A report carried out by a UK-based consultancy and published by electricity generator UK Power Reserve has found that the UK's electricity capacity market auctions (CMAs) might 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,” Ecuity Consulting said.
Therefore, the report calls for the government to completely exclude tax-relief funded players from the Capacity Market “to ensure the financial benefits of the schemes are completely removed, enabling all generators to compete fairly.”
According to the report, the current system resulted in an “overcompensation” in the past two years which “created a un-level playing field in the CM” leading in turn to “a sub-optimal outcome for government, capacity providers and ultimately, consumers.”
The players would be able to invest 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 are aimed at incentivising investments in high risk businesses.
However, because “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” the consultancy said.
“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 (...) and via CM payments which are paid for by the UK bill payer” explained Ecuity partner James Higgins.
Moreover, “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” he added.
“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” he said.
Meanwhile, the Department of Business, Energy and Industrial Strategy (BEIS) has issued proposals and a consultation to tackle the issue of selective overcompensation. It suggested offsetting CM payments for future EIS/VCT funded projects against the tax relief capital raised, UK Power Reserve reported.
UK Power Reserve (UKPR) has a portfolio of some 700MW of thermal generation assets in the UK, which service the capacity, wholesale and ancillary markets.
It comprises 185MW across 14 existing power stations and over 500MW of committed investment in 26 more gas-fired power stations which it currently building and which will be online by 2018, it said.