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:
- There needs to be consideration as to whether, and how, to enable participation by subsidy-free renewables in the CM.
- 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.
