Report by Ecuity Says Government Must Do More to Halt Electricity Capacity Market Distortion Caused by Subsidies to Back up Power Generators

UK Power Reserve Ltd has today published an independent report by energy policy experts Ecuity Consulting LLP which looks at the damaging impact of tax incentive schemes used to fund back up power generation on the market and taxpayer.

Ecuity’s review shows that the UK’s electricity capacity market auctions (CMAs) have been distorted in the past two years by players able to bid at a lower level than others by using investment with special tax relief. This means the profit margin on each unit of investment they make in the capacity market (CM) is significantly higher than for those using other types of funding. This overcompensation creates an un-level playing field in the CM, which has resulted in a sub-optimal outcome for government, capacity providers and ultimately, consumers.

The players in question 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) which the Government set up to incentivise investment in high risk businesses. This kind of power generation is not high risk. Investors can earn up to six times their initial investment in just four years with tax relief.

Ecuity Partner James Higgins commented:

“Being able to bid at a low level, while still getting high returns on their investment, means that the outturn price of the 2014 and 2015 CMA 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 outturn price.

These investors, which we estimate comprised over 700MW in the first two CMAs, are being subsidised in two ways: via their tax breaks which we estimate has cost taxpayers £145million (or £5 for every person in the UK); and via CM payments which are paid for by the UK bill payer. Access to this double subsidy has been well flagged.”

The Department of Business, Energy and Industrial Strategy (BEIS) has issued proposals and a consultation to tackle the issue of selective overcompensation. It suggests offsetting CM payments for future EIS/VCT funded projects against the tax relief capital raised.

Commenting on the Report, and BEIS proposals UK Power Reserve CEO Tim Emrich commented

“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. Ecuity’s analysis shows BEIS’ proposals must however be strengthened to sufficiently remove the subsidy, level the playing field, and ensure the government gets its desired energy mix.”

The review concludes that is is critical the government properly balances security of supply, affordability and decarbonisation targets by completely excluding tax-relief funded players from the Capacity Market. Instead of offsetting payments which will be difficult and impractical to implement, the authors recommend that BEIS needs to fully exclude tax-relief funded parties from the CM to ensure the financial benefits of the schemes are completely removed, enabling all generators to compete fairly.

Notes to editor:

Ecuity is a specialist consultancy focused on sustainable energy policy. The consultancy services cover Regulatory Insight, Commercial Strategy and Influencing Campaigns. Ecuity has a wealth of campaigning, political and regulatory experience within the public and private sector. Individually and collectively, Ecuity have built strong working relationships within Government, the EU Institutions, Environmental NGOs, and with each of the main political parties, as well as a wide range of industry and other contacts throughout the UK and in Europe.

Link to the report

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