Government proposes capacity market incentive for reducing electricity demand

The Government has announced plans to amend the Energy Bill to include financial incentives via the capacity market to deliver permanent reductions in the UK's electricity demand.

The proposal is a response to a consultation launched by the Government in November 2012, which sought views on a range of options to unlock the potential benefits of energy efficiency including the use of financial and non-financial incentives.

Announcing its plan, the Department of Energy and Climate Change (DECC) highlighted the "significant potential" for greater electrical efficiency in the UK.

It said that energy efficiency could save up to 32 terawatt hours (TWh) or around 9% of total demand in 2030. It also said that reducing the amount of electricity used could save around £2.3bn and cut emissions in the traded sector by 3.2 mega tonnes, which is the equivalent of the electricity use of around 1.8 million households in a year.

However, DECC pointed out that despite the benefits, efficiency measures are often not taken up, even where they are cost effective.

This is due to a range of market failures, it said, including misaligned incentives, imperfect information, undervalued energy efficiency opportunities and embryonic markets.

Overall respondents were most positive towards the premium payment, which would provide a payment per kilowatt of electricity saved, similar to a feed-in-tariff approach and a scrappage scheme, where payments would be made to reduce the cost of replacing an existing piece of equipment with a new more electricity efficient version.

According to DECC, around a fifth of respondents explicitly favoured these options, with those in favour of a premium payment saying it would drive innovation and competition and would capture deeper savings, whereas simplicity was seen as the key advantage of a scrappage scheme.

However, there was most negativity towards a capacity market and supplier obligation, with around a fifth of responses "explicitly negative" about these options. Those who were negative towards the capacity market questioned how compatible it was with delivering Electricity Demand Reduction (EDR) at all times, with some concerns over potential for complexity and what it could deliver.

Despite this, the Government said there could be a strong case for a financial incentive for permanent reductions in electricity demand, and that a market-wide incentive is the "best approach". Even after the costs of EDR measures are factored in, estimates suggest EDR could deliver net benefits to society of around £0.7bn.

"Government proposes to amend the Energy Bill such that a market wide financial incentive to encourage permanent reductions in electricity demand could be delivered via the Capacity Market. There are however some uncertainties so we are considering whether to pilot the proposed approach prior to implementation," it added.

Earlier in May, the Association for the Conservation of Energy (ACE), Green Alliance, WWF UK, the Oxford Environmental Change Institute and The Co-Operative wrote a letter to Secretary of State for Energy and Climate Change Ed Davey, conveying concern at the Government's current policy on EDR and proposing a feed-in-tariff for energy efficiency.

Commenting on today's proposal, ACE's director Andrew Warren said: "This is a tremendous triumph for common sense. It is a policy which the Association for the Conservation of Energy has campaigned about for over two decades.Throughout that time, every objective study has revealed that it is frequently far cheaper in strategic terms to save electricity than it is to generate electricity.

"It is very welcome news that at long last the government is legislating so negawatts will be able to compete on an even playing field with conventional megawatts. We hope that the relevant amendment to the electricity market reform bill will be tabled by the Government in time so it can be discussed at Commons Report Stage, a fortnight from today," he added.

Leigh Stringer


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