Capacity Market: Consultation on Future Improvements

United Kingdom

The Department for Business, Energy and Industrial Strategy (“BEIS”) ran its Capacity Market (“CM”) Consultation on Future Improvements (the “Consultation”) between 3 February – 2 March 2020.

Following the eleven month standstill period imposed by the judgment of the General Court in November 2018, the European Commission completed their investigation into the GB CM scheme and published their final decision (the “Decision”) in October 2019, finding that the CM scheme complies with EU State aid rules, bringing the standstill period to an end. The full decision was published on the 6th March 2020.

The Consultation sought views on proposals to implement five of the six commitments referenced in the Decision, as well as reviewing the exclusion from the CM of plants with long-term STOR contracts and other minor improvements.

Commitments

Implementation of the commitments referenced in the Decision is intended to ensure the continued compatibility of the CM with State aid rules in the future and relate to:

  1. The lowering of the minimum capacity threshold for participating in the auctions;
  2. The participation rules for new types of capacity;
  3. The access to long-term capacity agreements;
  4. The volume of capacity to be secured in the CM’s year-ahead (“T-1”) auction;
  5. Compliance with the new Electricity Regulation (EU 2019/943), in particular the implementation of carbon emissions limits; and
  6. The direct participation of cross-border capacity (this commitment will take additional time to deliver and will be the subject of a call for evidence separate to the Consultation).

Proposals

To achieve these commitments the Government proposes to:

  1. Allow all types of eligible capacity types (except interconnectors) to apply to prequalify to bid for all the agreement lengths available in the CM (up to fifteen years) if they can demonstrate they meet the relevant capital expenditure (CAPEX) thresholds – the only technology other than interconnectors that cannot currently access multi-year agreements is Demand Side Response (DSR) and therefore the key impact of this proposal is to allow DSR to access multi-year agreements.
  2. Reduce the minimum capacity threshold to participate in the CM from 2MW to 1MW – this reflects the GB (and indeed international) trend towards the deployment of even smaller, more distributed energy resources. In order to ensure that the CM remains in line with other markets (and so that operators can effectively stack other revenues with CM revenues), the Government propose to reduce the minimum capacity from 2MW to 1MW for all auctions.
  3. Incorporate in legislation the Government’s commitment to procuring at least 50% of the capacity set aside for the T-1 auction, and to set a methodology for determining the minimum amount of capacity to be set aside – the change will guarantee auction volumes in the T-1 auctions. Given that the same methodology is to be used as applied in recent years for calculating the minimum amount of capacity to be set aside, the proposal represents a formalisation of existing policy rather than a change in policy.
  4. Ensure the rapid incorporation into the CM of any new capacity type which can effectively contribute to addressing the generation adequacy problem – as the CM is technology neutral, the aim of this change is to supplement and formalise the existing processes for incorporating new technologies into the CM (together, crucially, with their relevant de-rating factor) to ensure there are no delays in the future. While the Consultation is clear that at present BEIS views the current list of CM technology types as appropriate, it acknowledges that a clearer process for considering new technology types on an annual basis, and in time for participation in prequalification for the next auction, would be helpful. This would be achieved through a proposed new duty on the Secretary of State to review annually whether there are any new capacity types, not currently participating in the CM, which can effectively contribute to addressing the resource adequacy problem. The Consultation suggests this would involve a government call for evidence, commencing in October each year, through which it would consider proposals for any new technology classes. Where new technology classes were to be incorporated this would be followed by a Delivery Body led process for establishing de-rating factors (the de-rating factor being the way in which the capacity of any given technology type is determined for the purposes of the CM and the payments provided thereunder), such that, where practicable, participation in the next auction round is facilitated.
  5. Establish a reporting and verification mechanism for the carbon emission limits to be applied to the CM – the implementation of emissions limits in the CM by ensuring that there is a mechanism for reporting and verifying emissions from each Capacity Market Unit (“CMU”).
  6. The recast Electricity Regulation in 2019 introduced a new requirement for capacity mechanisms to include carbon emissions limits for both new build and existing capacity. In 2019 the Government consulted on arrangements for applying the emissions limits in respect of generating units which have fossil fuel components that existed before 4 July 2019. The Government response to that consultation will be published in due course.

    The Agency for the Cooperation of Energy Regulators (ACER) published its opinion (the “Opinion”) on the new requirement, where they proposed a detailed methodology for calculating compliance with the emissions limits and arrangements for the reporting and monitoring of carbon emissions in respect of generating units. Whilst the Opinion is non-binding, it presumes that Member States applying capacity mechanisms will implement the arrangements. To account for the Opinion, the Government is now consulting on amendments to the CM Rules.

    Declarations for existing capacity

    The Government is considering whether to apply the carbon emission limits from 1 October 2024 or 5 July 2025 to existing capacity. A decision will be announced in due course, but irrespective of the final decision as both dates fall within the 2024/25 Delivery Year the CM Rules will need to be amended in advance of the T-4 auction.

    The Government proposes that an Applicant for a CMU which contains a fossil fuel component will be required to submit during prequalification a declaration to the Delivery Body listing all of the components in the CMU with a calculation of emissions against each. This is more detailed than the current requirement in the CM Rules, but is in line with the Opinion and is necessary to enable the proper application of the emissions calculation. In line with the current position, no declaration will be required for CMUs that do not contain a fossil fuel component.

    Reporting and Verification

    As well as this declaration, the Government propose to build upon the existing framework and require more information to be submitted to support the verification of compliance with the emissions limits and in line with the Opinion. Specifically, an applicant must declare:

    1. The specific emission of the generating capacity;
    2. The yearly emissions of the generating capacity; and
    3. Supporting information (detailed in the table at Annex F to the Consultation).

    It will be interesting to see how such focus on carbon emissions develops in the future in light of BEIS’ focus on Net-Zero.

  7. Remove the exclusion of plans with long-term STOR contracts from the CM – due to changing market conditions it is no longer expected that the payment of CM revenues to plants that also hold long-term STOR contracts will yield windfall profits (which is against State aid rules), and therefore the exclusion is no longer necessary. As a result, it is proposed that units with contracts for long-term STOR be allowed to participate in the CM for all auctions for which prequalification opens after January 2020.
  8. Add additional information items to future CM Registers to help reduce the risk of fraud and error – this change focusses on bolstering the existing measures for identifying fraud and errors in the information provided by Participants/Applicants in respect of the CM through, in particular, adding more categories of information to that included in the CM Register in respect of prequalified applicants.
  9. Make minor corrections and clarifications to the CM Rules

Results of the recent T-4 Auction

The T-4 Capacity Auction for delivery in 2023/24 (the “Auction”) concluded on 6th March 2020 and the provisional results have been published. The clearing price was a healthier £15.97, with 73.62% of applicants securing a Capacity Agreement.

Existing generating capacity secured 77.68% of agreements. The largest proportion of agreements were awarded to existing and new-build Combined Cycle Gas Turbines (CCGT), followed by Combined Heat and Power (CHP) (10.25%). 1.3GW of existing coal plant and three onshore wind farms also secured agreements.

For a full list of the CMUs to which a capacity agreement has been awarded and the duration of those agreements, see page 6 of the Final Auction Report.

Next Steps

The brief Consultation period was to ensure that the Government had time to make any necessary legislative changes and changes to the CM rules to implement the commitments covered in the Consultation before the prequalification window for the next auction round opens in Summer 2020.

Following the close of the Consultation, the Government will now seek to make the necessary amendments to the Electricity Capacity Regulations and the Capacity Market Rules before the prequalification window for the T-4 2024/25 and T-1 2021/22 auctions open in the summer of 2020.