Government told to fix ‘distortion’ in Capacity Market auctions

Subsidies for back-up power generators have “distorted” the UK’s Capacity Market (CM) and negatively affected taxpayers. That’s according to a report by Ecuity Consulting and published by UK Power Reserve, […]

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By Jacqueline Echevarria

Subsidies for back-up power generators have “distorted” the UK’s Capacity Market (CM) and negatively affected taxpayers.

That’s according to a report by Ecuity Consulting and published by UK Power Reserve, which calls on the government to do more to halt the electricity capacity market distortion.

It states some generators bid at a lower level than others by using investment with special tax relief. That makes the profit margin on each unit invested in the CM “significantly higher than for those using other types of funding”, with the “overcompensation creating an unlevel playing field”.

Those players are investing in power generation units with taxpayer-funded risk finance schemes like the Enterprise Investment Scheme (EIS), Venture Capital Trust (VCT) and Seed Enterprise Investment Scheme (SEIS), it adds.

The government set up those schemes to incentivise investment in high risk businesses. However the report claims this kind of power generation is not high risk and investors can earn up to six times their initial investment in just four years with tax relief.

Ecuity Partner James Higgins said: “Being able to bid at a low level, while still getting high returns on their investment, means that the out-turn price of the 2014 and 2015 CM [auction] has been lower than anticipated and the government has not been able to secure the right generation mix via the capacity mechanism. In particular, large gas fired power stations (CCGTs), have been squeezed out of the mix because they would not make a profit at the out-turn price.”

The report states these investors, estimated to comprise more than 700MW in the first two CM auctions, are being subsidised in two ways: via their tax breaks which it claims has cost taxpayers £145 million and CM payments which are paid for by the UK billpayers.

UK Power Reserve CEO Tim Emrich adds: “It is important reforms happen and we welcome BEIS’ efforts to close the loophole because we estimate a further 1GW+ of tax relief funded capacity could emerge in the 2016 CMA.”

According to a report by the National Audit Office (NAO), subsidies for renewables “will add more to energy bills than planned”.

ELN has contacted BEIS for a response.

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