By Karolin Schaps
LONDON (Reuters) - Britain proposed on Thursday creating a market-wide power capacity backup system, run by network operator National Grid, to secure electricity supply at times of high demand and when output drops from intermittent sources like wind and solar.
The British power market faces the closure of one fifth of installed production capacity by 2020 as older and inefficient plants shut down.
Thursday's proposals aim to encourage plant developers to build new stations by offering a market system that seeks to generate stable revenue for operators through capacity auctions worth 2.88 billion pounds ($4.44 billion) until 2030.
"The capacity market is designed to ensure sufficient reliable capacity is available to ensure security of electricity supply in times of system stress, for example during a cold, windless period," the energy ministry said in its proposal report.
Under the proposed system, power plant owners can bid to provide capacity through an auction for a given year.
This will commit them to deliver power - or reduce consumption for large energy users - at times when supply margins are tight and face penalties if they fail to comply when necessary.
The cost of the auction system will be passed on to consumers' energy bills, but the government says the increases will be 4 percent lower than if the market was left as it is now.
UK-based power generators had mixed reactions to the proposals Thursday, but many welcomed the government's progress in pushing reforms forward.
"The details announced today will help to provide companies and investors with the confidence to make the 200 billion pounds worth of investment in energy infrastructure in the next nine years," said David Porter, chief executive of the Association of Electricity Producers, which represents Britain's power generators.
"(But) there is still a lot of work to be done on the finer details."
The head of an independent power generator said he was disappointed the capacity mechanism would not come into force until later this decade, which would make it hard to find power purchasers for new plants coming online in the near future.
Five out of Britain's 'Big 6' power suppliers said in their consultation response to the proposals they preferred the market-wide capacity mechanism, while one of them was in favor of the alternative strategic reserve option.
The capacity auctions will come into force around 2019, but the government said the exact timing depended on when the security of supply outlook became acutely tight.
The energy ministry also proposed giving network operator National Grid the role of overseeing the backup capacity mechanism and of acting as the agency to manage subsidies paid to low-carbon power generators, called contracts-for-difference (CFD).
"We welcome today's announcement and look forward to playing our part in delivering government policy on EMR (Electricity Market Reform)," said National Grid's executive director, Nick Winser.
The first power plants will be able to make use of CFDs from around 2014.
The ministry made its initial power market reform proposals to reward low-carbon energy production in July and published further details on specific mechanisms Thursday, following consultations. ($1 = 0.6488 British pounds)
(Editing by Anthony Barker)