As a result of the Government’s environmental policies, fossil fuel generation became more expensive (due to the Climate Change Levy), while large amounts of renewable generation were added to the system. Renewable generation can be expensive to build – hence the need for subsidies – but it costs very little to run: it has close to zero marginal cost of generation since the “fuel” (wind, sun etc) is free. This means that power generation with real fuel costs are pushed down the merit order, only running when cheaper forms of generation cannot meet demand.
This lesson covers the UK's Capacity Market, how it supports generators and how its costs are recovered from suppliers.