Friday, 16 January 2015

What's In Your Electricity Bill - Part 3 : Capacity Payments

Source - CER Annual Capacity Payment Sum, Decision Paper, 2015

Capacity Payments are paid to generators to make their capacity available. The generator doesn't have to actually supply electricity, they get paid based on the output they could potentially export to the grid. This may seem strange but it appears that this payment is required to recover some of the capital costs of building plant.  In recent years, capacity payments have been paid to standby diesel generators and wind farms as part of the paradoxical energy policy that has been implemented since the Green Party were in government.

The capacity payments pot has not fluctuated much in the past few years. It has hovered around the €530 million mark, quite a substantial amount, around a quarter of total energy payments. In 2014, the total rose to € 565 million, up €14 million from 2010 and down just €10 million from 2008, at the height of the building boom. It is calculated based on a formula for All Island Capacity Requirement multiplied by the fixed costs per Kw of running a peaking plant in Northern Ireland which runs on oil. So will we be seeing a reduction in Capacity Payments now that oil prices have halved ? Well, unfortunately, the CER have based 2015 rates on 2014 rates and have estimated that oil prices would rise, hence the capacity payment pot for 2015 has gone up to € 574 million.

Capacity payments to wind farms make up around 5% of the total, for providing capacity that is not guaranteed and cannot be relied upon (e.g. 11th / 12th October 2014 when wind power was zero for long periods). But wind farms drive up the final cost of capacity payments. The formula for All Island Capacity Requirement takes account of the capacity credit of wind (now at 369MW out of a total wind capacity of 2,700 MW) which is then added on to the conventional requirement to arrive at the final figure. So the pot was € 29 million higher as a result of wind energy, roughly equal to the amount they receive.

This then raises the question - why, with over 2,000MW of wind in the system, which was designed to reduce dependence on fossil fuels, are we paying well over € 500 million a year to fossil fuel plant just to make them available to provide power when the wind stops ? Have we backed the wrong renewable horse ?

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