Tougher penalties for Capacity Market non-delivery proposed

The government has proposed tougher penalties for companies that fail to honour their Capacity Market obligations.

In a new consultation paper, the Department for Business, Energy and Industrial Strategy (BEIS) has outlined a series of proposals designed to align the Capacity Market with the UK’s wider 2050 net-zero emissions target while maintaining security of power supply.

Alongside proposals to tighten emissions from Capacity Market generation and introduce new three-year contracts for flexible low carbon technologies, such as demand side response (DSR) and storage, the paper moots much stronger penalties for companies that do not deliver back up power when required.

Under the BEIS proposals, those failing to meet their Capacity Market obligations during a system stress event will be required to pay a quarter of the £/Mw hour clearing price at the time. The current penalty rate is 1/24^th.

However, the cap on penalties will not be raised under the government’s proposals, meaning that capacity providers will not be out of pocket if they fail to deliver during stress events.

Justifying the tougher penalty rate, the document says: “A significantly strengthened penalty rate sends a clear signal to deter non-delivery in a system stress event without increasing the financial risk faced by capacity providers to the same extent as a more punitive penalty cap.”

The document also outlines a proposal for a new lower emissions limit in the Capacity Market which will kick in for new build plants from October 2034.

The emissions intensity limit, which new-build units must meet in order to secure multi-year agreements, has been cut from 550g to 100 CO2/KWh.

The new emissions intensity limit would enable lower carbon source combustion plants, such as CCS (carbon capture and storage) and hydrogen, to qualify for the capacity market but not unabated gas plants.

However, existing unabated gas plants will continue to qualify for support beyond 2035 under the paper’s proposal not to change the yearly limit on emissions, which is the alternative route units can use to access the Capacity Market.

Retaining this unchanged yearly limit for existing units would enable unabated gas plants with 40% thermal efficiency to operate up to around 750 hours per annum, according to the paper.

Running the two limits will incentivise unabated gas generators to either abate emissions or operate on a limited basis as peaking plants, it says.

The paper also proposes the introduction of a new type of three-year capacity market contract for low carbon flexible capacity, such as DSR and smaller-scale electricity storage.

These shorter contracts will not have to meet the minimum capital expenditure thresholds.

However these capex thresholds will continue to apply to 15-year Capacity Market contracts in order to help bring forward more capital intensive plant.

The introduction of the three-year contracts is designed to stem the stagnation in the level of the DSR coming forward via the Capacity Market by enabling such projects to benefit from longer term contracts that will help to cover costs, such as for setting up and maintaining metering and communications equipment.

Consultation on the paper’s proposals runs until 3 March.

Responding to the consultation paper, Energy UK deputy director of policy Adam Berman said: “Reforming the capacity market is key to reaching a net zero power system. It’s critical to ensure that we can incentivise new forms of flexible low carbon generation.

“Phasing out unabated gas is absolutely key but can only be met by rapidly expanding our short- and long-duration storage through technologies such as green hydrogen, batteries, and pumped hydro storage”.

RenewableUK chief executive Dan McGrail said: “We need to incentivise more investment in new low carbon flexibility in our modern energy system based on renewable technologies including wind, solar, tidal stream and green hydrogen.

“This will strengthen the UK’s energy security, enabling us to move closer towards energy independence in the years ahead”.