Technical improvements to the Capacity Market confirmed by BEIS

Following its consultation launched in March 2021 on technical improvements to the Capacity Market (“CM”) (the “Consultation”), the Department for Business, Energy and Industrial Strategy (“BEIS”) has published its response, confirming which of its proposals will now be implemented (the “Response”).

BEIS will proceed to implement most of the proposals set out in the Consultation (with some refinements), but, most notably, will not proceed with its proposal to require Capacity Market Units (“CMUs”) to register as Balancing Mechanism Units (“BMUs”) at this time.

Background

Alongside the T-1 and T-4 Auctions held earlier this year, on 5 March 2021, the Consultation was launched with the purpose of seeking views relating to ten areas of incremental and technical improvements to the CM following engagement with stakeholders last year (our commentary on the proposals set out in the Consultation as well as the T-1 and T-4 auction results can be found here).

The ten proposals were as follows:

1. requiring all CMUs to be registered as BMUs;
2. implementing changes to certain formulae and clarifications to the legislation relating to Emissions Limits in the CM;
3. giving the CM Delivery Body greater flexibility to consider information which corrects administrative or clerical errors in prequalification applications;
4. preventing certain secondary trades from being rendered ineffective when the transferor’s Capacity Agreement is terminated;
5. reviewing the existing Covid-19 easements (for an overview of the initial easements introduced, see our previous article here);
6. extending the deadline for meeting the Extended Years Criteria so that it aligns with the requirement to provide Evidence of Total Project Spend, and make the sanction for breaching both (a reduction in agreement length) subject to the Secretary of State’s discretion;
7. allowing refurbishing plant to have the same Long-Stop Date as new-build plant;
8. disabling the net welfare algorithm for T-1 Auctions that are held only to meet the 50% set-aside commitment;
9. maintaining the minimum capacity threshold at 1MW; and
10. other minor corrections to relevant legislation.

Of all the proposals put forward by BEIS, the most eye-catching was the requirement for all CMUs to be registered as BMUs. BEIS’ rationale for putting forward this proposal was that by requiring CMUs to register as BMUs, this would improve NGESO’s visibility and utilisation of these assets and therefore improve its ability to manage system security.

Improvements to be (and not to be) implemented

The Response confirms that proposals 2 – 9 set out above will be implemented. In respect of proposal 5 more specifically, BEIS will be extending the Covid-19 easements relating to i) the extended long-stop date, ii) the extended deadlines for Metering and DSR Tests for DSR CMUs, and iii) Independent Technical Expert certificates in relation to progress reports. The easement relating to appeals will not be changed and continues to be in place for CMUs that were awarded a capacity agreement prior to 1 April 2020. The Response notes that these easements will allow management of any delays to an operator’s fulfilment of CM milestones caused by Covid-19. It should also be noted that BEIS have not extended the easements on Satisfactory Performance Days, DSR baseline data or the Metering Test deadline, as these are expected to be of limited impact.

Proposal 1, namely the requirement for all future CMUs to register as BMUs, will not be implemented at this time.

Comment

It is not entirely unsurprising that BEIS has backpedalled (at least for now) on its proposal to require all future CMUs to register as BMUs. The majority of stakeholder responses to the Consultation cited concerns with this proposal due to current market barriers, such as the costs involved with becoming a BMU and complying with the requirements of the BSC.

However, BEIS notes in the Response that it considers this to be a “worthy change for the future” that would have benefits for the wider system and market including:

• Calculation of Loss of Load Probability and De-Rated Margin;
• Transmission charging;
• Forecasting of electricity margins; and
• Making wholesale power prices more reflective of market and system conditions.

Looking forward, BEIS reports that it will be engaging further with NGESO, Elexon and Ofgem to explore solutions to the issues raised by stakeholders in respect of this proposal and Balancing Mechanism participation more widely, and will then develop policy proposals addressing these concerns.

It therefore seems that this proposal is not completely off the table and will certainly be a development to watch.

Next steps

The regulations implementing the changes (namely the Electricity Capacity (Amendment) Regulations 2021 and Capacity Market (Amendment) Rules 2021) have been laid before Parliament and must be debated and approved by both Houses of Parliament before they can be made and come into force.