Capacity market penalty hike put on back burner

The introduction of stiffer penalties for companies which fail to honour their capacity market (CM) obligations will be pushed back beyond next year’s auction, the government has revealed.

The tougher penalty regime and moves to cut the emissions limits on new and refurbishing CM plants are two elements of wider reforms of the back-up power scheme that require further work, according to a Department for Energy Security & Net Zero paper published today (12 June).

The document, which outlines an analysis of responses to a recently concluded consultation on CM reforms, says the government does not intend to make changes to non-delivery penalties ahead of the prequalification window for next year’s capacity auction.

The consultation paper, published earlier this year, proposed fining companies a quarter of the £/MW hour clearing price if they fail to meet their CM obligations when called on at times of system stress. The current penalty rate is 1/24^th of the clearing price.

However, the government has decided to carry out further work on its penalty package, after concerns were raised about potential “unintended consequences” for security of supply by respondents to the consultation,

Respondents to the consultation suggested that higher penalties could reduce appetite for participation in the CM, particularly for sources of generation that may be unable to dispatch power immediately, such as wind.

The responses also highlighted the risk that setting a high rate could result in CM plants rapidly exceeding their monthly penalty caps, thus reducing their incentives to participate in the market.

Also requiring further work are steps to cut the emissions limit for new build CM plants from 550 to 100g CO2/KWh, which would make unabated gas power stations ineligible from 2034 onwards.

Further analysis and development are required to balance ambitions for a clean energy system with energy security impacts resulting from increased geopolitical uncertainty, says the response.

“While the government recognises that progressing this policy as part of phase 2 harbours the risk of a new tranche of long-term agreements being awarded to unabated capacity in the CM auctions in 2024, the impact of this capacity on our 2035 ambition must be qualified by our ongoing commitment to enable clear and effective decarbonisation pathways for existing capacity.”

Despite the delays, reforms which get an immediate go ahead include extending temporary arrangements introduced in 2022 to removes barriers to mothballed plants entering the CM.