BEIS confirms raft of changes to Capacity Market rules

The government has confirmed a series of amendments to the Capacity Market rules, including applying an emissions limit for existing generators and allowing demand-side response providers to bid for 15-year contracts.

The Department for Business, Energy and Industrial Strategy (BEIS) was responding to a series of consultations held over the last year – one on “future improvements” prompted by the temporary suspension of the Capacity Market; another on new emissions limits required by EU regulations; and a third on the proposed relaxation of rules in response to the coronavirus pandemic.

The consultation on future improvements was held between February and March and examined five of the six commitments made by the government as part of the European Commission’s decision to reapprove the Capacity Market in October 2019.

The Capacity Market had by then been suspended for almost a year after the European Court of Justice overturned a 2014 decision by the commission to approve the mechanism under state rules. The court said the commission had failed to properly investigate concerns that the Capacity Market discriminated against some technologies, in particular demand-side response.

At the time, the government vowed to make improvements regarding:

• The minimum capacity threshold
• Access to long-term contacts
• The rules for new types of capacity
• The volume of capacity procured in year-ahead auctions
• Compliance with new EU regulations
• The direct participation of foreign capacity

The consultation did not examine the last of these commitments but did additionally review the current exclusion of capacity with long-term contracts for Short Term Operating Reserve (STOR).

BEIS has now confirmed its intention to:

• Reduce the minimum capacity threshold from 2MW and 1MW and allow secondary trading below this level so long as an entire obligation is being traded
• Allow demand-side response providers to bid for full 15-year contracts provided they meet the associated capital expenditure requirements
• Introduce a formal annual review of new technologies which are not yet competing in the capacity market but able to contribute towards security of supply
• Enshrine in legislation its commitment as part of state aid reapproval to procure at least 50 per cent of the capacity set aside for year-ahead (T-1) auctions
• Create a reporting and verification mechanism to allow for the introduction of limits on carbon dioxide emissions.
• End the exclusion of long-term STOR contract holders from the Capacity Market

BEIS said respondents to the consultation were broadly supportive of its proposals, with the only exception being ending the exclusion of long-term STOR contract holders. Opponents to this change said it would create market distortions, hand windfall profits to contract holders and encourage more fossil fuel generation to the enter the capacity market.

The exclusion was originally written into the rules to ensure compliance with EU state aid guidelines stipulating that capacity markets should have built in mechanisms to prevent the emergence of windfall profits.

However, BEIS said long-term STOR contracts have not been as lucrative as was expected at the time and are now similar in value to other balancing and ancillary services, none of which are excluded from the Capacity Market. It said the exclusion was therefore no longer necessary.

The new emissions limits are required by EU regulations introduced as part of the bloc’s clean energy package in 2019.

The regulations state that generators commissioned after 4 July last year should not be eligible for capacity contracts if they emit more than 550kg of carbon dioxide from fossil fuels for each kilowatt-hour of electricity they produce. Generators commissioned after this date should meet the limit from 1 July 2025 and henceforth emit no more than 350kg of carbon dioxide from fossil fuels annually for each kilowatt of capacity.

As noted by BEIS, the limits are already in place for new-build generators and unproven demand-side response. The consultation instead concerned the limit for existing generators as of 4 July 2019.

One of the questions it sought to answer was whether the limit should be introduced on the date specified by the regulations or from the beginning of that delivery year. The majority of respondents favoured the latter, arguing that it would be simpler and avoid the need for ad hoc regulations.

BEIS agreed, adding that it would not pose any risk to security of supply and would align with the government’s plans to bring forward the date for the coal phaseout to 2024.

Given the urgency of the issue, the final consultation on the relaxation of rules in response to the coronavirus took place over six days in April. Based on the responses, BEIS has decided to:

• Allow any capacity payments for the 2019/20 delivery year that have been suspended due to a failure to comply with satisfactory performance targets to be paid if and when the requirements are met
• Extend the deadlines associated with a number of milestones if capacity providers can show the delay is linked to the coronavirus pandemic
• Reduce the amount of data required to establish a demand baseline for demand-side response providers
• Allow a longer time for appeals to the energy secretary, the delivery body and Ofgem
• Allow the energy secretary to exercise greater discretion when determining appeals against termination notices

Responding to the announcement, Nina Skorupska, chief executive of the Association for Renewable Energy and Clean Technology (REA), commented: “The changes to the Capacity Market today will help make it easier for cutting-edge clean technologies to compete.

“In particular, we welcome the introduction of emission limits with mandatory reporting and verification. This should help push out some of the highest carbon-emitting plants and redirect funding to cleaner means of ensuring the security of supply.

“Reducing prequalification rules will also be helpful, as will allowing demand-response projects to bid for longer contract lengths. The reduced capacity thresholds will additionally ensure a greater number of smaller sites can participate.”

Vijay Shinde, chief technology officer at Harmony Energy and chair of the REA’s forums for energy storage and large-scale power, said: “The outcome is encouraging to the energy storage industry. The changes will help progress a number of projects which in turn will assist in unlocking the vast potential of renewable power in the UK.

“Today’s positive announcement comes on the heels of the UK regulator last week approving changes ending ‘double charging’ of electricity storage. The current grid charging arrangements, which are distortive and leading to network costs being disproportionately recovered from electricity storage facilities will thankfully end March 2021.

“With these regulatory changes happening, the UK storage industry is heading in the right direction.”