A payment plan designed to keep centralized generation available in case it’s needed has become a massive subsidy that is keeping the coal industry in business in the United Kingdom, Germany, and Spain, analyst Gerard Wynn reported last month on the Energy and Carbon blog.
“Capacity payments” were originally set up to ensure back-up power for electricity grids, by paying producers to keep coal or natural gas plants available in case they’re needed. But in today’s European utility industry, the payments “are looking more and more like subsidies to prop up a fading industry threatened by the rise of renewables,” Wynn writes. “It’s an expensive arrangement that does little more than reward decrepit coal- and other fossil-fuel-fired power plants for waiting in the wings—not for generating electricity.”
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He notes that capacity payments to UK coal plants have increased sharply, despite a national mandate to phase out coal by 2025. The payments ultimately support “an increasingly uneconomic form of power that is on its way out as energy markets evolve, and as climate change and air-quality regulations grow.”
Wynn details three types of capacity payments that coal plants will receive from the UK’s National Grid this year: £122 million to keep 3.6 gigawatts of “aging, uneconomic fossil-fuel-fired power plants” available over the winter, £322 million in advance payments for coal deliveries between 2018 and 2020, and £146 million to keep thermal plants available in case the grid collapses.
“Such subsidies are hard to justify given the falling cost of renewables,” Wynn writes. “They are especially questionable in the European Union, whose emissions trading scheme allocated windfall profits to utilities of at least $10 billion cumulatively from 2005-12. The windfall was meant to help utilities transition to a low-carbon future, but these companies have since played almost no part in the growth of small-scale renewables that compete with coal- and gas-fired plants across Europe.”
A somewhat similar discussion has been taking shape in New York State, where the Environmental Defense Fund is arguing that a standby tariff for large power users has become a “major obstacle” to distributed generation.
“While utilities say they need standby tariffs to recover the costs of maintaining a reliable electric grid, many potential and existing large electricity customers producing their own power see standby tariffs as perversely designed to undermine the business case for distributed generation,” explains Marc Rauch, an EDF senior specialist.
“Utilities say they must recover not only their ordinary costs of distributing electricity, but also their incremental costs of maintaining the reserve electricity needed in case customer generators break down and need to draw more electricity from the grid,” he writes.
But U.S. utilities are already “guaranteed above-market rates of return on capital investments, such as new power plants, transmission lines, and distribution facilities. Since distributed generation lessens the need for investment in these types of facilities, utilities have scant incentive to encourage its adoption. Hence, the widespread skepticism on the part of large electricity customers producing their own power.”
