The Department for Business, Energy and Industrial Strategy (BEIS) has issued a call for evidence on the Capacity Market, looking at early actions to align it to net zero as well as a longer-term review.
Following BEIS’ five-year review in 2019, the call for evidence outlines its initial plans to conduct a ten-year review, with a range of developments needing to be taken into account.
These include the increasing challenge of maintaining security of supply as more renewables are added and infrastructure ages, the increased ambition of delivering net zero and the new context of possible implementation of direct cross-border participation in the Capacity Market, which has been impacted by Britain's exit from the European Union.
BEIS is seeking views on the Capacity Market’s performance since its implementation as well as views on the Capacity Market as a continuing mechanism to address system adequacy. It is asking if there is a need for continued market intervention by the government to address electricity security, and if the Capacity Market could address wider system services such as flexibility and stability.
The role of the T-1 auctions has been called into question following a string of low clearing prices, with the T-1 2020/21 auction clearing at just £1.00/kW/y, prompting Cornwall Insight's head of training, Ed Reed to state that with "such a low price, it raises the question of whether running these T-1 auctions for relatively low capacity is beneficial".
Prior to this, the 2019/20 T-1 auction cleared at just £0.77/kWh.
Looking at specific measures, BEIS is to consider limiting access to the longest multi-year agreements available in the Capacity Market to ‘low carbon’ capacity, while considering how to account for ‘lower’ rather than ‘low’ carbon capacity when determining eligibility for multi-year agreements. It is therefore asking for views on how to best account for this, as well as the benefits and challenges of linking future long-term agreements to a new carbon emission limit.
BEIS is also exploring how the connection capacity of wind and solar is determined. This has been previously consulted on by Ofgem, with concerns that allowing Capacity Market Units (CMUs) to self-nominate their connection capacity opens up a risk that some may over-state their connection capacity to circumvent the impacts of de-rating.
However, the preferred approach outlined by Ofgem would require CMUs to output at above 97% of their connection capacity on three separate occasions - something which BEIS said is unlikely for wind and solar. It therefore believes alternative arrangements should be made for these technologies, seeking views on what percentage of connection capacity wind and solar could reasonable be expected to meet three times a year.
BEIS is also exploring potentially strengthening the penalty regime. It said that winter 2020/21 witnessed more volatile wholesale prices and an increase in the number of Electricity Margin Notices and Capacity Market Notices issued relative to previous years.
Whilst the reliability standard of three hours loss of load expectation (LOLE) was achieved, a combination of the greater non-delivery of capacity, a higher proportion of plants reaching the end of their operational lives and an increased volume of capacity not registered as a Balancing Mechanism Unit and therefore not visible to National Grid ESO created tighter operational margins than previously seen since the introduction of the Capacity Market.
In an early view of National Grid ESO's winter outlook released last week, the ESO said it is expecting there to be similar or even slightly lower system margins over this winter, predicting a base case de-rated margin of 4.3GW or 7.3%.
This means the need for capacity to deliver when required is more important than ever, BEIS said.
As it stands, capacity providers that don’t deliver sufficient capacity to meet their capacity obligation during system stress events are required to pay a penalty called a Capacity Provider Penalty Charge. This penalty rate is set at 1/24 of the £/MW clearing price for the capacity obligation awarded to the CMU, with BEIS considering increasing the figure to 1/8.
It is also considering whether to require CMUs that fail to deliver in a stress event to undertake an additional Satisfactory Performance Day, as well as alternative approaches to the penalty regime such as the loss of capacity payments for a pre-determined number of months if a provider fails to deliver during a stress event.
Additionally, BEIS is looking at whether new build Generating CMUs that provide evidence that they need more time for construction than the start of the delivery year of the T-4 auction should be allowed to declare in their prequalification application for a T-4 auction a later first delivery year.
It is seeking views on if there are other approaches to removing barriers for participation for technologies with longer build times, and how best to mitigate any security of supply risk that could occur from a later delivery year.
Lastly, it is asking if it should continue to enable cross-border participation in the Capacity Market, and if this was removed, how target capacity calculations should be altered to reflect the contribution of cross-border flows to security of supply.
It follows BEIS confirming a series of Capacity Market improvements following a consultation with industry last month, with these including extending the existing COVID-19 easements relating to the extended long-stop date and maintaining the minimum capacity threshold at 1MW.
It also confirmed that the proposal to require all Capacity Market Units to also be registered as Balancing Mechanism Units had been placed on hold following feedback highlighting concerns over the implementation timeline.
The full call for evidence, including all 33 questions, can be found here. It closes for responses on 18 October 2021.