Capacity market auctions distorted says report

Tax incentive schemes are distorting the UK’s capacity market auctions and giving some participants an unfair advantage, according to a new report.

The review, commissioned by UK Power Reserve and compiled by consultancy firm Ecuity, said that some bidders were using investment that came with special tax relief.

Some players have used Venture Capital Trusts (VCTs), Enterprise Investment Schemes (EISs) and Seed Enterprise Investment Schemes (SEISs) to raise money to fund back-up power generation.

Such schemes were set-up to support high-risk ventures, but Ecuity argues back-up power generation does not carry a high risk.

The profit margins made by those that are using the special tax reliefs are higher than their competitors, the report said, giving them an unfair advantage.

Investors can earn up to six times their initial investment in just four years with tax relief, the report added.

Unfair advantage

James Higgins, a Partner at Ecuity, said: “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 capacity market auctions 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 £145 million – or £5 for every person in the UK – and via capacity market payments, which are paid for by the UK bill payer.

“Access to this double subsidy has been well flagged.”

Double subsidies

The Department of Business, Energy & Industrial Strategy (BEIS) is currently consulting on closing such loopholes.

Tim Emrich, Chief Executive at UK Reserve Power, said: “It is important reforms happen and we welcome BEIS efforts to close the loophole because we estimate a further 1GW-plus of tax relief funded capacity could emerge in the 2016 capacity market auction.

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

> Download the report