefore those with a capacity contract receive a payment based on that year's auction clearing price. However, generators which invest in upgrades to their plant (as well as those building new plant) and spend in excess of specific thresholds are eligible for longer term contract. The thresholds are £125/kw for a 3 year contract and £250/kw for a 15 year contract. A 2GW plant would need to spend over £250 million to qualify for a 3 year contract and £500 million for a 15 year contract. Ratcliffe-on-soar power station, recently undertook extensive works which were rumoured to cost £800 million. This is well in excess of the £500 million a plant of its size would need to spend on retrofit/upgrade works in order to qualify for a 15 year capacity contract.

2. The highest possible clearing price is £75/kw which is the capacity market cap. If the auction cleared at this level then a 2GW plant would receive a £150 million capacity payment that year.

3. All coal plants will have to comply with the Industrial Emissions Directive which regulates air pollution and comes into force in 2016. As emissions from the majority of the UK coal plant currently exceed the new thresholds they will need to invest in technology called Selective Catalytic Reduction (SCR) to meet the new standards. Estimates from a recent report to government (https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/315717/coal_and_gas_assumptions.PDF) suggested that upgrades to meet these standards would cost between £195 million and £260 million for a 2GW plant. Although neither figure exceeds the £500 million threshold for a 15 year capacity contract, plant owners may choose to undertake other upgrades at the same time as was the case at Ratcliffe power station.

4. For example a 2010 report from the Regulatory Assistance Project highlighted that capacity markets in the US PJM market which allow equal participation of demand side resources reduced auction clearing prices from $178.78 to $16.46 (p3): uds-cse&usg=AFQjCNGNOjzziy9lPBS9MVJgIZ8qSYc4nw

5. European Commission: State aid: Commission authorises UK Capacity Market electricity generation scheme http://europa.eu/rapid/press-release_IP-14-866_en.htm

For more information:

George Smeeton, Media Relations Manager WWF-UK
Tel: 01483 412 388, mob: 07917 052 948, email: GSmeeton@wwf.org.uk, twitter: @GSmeeton
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