CO2 limits amendments to Capacity Market

Importantly, the regulation has introduced new requirements for capacity mechanisms regarding CO2 emissions limits.

The new requirements

Any generation capacity that started commercial production from 4 July 2019 that emits more than 550g of CO2 emissions per kWh will not be eligible to receive payments or commitments for future payments under a capacity mechanism.

In addition, from 1 July 2025, generation capacity will be ineligible for payments and commitments for future payments under capacity mechanisms if it;

  • began commercial production before 4 July 2019 and emits;
  • more than 550g of CO2 emissions per kWh and
  • more than 350kg CO2 of fossil fuel origin on average per year per installed kWe.

Member States of the EU will be required to adapt their capacity mechanisms to comply with the new rules by 31 December 2019.

What will be affected?

The emissions limits are expected to affect coal, diesel and potentially older inefficient gas generation. The changes will also prevent existing diesel and other generating components that do not meet emissions limits from being utilised as part of a DSR (Demand Side Response) CMU (Capacity Market Unit).

The Government will be consulting on the following points:

  • Whether emissions limits for existing generation should take effect on 1 July 2025, or 1 October 2024.
  • What length of agreements should be awarded in the upcoming T-3 and T-4 auctions to refurbishing fossil fuel generation that will not meet the emissions limits.
  • How best to deal with false or inaccurate Fossil Fuel Emissions Declarations and the recovery of capacity payments in such cases.

The consultation will run from 22 July 2019 until 6 September 2019.

Ongoing Capacity Market issues

The Capacity Market continues to be under suspension, following the ruling from the European Court of Justice in November 2018. The investigation by the European Commission is expected to conclude by the end of the year. Until a final decision is reached, National Grid are running the scheme as normal, short of making payments, to ensure that capacity providers may be eligible for deferred payments after the standstill period.

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.

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Energy Policy Dates for 2019

As we look ahead to 2019, we’ve outlined key energy industry changes and dates to take action by.

EU ETS – Market Stability Reserve (MSR)

1 January – MSR Implementation

The European Commission is introducing a solution to the oversupply of allowances in the carbon market, which will take effect in January.

EU carbon allowances, or European Allowances (EUAs) serve as the unit of compliance under the European Emissions Trading Scheme (EU ETS). In response to a build-up of these allowances, following the 2008 global financial crisis, the European Commission has introduced a long-term solution known as the Market Stability Reserve (MSR). With Brexit looming, there’s uncertainty as to whether these changes will affect the UK.

 

Energy Price Cap

1 January – Price Cap implementation

Price protection for 11 million customers on poor value default tariffs will come into force on 1 January 2019. Ofgem has set the final level of the price cap at £1,136 per year for a typical dual fuel customer paying by direct debit.

When the price cap comes into force suppliers will have to cut the price of their default tariffs, including standard variable tariffs, to the level of or below the cap, forcing them to scrap excess charges. The cap will save customers who use a typical amount of gas and electricity around £76 per year on average, with customers on the most expensive tariffs saving about £120. In total, it is estimated that the price cap will save consumers in Great Britain around £1 billion. Read more here.

 

Ofgem’s Targeted Charging Review (TCR) – the end of Triad season?

4 February – Consultation conclusion

Ofgem has launched a consultation, due to conclude on 4 February 2019, into how the costs of transporting electricity to homes, public organisations, and businesses are recovered. Proposed changes could remove the incentive for Triad avoidance.

Costs for transporting electricity are currently recouped through two types of charges:

  • Forward-looking charges, which send signals to how costs will change with network usage
  • Residual charges, which recover the remainder of the costs

In order to ensure that these costs are shared fairly amongst all users of the electricity network, Ofgem are undertaking a review of the residual network charges, as well as some of the remaining Embedded Benefits, through the Targeted Charging Review (TCR). Ofgem are exploring the removal of the Embedded Benefit relating to charging suppliers for balancing services on the basis of gross demand at the relevant grid supply point. This is important as it would eliminate the incentive of Triad avoidance.

 

Brexit

29 March – Scheduled date to leave the EU

Whilst not a specific energy policy announcement, the UK’s departure from the EU is a significant event that has raised a lot of questions concerning UK energy security.

