Government to make further adjustments to Capacity Market

Following a consultation in March on additional measures to keep the Capacity Market (CM) running smoothly during the current standstill period, the government has published a decision detailing planned legislative changes.

The government maintains that the CM scheme is still the right mechanism to provide security to electricity supplies at the least cost. In order to continue this, the government intends to:

  • Replace the planned T-4 auction with a T-3 auction for delivery in 2022/23.
  • Allow certain renewable technologies to participate.
  • Remove the historical floor from the interconnector de-rating methodology.
  • Make minor corrections and additions to the CM Rules to ensure they are clear and operate as intended.

When implemented, these rules will see renewable technologies allowed to bid for contracts for the first time under the Capacity Market, having previously failed to qualify due to funding through subsidies. Renewable generators that do not receive support via the Contract for Difference, Renewables Obligation or Feed-in Tariff schemes will be allowed to participate.

The rearranged date for the delayed 2018 T-1 Capacity Market Auction is scheduled to go ahead on 11-12 June 2019 for delivery in the 2019/20 year.

The current state of the Capacity Market

The CM scheme is currently under suspension, following a ruling on 15 November 2018 by the European Court of Justice that its design was biased against small, clean energy and therefore shouldn’t be eligible for State Aid approval. Under EU State Aid rules, it is required that member states need to consider alternative options to meeting power demand, before subsidising fossil fuel generation.

The Court’s decision means that payments made under the CM scheme will be frozen until the UK Government can obtain permission from the European Commission to continue in an official capacity.

The European Commission has to undertake a formal investigation of the CM to clear it. If successful, the Department of Business, Energy and Industrial Strategy (BEIS) have said that auction results to date will still stand and that payments are legal.

In the meantime, BEIS has asked the National Grid Electricity System Operator (ESO) to keep the Capacity Market scheme running, short of making payments. BEIS has said that if those with contracts deliver their obligations, they may then be eligible for deferred payments if the market is reinstated.

BEIS expects a decision by the Commission to be made by early next year.

How the closure may affect you

In the short-term the Capacity Market charge will still be levied on customer’s bills, currently accounting for 0.3p/kWh, approximately 2.5% of a bill. This means that consumers will likely see little immediate change.

However, the ongoing suspension could mean a halt to the charge. An unsuccessful investigation by the European Commission could potentially see UK consumers receive a refund for previous CM charges paid through their electricity bills. This could be partially offset by a resultant hike in wholesale energy prices as guarantees of supply from larger operators are no longer certain.

Smaller operators in the scheme may be faced with a dilemma as missed capacity payments could result in cash flow issues. However, a closure to the Capacity Market could see the early shutdown of some coal plants, raising market power prices, and providing opportunity to these smaller operators.

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Capacity Market: auction Rule change could raise costs for consumers

This week saw the government confirm plans for the UK’s next Capacity Market auction for delivery in 2022/23.

The auctions are expected to take place next year, with a price cap of £75 per kilowatt per year and a price taker threshold of £25 per kilowatt per year.

The Department for Business, Energy and Industrial Strategy (BEIS) announced that for the T-4 auction, it was targeting a total volume capacity of 46.7GW. Of this, 400MW will be set aside, leaving 46.3GW to be auctioned in the T-4.

In addition to this, BEIS have added a further 4.6GW of capacity to the T-1 auction for delivery in 2019/20 to ensure generation needs can be met in the event of a surge in demand during the winter season.


Comparisons to previous auctions

The threshold lies much higher than prices at the previous capacity auction earlier this year, which cleared at a record low of £8.40 per kilowatt per year. Following recommendations from the National Grid, the latest price threshold is to take into account the UK leaving the European Union, with the UK either remaining involved in internal energy market or setting up a new future agreement with comparable arrangements.

When compared with the National Grid analysis for 2021/22 in last year’s report, the 2018 recommendation for 2022/23 is 3.8GW lower. This can be attributed to two reasons; the first being changes that affect the total de-rated capacity required and the second reason being changes that affect the split of total de-rated capacity between eligible and ineligible capacity. These partially stem from lower peak demand and increases in renewable contributions at peak times.


How will this impact you?

With an agreed threshold price from the Government, auction results will likely see an increase to costs for energy bill payers. Annual Capacity Market costs from April 2018 to March 2019 saw a price of £3.68/MWh for customers. Last auction saw the lowest Capacity Market auction prices to date, so a return to around previous amounts will be a noticeable change.


Additional effects

The price taker threshold point will seek to drive investment in back-up generation and flexible grid services. Developers of battery storage were unwilling to commit to the low prices on offer at the last auction. However, around 500MW of battery storage capacity was contracted at a previous clearing price of £22.50 per kilowatt per year suggesting that a higher price will see new contracts.

One notable change announced was that payments for providing embedded generation are set to drop from £45 per kilowatt per year to just £3.22 per kilowatt per year between 2018 and 2020.

A significant payment reduction could result in higher capacity market clearing prices which may see larger energy users explore the perks of taking advantage of the flexibility available in their energy demand. This in turn could see more Demand Side Response (DSR) participation as they look at opportunities in balancing services and wholesale markets.


Stay informed with EIC

EIC can help you remain informed of price increases and help you budget for any impact these auctions may have on your costs. To find out more about the Capacity Market you can contact us by calling 01527 511 757, by email