14 August 2018

By Alec Whiter

BEIS published its call for evidence on the Capacity Market and Emissions Performance Standard Review on 8 August 2018. This marks the start of the government’s formal assessment of the Capacity Market and the Emissions Performance Standard following their introduction through the Energy Act 2013.

It is anticipated by many that this review will lead to subsidy free renewables being able to participate in future capacity market auctions and potentially result in a number of other transformative changes to the capacity market to reflect the rapidly changing energy market.

Evolution not revolution

It is clear that the government believes the capacity market is working broadly as intended. Its stated working assumptions include the following:

  • There is a continuing need for the capacity market.
  • The capacity market objectives remain valid.
  • The existing capacity market design has been broadly successful in meeting its objectives.
  • While not ruling out the possibility of wholesale change, the review will lead to the enhancement of certain elements of the capacity market rather than fundamental change.

The government is aware however that the energy market is changing rapidly with new technologies and business models effectively competing with traditional generation assets. It has subsequently indicated it has two priority issues that it wants to address through its review and that there are a number of other capacity market areas where it may make changes.

The priority issues: renewables participation and interconnectors

1. Renewables participation

The first of the priority issues is whether and how to enable subsidy free renewables to compete in the capacity market.

As part of this, the government has indicated that it will look at the de-rating factors for the permitted renewable technologies (most likely onshore wind and solar PV), the penalty regime and whether it is sufficient to address the risks of non-despatchable technology and secondary trading opportunities, including the participation of hybrid schemes (for instance solar PV and storage).

2. Interconnectors

The second of the priority issues is the de-rating factors for interconnectors.

As the amount of interconnection capacity with capacity market agreements has significantly increased, the government has received a large amount of feedback that the contribution new interconnectors will make to security of supply will diminish as the amount of interconnection grows.

Other EU member states have also introduced their own capacity mechanisms with different penalty regimes, raising concerns around double commitment during correlated stress events. The government has subsequently indicated that it will investigate whether changes should be made to the interconnector de-rating methodology to ensure interconnectors are not over compensated relative to their real contribution to security of supply in future capacity market auctions.

Other important issues

It is clear from the call for evidence that the government is likely to review a number of other core areas within the capacity market including the following:

  • How to support investment in capacity. Questions include whether the length of capacity market agreements (currently one, three or up to 15 years contingent on technology and status) is distorting competition in favour of new build generation and at the expense of DSR.
  • How to ensure the delivery and performance of reliable capacity and liquid secondary markets through areas such as credit cover, milestones and penalties. One proposed penalty idea is to move away from the current penalty regime involving monthly and annual caps to a market based approach with defaulting capacity providers being charged the value of the lost load (VoLL) for their underperformance.
  • How to increase liquidity and competiveness in the capacity market. Mooted options including potentially permitting overseas capacity to directly participate, changing the regulations to permit behind the meter CHP systems to compete and allowing battery storage projects to augment their capacity/duration during their lifespan.
  • How to ensure a level playing field, with the express aim of removing perceived distortions such as:
    • small thermal plant being exempt from the EU ETS and potentially other emissions legislation
    • DSR de-rating factors having an unintended impact on the deployment of standalone and behind the meter storage
    • behind the meter embedded generation potentially being doubly incentivised through capacity market payments and avoided capacity market supplier levy charges.
  • How to complement the decarbonisation agenda. One potential option being the introduction of a carbon emissions intensity limit.

What happens next?

The call for evidence is open until 1 October 2018.

The government has stated that it intends to develop proposals for its two priority issues, renewables participation and interconnectors, for consultation late in 2018 so that, if considered appropriate, it is in a position to prepare amendments to the Electricity Capacity Regulations 2014 and the Capacity Market Rules for laying in Parliament ahead of the 2019/20 winter auctions.

How can Burges Salmon help?

Burges Salmon's award winning energy team have market leading experience in advising on energy projects and policy and are continuing to track capacity market policy developments closely. If you are interested in hearing more from us please contact James Phillips or Alec Whiter.

Key contact

James Phillips

James Phillips Partner

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

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