We put together a Q&A on how Brexit may impact the UK energy industry and climate change targets. Read more here.

 

Closure of the Feed-in Tariff (FiT) scheme

31 March – Scheme Closes

The Government has confirmed plans to remove the export tariff for solar power, which currently provides owners of solar PV panels revenue for excess energy that they generate. This will coincide with the closure of the Feed-in Tariff (FiT) scheme.

The FiT scheme was introduced in April 2010 in order to incentivise the development of small scale renewable generation from decentralised energy solutions such as solar photovoltaics (PV), wind, hydro, anaerobic digestion and micro Combined Heat and Power (CHP). Generators were paid a fixed rate determined by the Government, which varied by technology and scale.

The scheme will close in full to new applications from 31 March 2019, subject to the time-limited extensions and grace period.

 

Streamlined Energy and Carbon Reporting (SECR)

1 April – SECR implementation

Streamlined Energy and Carbon Reporting (SECR) is on the way, due to come in to effect from 1 April 2019. The introduction of this new carbon compliance scheme aims to reduce some of the administrative burden of overlapping schemes and improve the visibility of energy and carbon emissions when the CRC scheme ends.

EIC can help you achieve compliance. Read more about Streamlined Energy and Carbon Reporting (SECR) by clicking here.

 

UK Capacity Market

Early 2019

The UK Capacity Market is currently undergoing a temporary suspension, issued by the European Court of Justice (ECJ), on the back of a legal challenge that the auction was biased towards fossil fuel generators.

The ECJ’s decision means that payments made under the Capacity Market (CM) scheme will be frozen until the UK Government can obtain permission from the European Commission to continue. In addition, the UK will not be allowed to conduct any further CM auctions for energy firms to bid on new contracts.

The UK government has since iterated that it hopes to start the Capacity Market as soon as possible and intends to run a T-1 top-up auction next summer, for delivery in winter. This is dependent on the success of a formal investigation to be undertaken by the European Commission early in the New Year.

 

Spring Statement and Autumn Budget

The UK Government’s biannual financial updates are always worth looking out for.

The Spring Statement will be delivered in March and the more substantial Autumn Budget is scheduled for October. The 2018 budget had a very heavy focus on Brexit, with very little to say concerning energy policy. It is likely this will be the case for the Spring Statement and potentially going forward.

 

Energy Savings Opportunity Scheme (ESOS)

5 December – ESOS Phase 2 compliance deadline

ESOS provides a real chance to improve the energy efficiency of your business, on a continual basis, to make significant cost savings.

In Phase 1 of ESOS we identified 2,829 individual energy efficiency opportunities, equivalent to 461GWh or £43.9m of annual savings across 1,148 individual audits. Our team also helped over 300 ESOS Phase 1 clients avoid combined maximum penalties of over £48million.

With EIC you can achieve timely compliance and make the most of any recommendations identified in your ESOS report.

 

Stay informed with EIC insights

Our Market Intelligence team keep a close eye on the energy markets and industry updates. For the most timely updates you can find us on Twitter and LinkedIn Follow us today.

Visit our website to find out more about EIC Market Intelligence and how we keep our clients informed at a frequency to suit them.

UK Capacity Market suspended by European Court of Justice

Somewhat lost amongst the noise surrounding the proposed Brexit Agreement comes the news that UK’s Capacity Market (CM) will undergo a temporary suspension.

 

What is the Capacity Market?

The Capacity Market allows plant to offer capacity to the electricity system at a price set by auction. The market has been introduced to prevent a short-fall in electricity generation due to the closure of older fossil fuel plant. Every year, the Government decides how much capacity will be needed to safeguard the system. Both generators that are currently operating, and those that are being developed, can take part in the scheme.

 

The Court’s Ruling

The ruling from the European Court of Justice (ECJ) follows Tempus Energy’s challenge to the UK Government that took place in 2014. The company took issue with the decision to grant the UK’s Capacity Market with State Aid approval, making claims that the design was biased against small, clean energy, making it easy for coal, gas, and diesel generators to control the market.

The ECJ said that the European Commission was wrong to not more closely investigate the UK’s plans to establish the CM in 2014, when the organisation was originally responsible for assessing whether the policy complied with State Aid rules.

