DECC to use capacity market to encourage electricity demand reduction

The Department of Energy and Climate Change (DECC) will use the proposed capacity market included in the Energy Bill to encourage electricity demand reduction in the UK.

The government is proposing that businesses and organisations could be rewarded for reducing energy demand at peak times – similar to the proposed incentives for those supplying backup energy in the capacity market contained in the Energy Bill currently working its way through parliament.
In its response to the Electrical Demand Reduction consultation issued last year, DECC rejected the popular idea of a premium payment scheme, which would provide a payment per kilowatt hour of electricity saved in a similar manner to the feed-in tariff. DECC believes that a premium payment would not enable the same trade off against supply that the capacity market would deliver as well as requiring the creation of a separate delivery mechanism and supporting infrastructure.  

As a result, the capacity market has been chosen as the preferred route to deliver financial incentives for electricity demand. DECC lists the following reasons for the decision:

1. • It targets reductions at peak demand and so incentivises demand reduction at times when it is more valuable. This is because it costs more to supply electricity during peak periods and generation and transmission infrastructure has to be set up to meet periods of peak demand;
2. • It enables electricity demand reduction to be delivered where the price reflects the value it provides to the system. This is because, unlike with other delivery mechanisms, within a capacity market demand reduction can compete directly with supply;
3. • It avoids the creation of a separate delivery mechanism for electricity demand reduction, reducing deliverability risk; and
4. • It enables demand-side response and electricity demand reduction to be brought together in a single delivery vehicle enabling more effective, joined up delivery of both policies.

The use of the capacity market to encourage electricity demand reduction goes against the majority of responses that DECC received to its consultation. Approximately 20% of respondents thought that this would be a negative option due to concerns over the compatibility with delivering electricity demand reduction at all times.