Ofgem gives update on five-year capacity market review

Ofgem has issued an update on its first five-year review of the capacity market.

The regulator launched the review in an open letter to stakeholders in September 2018, which sought views on the performance of the scheme so far and whether it could be made less burdensome on those who take part.

In April 2019, Ofgem published a consultation setting out the areas it wished to explore, including the arrangements for secondary trading, the incentives for the delivery body, National Grid ESO, and the rule-change process itself.

It also proposed some initial amendments to the capacity market rules.

Ofgem has now reached a decision on which of the proposals to take forward, as detailed below. The regulator said will shortly publish a report on the five-year review as well as a forward work plan for its remainder.

Progress reports

Contract winners are currently required to submit a progress report at least once every six months from the start of the first June after the awarding of an agreement, until they reach the substantial completion milestone or a non-completion notice is issued.

If there is any material change in progress, then they must present an independent assessment from a technical expert. Ofgem said these assessments can be expensive to commission but often cost the same, regardless of the project size. As a result, smaller projects are likely to be disproportionately affected.

It therefore proposed to remove the requirement to submit regular progress reports and the associated expert assessments. Ofgem has instead suggested placing an obligation on company directors to inform the delivery body if projects suffer any substantial setbacks.

However, following pushback from stakeholders, who warned that this could leave National Grid blind to the state of progress, the regulator has decided to consider these proposals further.

Planning consents

As part of the pre-qualification process, applicants are required to demonstrate they have secured the relevant planning consents. But they can also request to defer submission until 22 days before the auction they are applying to if there is an unexpected delay beyond their control.

Back in 2017, Ofgem decided to remove this option, but delayed the change for one year to give applicants time to adjust their procedures.

However, stakeholders have since raised concerns over how this would affect larger projects which need to secure a development consent order – a process which typically takes between 18 months and two years.

In April, Ofgem proposed to halt this rule change and either maintain status quo, defer the requirement to submit relevant planning consents until after the auction, or add an exemption for projects seeking a development consent order.

The regulator has now decided to shelve the amendment as planned but is still considering which of the three subsequent options to take.

Secondary trading

Contract winners are currently only able to begin secondary trading following the year-ahead (T-1) auction for the relevant delivery year. Ofgem said this limits trading to a “short and potentially unpredictable” period immediately before the capacity obligations come into effect.

The regulator proposed to extend the secondary trading window to the results day for the four-year-ahead (T-4) auction for the relevant year, arguing this would have no impact on the integrity of the capacity market, but would enable contract holders to make better commercial decisions.

The proposal received strong support from stakeholders. However, Ofgem said this change has wider implications than it initially anticipated and has therefore decided to give it further consideration.

Capacity market register and demand-side response

As part of its annual rule change process in 2017, Ofgem considered two proposals – CP270 and CP271 – which sought to increase transparency by requiring more information to be listed in the capacity market register, including the primary fuel type and the details of all components within a capacity market unit (CMU).

Ofgem decided to delay their introduction pending the implementation of its own proposal – OF12 – which would allow the components in a demand-side response CMU to be altered within a delivery year.

With OF12 now being finalised, Ofgem has said it will proceed to enact all three of the proposals. OF12 will take effect following the current pre-qualification round. The regulator said it is still working on a date for the introduction of the other two.

Interconnectors

Ofgem has chosen remove requirements on interconnectors to declare their technical requirements, forecasted reliability and possession of an interconnection license during pre-qualification.