All units in Capacity Market may be required to join Balancing Mechanism

All units in the Capacity Market may also be required to register in the Balancing Mechanism under new rules being considered by the Department for Business, Energy and Industrial Strategy (BEIS).

The department is consulting on a number of proposed improvements to the scheme, which also include changes to the way emissions are calculated and the removal of certain restrictions on secondary trading.

Under the standard licence conditions, most large transmission-connected generators are already obliged to register as Balancing Mechanism Units (BMUs). However, BEIS noted in the consultation document that an increasing proportion of Capacity Market Units (CMUs) are now connected at the distribution level and meet one of the exemption criteria, meaning they are not required to become a BMU or a party to the Balancing and Settlement Code (BSC).

As a result, they are not required to notify National Grid Electricity System Operator (NGESO) of their position at gate closure, their availability to deviate from that position or the price at which they would be willing to do so.

“These exempted units do not provide the same level of visibility to NGESO and so cannot be fully valued for their real-time offering such as flexibility,” the document stated.

“This can create serious issues for NGESO in understanding the true amount of capacity available to it to manage the electricity system. This also potentially results in inefficient scheduling and dispatch of units. Inefficiency ultimately impacts on end consumer energy bills.

“Both outcomes are contrary to the Capacity Market’s primary objective – ensuring security of supply at least cost to the consumer.”

BEIS acknowledged that many distributed units have chosen not to accede to the BSC due to practical and commercial considerations. “However,” it added, “action has been taken to address many of these barriers and so it is now appropriate to consider requiring CMUs to be registered as BMUs.”

It said the recent launch of a new application programming interface as part of National Grid’s programme to widen access to the Balancing Mechanism means they no longer need to exchange data through its traditional fixed line telecommunications network. It said the creation under the same programme of the new role of Virtual Lead Party, which allows independent aggregators to create secondary BMUs without becoming the registered supplier for the included assets, has also removed “previous burdens and barriers to market entry”.

BEIS said it is assessing whether these proposals can be implemented in time for the opening of the prequalification window in 2022 but conceded they “represent a significant change.”

Other proposals being considered by the department include:

• Introducing new formulae for calculating the emissions of power stations burning a mix of fuels or fitted with carbon capture, utilisation and storage (CCUS) for the purpose of applying the new limits that began being phased in from July 2019. In the case of the latter, BEIS said it has been made aware by a potential participant that they wish to enter a CCUS equipped plant into future auctions. It is additionally looking to refine the formula for calculating the emissions of combined heat and power units on the basis of their efficiency.
• Maintaining the minimum capacity threshold for units at 1MW. The limit was lowered from 2MW in July 2020 but BEIS said only a small number of units below this threshold prequalified for this year’s auctions. It said the 1MW threshold is still aligned with those for other energy markets and “strikes the correct balance between encouraging auction liquidity and minimising administrative costs.”
• Preventing secondary trades from being cancelled if they only cover part of the seller’s obligation and their agreement is terminated, as happens under the current rules. “Over the next few years, we are expecting significant amounts of capacity to reach end-of-life and capacity margins to tighten to levels more consistent with the reliability standard,” the consultation explained. “We therefore need to ensure that any capacity closing prematurely and at short notice can be replaced promptly through secondary trading at least partially if this is the only option available.”
• Disabling the net welfare algorithm for year-ahead (T-1) auctions that are held only to meet to the government’s commitment of auctioning off at least 50 per cent of the capacity set aside when determining the procurement target for the corresponding four-year-ahead (T-4) auction. BEIS said this would ensure the costs to consumers are minimised, noting that 820MW of de-rated capacity was procured in the 2020 T-1 auction at a cost of £820,000, despite National Grid recommending of target of zero and ministers setting it at 300MW.