07 March 2016

The proposals are contained in DECC’s response to its October 2015 consultation, which is available here , and further proposals are set out in a new consultation launched on the same day, available here. A summary of these proposals is set out below:

Buying more capacity, and buying it earlier

DECC has proposed buying a greater amount of capacity - around 1 GW more volume - at the next four-year ahead auction in December 2016.

As well as buying more capacity, DECC is likely to be leaving less capacity to the one-year ahead auction. Previously, 2.5GW was set aside for the one-year ahead auction, but under the new plans a greater share of this capacity will be purchased in December 2016’s auction for capacity in 2020/21.

Increasing the amount of capacity to be purchased is intended to encourage investment, particularly in gas-fired power stations, as the UK transitions away from coal. In all, these plans could increase the amount of capacity being auctioned this December by over 3GW, although the exact amount will be confirmed in the summer.

Tightening delivery incentives

In order to provide the security of supply that the Capacity Market was set up to ensure, DECC will be tightening the incentive and penalty regime, particularly in relation to new build projects. A number of the proposals that were consulted on in October will be implemented, including:

  • Banning those projects which fail to deliver from participating in future auctions.
  • Introducing more monitoring and reporting milestones.
  • Potential increases in credit cover for projects which cannot demonstrate the required progress by the financial commitment milestone.
  • Higher termination fees to discourage generators from reneging on agreements without fulfilling their commitments.

Early introduction of the Capacity Market for 2017/18

To prevent National Grid from having to rely on the expensive Contingency Balancing Reserve (CBR), DECC proposes to bring forward the start of the Capacity Market delivery period by one year. This would involve holding a one-year ahead auction in the coming winter (probably January 2017).

The proposed new auction would purchase 100% of the Capacity Market requirement for the 2017/18 year period and ensure that the CBR for that year is replaced by the Capacity Market. It is hoped that this early introduction of the Capacity Market will reduce the distorting effect of the CBR which can create price volatility and uncertainty.

Diesel generation

DECC states that it can be expected that diesel will have less of a role to play in future auctions. Whilst the regulatory measures to achieve this would sit outside of the Capacity Market itself (in order to remain technology neutral), the Government is considering introducing legislation by January 2019 (and possibly sooner) that would set binding emission limit values on relevant air pollutants from diesel engines. These limits would apply to generators or groups of generators with a rated thermal input equal to or greater than 1 MW and less than 50 MW, irrespective of their number of hours of operation during any given year. If you would like more information about air quality controls on diesel generation and current developments in air quality regulation that may affect this, please let us know.

Charging for Embedded Generators

DECC also took the opportunity to highlight the study being undertaken by Ofgem in respect of the charging methodology applied to embedded generators, noting that these charging arrangements could be having an increasing impact on the system, including distorting investment decisions and leading to inefficient outcomes in the Capacity Market. Further details on this are expected to be published by Ofgem in the summer before prequalification for the next auction round begins.

The March 2016 consultation

Alongside the response, DECC published a new consultation with the aim of making further adjustments to the framework, in particular:

  • New build assurance
  • Termination fees
  • Avoiding cumulation of State aid
  • Eligibility for transitional arrangements
  • Prequalification timings
  • A review of the Capacity Market Rules

The consultation also looks at proposals for the introduction of the early capacity auction in 2017 mentioned above. The consultation will close on 1 April 2016.

Burges Salmon has advised numerous providers and aggregators of generation and demand-side capacity on the development and application of the Capacity Market. If you would like to discuss the implications of the proposed changes on your business, please contact James Phillips.

Key contact

James Phillips

James Phillips Partner

  • Head of Energy & Utilities
  • Head of Energy Transition
  • Energy Regulation

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