Ofgem reveals decisions on capacity market rule changes

Ofgem has revealed its initial decisions on whether or not proceed with a multitude of capacity market rule changes suggested by both itself and industry stakeholders.

After inviting submissions in an open letter in September, the regulator received an “unprecedented” 112 proposals to which it added four of its own.

Of those, Ofgem said it planned to take forward 38 proposals and give further consideration to 13 more. The regulator has launched a consultation on its minded-to decisions which closes on 3 May 2018.

The submissions covered a wide range of topics from participation by renewables to secondary trading of capacity agreements. Some of the most interesting proposals are outlined below:

Participation by renewables – CP263, CP313 and CP314 – consider further

Innogy and Eon both put forward proposals to allow renewables to participate in the capacity market. CP263 (Eon) and CP314 (Innogy) suggested adding individual renewable technologies such as onshore wind, offshore wind and solar to the list of generating classes and allowing them to bid if they are not in receipt of low-carbon subsidies.  CP313 (Innogy) instead suggested creating an “other technologies” generating class.

The companies argued that allowing renewables to take part would spur innovation and ensure the auctions are technology neutral. Ofgem agreed, saying the changes “should help to facilitate innovation and, where it encourages new sites to compete, directly benefit consumers by increasing liquidity and competition in the auction.”

However, the regulator cautioned that, although allowing renewables to participate would be unlikely to affect the clearing price as the capacity they provided would otherwise be deducted from the procurement target anyway, it would increase the total cost to consumers. “There is therefore a policy question of whether it is fair for consumers to pay for these generators,” it added.

Ofgem also warned that adding new technologies classes would “not be simple” as the current rules do not feature a methodology for de-rating wind and solar capacity. It declined to take forward the proposals for the time being but said it would work with government to assess the relevant policy issues.

DSR derived from storage – CP353 – consider further

Scottish Power proposed to extend the recent changes to de-rating factors for batteries to demand-side response (DSR) derived from storage. To do this, DSR capacity market units would be separated into different technology classes with corresponding de-rating factors based on the minimum length of time they could continuously provide capacity.

The firm said the current rules risked over-rewarding storage bidding into the auctions as DSR and could result in storage locating behind the meter in order to circumvent the new de-rating factors for batteries.

Ofgem said it supported further consideration of the proposal: “In particular, we believe more thought needs to be given on how DSR [capacity market units] would incorporate limited duration technologies into their portfolios, and how to take account of limited duration assets in unproven DSRs.”

The regulator said the proposal was not received soon enough to fully consider them for the latest round of amendments. DSR aggregator Kiwi Power has previously told Utility Week it is “completely unworkable”.

Secondary trading – CP247 and CP343 – take forward

Alkane Energy and Welsh Power submitted proposals to expand the eligibility criteria for secondary trading of capacity agreements. At the moment contracts can only be transferred to capacity market units which prequalified for the relevant delivery year but subsequently failed to secure an agreement.

CP247 (Alkane Energy) would extend eligibility to units which did not prequalify for the auction but later met all of the prequalification criteria. Meanwhile, CP343 (Welsh Power) would allow recently commissioned, non-contracted, existing capacity market units to register for secondary trading once they have proven their ability to deliver capacity.

Ofgem agreed to take forward the proposals on the basis they would “increase liquidity and reduce non-delivery risk, benefitting consumers.” The intent behind the existing arrangements was to minimise the risk of participants gaming the system by bidding speculatively or withholding capacity. However, the regulator said there are rules in place to prevent market manipulation which it believes can be enforced effectively.

“There is also no guarantee that capacity would be available in the secondary market, and any participant trading may have to pay a premium to the original party for doing so, reducing the incentive to carry out this strategy,” it added.

Contract lengths – CP257 – rejected

Client Earth called for all participants to be allowed to bid for three-year contracts and potentially 15-year contracts in T-4 auctions. The environmental law group said the current rules, which restrict 15-year contracts to new build generation and three-year contracts to new build and refurbished generation, do not adhere to the principle of technological neutrality.

Its submission to Ofgem made particular reference to the treatment of demand-side response (DSR), saying the current rules put them in a similar situation to existing generation that does not require investment to participate. By contrast, Client Earth said DSR providers may need to make “significant” upfront investments to install the necessary technical equipment on customers’ premises to deliver capacity.

Ofgem said it was unable to progress the proposal as it would require a change to not only capacity market rules but also regulations. The regulator said it is unable to amend these regulations and must ensure consistency between the two.

Auction eligibility for existing generation – CP293 – take forward

EP UK Investments, the owner of Eggborough Power station, asked for existing generation which opted out of a T-4 auction on the basis it would close by the first delivery year to be allowed to bid in the T-1 auction for that year. The company argued the proposal would increase liquidity in T-1 auctions and therefore lower costs for consumers.

It also noted that under the current arrangements existing generation can opt out of the T-4 auction and still enter the T-1 auction if they state they will remain operational. EP UK Investments said this provides an incentive for generation units which are unsure of their future status to say they will remain open, potentially resulting in too little capacity being procured in the T-4 auction.

Ofgem said the rule change could introduce some risk of withholding in the T-4 auction but nevertheless agreed to take forward the proposal on the grounds it should “improve auction liquidity and market transparency on future plant availability, and therefore increase the competitiveness of the process.”