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 rules also require any measures taken to increase capacity to be designed in a way that encourages operators of new clean technologies.

 

What’s next?

The ECJ’s decision means that payments made under the Capacity Market scheme will be frozen until the UK Government can obtain permission from the European Commission to continue.

Furthermore, the UK will also not be allowed to conduct any further CM auctions for energy firms to bid on new contracts. The nearest auctions were scheduled for early 2019.

Sara Bell, CEO of Tempus Energy, said: “This ruling should ultimately force the UK Government to design an energy system that reduces bills by incentivising and empowering customers to use electricity in the most cost-effective way – while maximising the use of climate-friendly renewables.”

 

How will this affect you?

The Government has released a statement saying that security of supply will not be impacted over this winter.

They acknowledge a ‘standstill period’ on the Capacity Market during which they will be working closely with the European Commission in order to aid their investigation and seek approval for the Capacity Market.

The cost of the Capacity Market is recouped via customers and currently accounts for 2.9% of an electricity bill.

The suspension of the payments to generators may result in customers receiving a refund, or at least a halt to ongoing payments while the suspension is in place.

However, if the scheme is cancelled all together it would lead to the removal of one cost to customers; the Capacity Market charge is just one of numerous non-commodity charges, paid on top of the wholesale price of energy, that are rapidly increasing.

 

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Capacity Market under review

The overall objectives of this review are to assess whether:

  • the CM is needed in future;
  • the CM currently meets its objectives of ensuring security of supply, cost effectiveness, and avoiding unintended consequences;
  • these objectives remain appropriate; and
  • they can be achieved in the future in a way that imposes less regulation.

 

The call for evidence

Both the CM and EPS were introduced five years ago as part of the Energy Act 2013. The announced ‘call for evidence’ is the first step in the review process.

The Government believes both the Capacity Market and the Emissions Performance Standard are working broadly as intended. The initial document states they “do not foresee the need for fundamental change.” However, this review will allow feedback to help them understand more about stakeholder issues and whether there are any changes to be considered. With this in mind, the Government has already indicated that there are some desirable changes that could improve the CM to ensure it continues to meet its objectives in the future.

Based on stakeholder feedback, two initial priority issues have been noted for the Capacity Market review:

  1. There needs to be consideration as to whether, and how, to enable participation by subsidy-free renewables in the CM.
  2. Following the latest round of CM auctions there has been feedback in relation to interconnectors. It’s been suggested that the contribution to security of supply made by interconnectors added to the system in future will face diminishing returns, as they are reliant on the same limited pool of spare capacity in the interconnected countries. The Government will consider whether changes to the methodology are required to ensure future interconnectors are not over-compensated relative to their real contribution.

 

Ofgem review

In addition to the Government review, energy regulator Ofgem will carry out a separate review on the Capacity Market to support the process. Ofgem will be announcing the details concerning the content and arrangements of their review at a later date. However, it can be assumed that it will seek to address very similar themes.

 

The Emissions Performance Standard

The objective of the EPS is to ensure that new fossil-fuel-fired electricity generation helps improve security of supply but still contributes to the UK’s decarbonisation objectives. The mechanism is a limit on the carbon dioxide emissions produced by new fossil-fuel generation plants. The Government is seeking stakeholder views on the effectiveness of the EPS. The five-year review of the EPS will answer similar high-level questions to the CM Review.

 

What to look out for

The call for evidence will be open between 8 August and 1 October 2018. A summary of the responses will be published later this year. The outcomes of these reviews will then be reported to Parliament in summer 2019.

 

Impact on consumers

The Capacity Market’s annual auctions define both how much capacity has been bought and at what price. The overall costs for both the capacity bought and the administration of the scheme are passed on to consumer bills, with the cost of capacity being the largest element.

EIC supports security of supply and any move to maintain a fairly structured scheme that keeps price impact to customers at a minimum. We can help you prepare for and control the impact of all your non-commodity costs, including Capacity Market Charges, with the help of our Long-Term Price Forecast Report.

With this report, you can access year-on-year price projections for the next five years. The report calculates future energy prices which include the ever-increasing green subsidies, network costs, and taxes.

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 info@eic.co.uk