Polluting diesel farms to bid in National Grid auction
Diesel farms, associated with noise pollution and toxic emissions, are among the providers bidding for contracts to supply back-up electricity to the UK’s National Grid in Tuesday’s annual capacity market auction. The farms, which provide support during peak demand, can make £5m ($6.34m) per year and the auction process has encouraged financiers to establish companies for the primary purpose of obtaining National Grid payments. Non-profit analysts InfluenceMap estimate the sector, which receives substantial tax breaks, could be worth £500m within years. Regulator Ofgem and the Department of Business, Energy and Industrial Strategy have both proposed reducing payments to the industry.

The owner of Britain’s energy network is gearing up to buy more power from suppliers to ensure the country’s lights stay on, with polluting diesel generators among the providers vying for contracts.

The National Grid needs back-up electricity sources that kick in when, for instance, demand is high but the weather is not breezy enough to power wind farms. It secures this back-up power through the annual capacity market auction that begins on Tuesday and will see controversial “diesel farms” taking part.

This auction process has created lucrative investment opportunities for people to invest in diesel farms, rows of noisy and polluting generators that operate for up to 15 years. In fact, financiers have set up companies specifically to access payments from the National Grid. And while the government is weighing up plans to limit the attractiveness of such investments, many diesel farms have been built and are already delivering returns. Still more could land multimillion-pound contracts this week.

Industry sources said one farm can easily make £5m a year, while non-profit climate analysis firm InfluenceMap today claims the diesel farm industry could pick up £500m in a matter of years. In some cases, investors are also eligible for generous tax breaks. Gas has become an increasingly important part of the UK’s energy mix as coal, due to be phased out by 2025, has been scaled back. Diesel farms are not there to provide power on a routine basis, but to fire up at times of peak use or to help balance second-by-second changes in demand.

While the farms offer a profitable investment, those who live nearby say their lives are blighted by noise pollution and fear of toxic emissions. In Ernesettle, Plymouth, locals told the Guardian they are fed up with generators being built in their quiet neighbourhood.

One of the two diesel farms in Ernesettle is owned by Rockpool Investments, founded by City financier Nicola Horlick. Each of Rockpool’s nine diesel farms has more than 100 investors putting in a combined £34m, according to documents seen by the Guardian. But for Ernesettle residents, the reality is intolerable noise pollution and a growing fear of harmful nitrogen oxide emissions.

Ernesettle residents Chris Kelland, Neil Macfarlane, Flo Vickery, Ray Morton and Alison Sargent. Photograph: Ben Mostyn/The Guardian

“It’s like a bloody jet engine in my garden,” said Flo Vickery.

Vickery was among hundreds employed at the Toshiba factory that once stood on the site the diesel farms now occupy. She has kept a diary of the noise they give off and says that in winter they often run for two hours an evening, several days a week.

Neighbour Chris Kelland said: “When the wind blows I have to shut the window because it’s just a continuous drone. It’s a big air polluter too. Why don’t they put it in their own back yard?”

Plutus PowerGen, which operates and part owns Rockpool’s plants, said it only uses Green D+ diesel, which boasts lower emissions. The company acknowledged there may be some noise pollution, but said its plants only run for up to 200 hours a year, meaning noise is “limited”.

However, the plants typically run only in winter, meaning noise from the generators could affect residents for at least an hour each day for four months. One reason Rockpool is so keen on diesel farms is that any set up before November 2015 are eligible for a tax break through the Enterprise Investment Scheme (EIS).

The scheme offers an income tax cut worth 30% of the investment, as well as reductions in Capital Gains Tax.

Stock market filings show that Rockpool set up nine power plant firms in time to beat a policy change that prevents new power plants from accessing the EIS tax break. Even without tax relief, diesel plants can deliver high returns.

Through the annual capacity market auction, companies can bid for 15-year contracts to provide power at short notice. The Grid said it did not know how many contracts have been awarded to plants that run on diesel.

But the rewards on offer mean Rockpool is just one of several major diesel investors. One such firm is Peak Gen Power, which applied to build 15 plants in the upcoming 2016 auction after succeeding with 13 bids last year.

It refused to say what fuel it will use but planning applications show that it has repeatedly sought permission for diesel-fuelled plants. Accounts registered at Companies House show the majority owner of Peak Gen Power is Dione Holdings, registered in the British Virgin Islands. The company declined to comment on the offshore structure.

While Rockpool and Peak Gen Power declined to comment, Oliver Hughes of Oxford Capital Partners – a diesel farm investor – said: “From our perspective, there’s an ever-increasing reliance on intermittent generation from renewables. One solution is to run a large coal fired power plant. The alternatives [to diesel farms] are potentially a lot more ugly.”

But energy experts dispute the suggestion that diesel is a necessary part of the transition to a low carbon future.



“Cleaner and cheaper options that the government should be prioritising include demand response, where non-essential demand is turned off for a little while, battery storage and CHP (combined heat and power) generation,” said Richard Black, director of the Energy & Climate Intelligence Unit. “All of those are natural components of the low-carbon power system that Britain needs to build over the next 15 years, whereas diesel is not.”

There are moves under way in government to change the policies that make diesel farms such an attractive investment. Energy regulator Ofgem has said that payments to small power plants appear too high. The Department of Business, Energy and Industrial Strategy recently proposed limiting these payments and has also considered slashing payouts to firms that are also in receipt of tax relief.

Rockpool Investments has fought policy change hard, according to a document obtained by InfluenceMap and shared with the Guardian. The document warns that retrospectively limiting the financial benefits available to the companies Rockpool owns would have a “devastating effect” on them.

But rival UK Power Reserve thinks the double whammy of subsidies and tax relief could be illegal under EU state aid rules.

“We believe any tax relief funded projects should be completely excluded from the capacity market and we won’t rest until that happens,” said chief executive Tim Emrich.

He said: “UK Power Reserve is considering its legal options in relation to state-aid non-compliance,” adding that BEIS’s proposed reforms “do not go far enough”.

Diesel farms face a second threat, with the Department for Environment, Food and Rural Affairs (Defra) consulting on measures to limit diesel emissions. This would make it harder for them to comply with environmental regulations, forcing them to spend money on pollution abatement technology or switch to a more expensive but cleaner fuel.

Defra acknowledged in its consultation that “potential distortions in the wider policy landscape” have given diesel an “unfair advantage”. Impending policy change is beginning to have an effect, with several diesel companies understood to have pulled out of the running for the capacity market auction.

But changes to the way the Grid pays small power plants are not expected to apply to those that secured consent in previous auctions. That means communities like Ernesettle have little to gain and local councillor Mark Lowry has been left scratching his head.

“It’s so easy to make money from this, it’s ridiculous,” he said. “Find some land, put a few diesel generators on it, get a massive tax subsidy. It’s so illogical.”