The UK government has published its response to the Capacity Market (CM) Phase 2 consultation and 2024 rule amendments to support auction liquidity.
This concludes consultation on CM reform aiming to improve security of supply, align the scheme with net zero goals and improve its functioning.
Due to time constraints, the Department for Energy Security and Net Zero (DESNZ) will not amend the Electricity Capacity Regulations 2014; changes will be implemented through amendments to the Capacity Market Rules 2014.
This will ensure that the proposals are in place ahead of the 2024 prequalification window for the 2025 CM auctions.
The proposals intended for implementation include the proposal to roll over a temporary amendment to enable mothballed plans to prequalify for the CM auction, and a proposal to support battery participation in the CM. Over 70% of respondents, predominantly industry stakeholders, supported the changes.
The first will see the extension of the measure introduced for the 2022 and 2023 prequalification windows that allowed Existing Generating Capacity Market Units (CMUs) to provide performance data older than 24 months within the prequalification window. Plants will still have to demonstrate satisfactory performance during the delivery year.
The measure is intended to increase the pool of capacity eligible to prequalify for the CM, enabling higher participation that may increase liquidity and put downward pressure on clearing prices.
To support battery participation in the CM, government will introduce a definition of ‘Permitted Battery Augmentation’ for battery Storage CMUs within the CM Rules. Permitted Battery Augmentation will allow CMUs in a ‘Storage Generating Technology Class that is Duration Limited’ to replace and/or add batteries at an existing CMU site, to enable batteries to maintain the level of capacity required to meet Extended Performance Test (EPT) requirements.
Speaking on the government response to Phase 2 CM consultation, William Stephenson, senior associate at Aurora Energy Research, told Current±: “This may have a considerable impact on the way that batteries bid into the market, accounting for future degradation and costs of augmentation. Importantly, this proposal does not seem to be applicable for existing Capacity Market Agreements, meaning that batteries that have already taken contracts would miss out on this option.”
Auction liquidity and ESO’s storage de-rating factors
Between April and May 2024, consultation was held on proposals to improve auction liquidity by refining the emissions verification process.
Changes to be implemented include amending rules that currently require CM users to use a Combined Heat and Power Quality Assurance Programme (CHPQA) certificate to better align with the definition of an ‘Emissions Year’ in the rules; enabling applicants to have their emissions verified after the application deadline to prequalify for the CM; and accepting older versions of Fossil Fuel Emissions Declarations (FFEDs) at prequalification.
National Grid ESO has also published its Electricity Capacity Report and response to the Storage De-rating factors consultation, the first methodology update in six years.
It has implemented the Scaled Equivalent Firm Capacity (EFC) changes in the 2024 Electricity Capacity Report, revising the methodology for calculating de-rating factors for duration-limited storage technologies.
Historically, energy storage’s de-rating factor was dependent on its duration: 0.5-hour systems got roughly 4-5% of the tariff with a phased increase to about 90% for systems with 8-hour or higher duration.
According to Stephenson: “This is good news for battery storage in the immediate next set of auctions, in February 2025, since de-rating factors, or the proportion of any asset’s capacity that gets paid its CM contract value, will increase.
“It reverses the trend that’s been experienced in recent years of de-rating factors falling sharply for battery storage and will therefore more strongly reward projects that are successful in the next auctions but procure fewer of them, since each asset will count for more towards the overall market’s procurement targets.”
As our sister site Energy-Storage.news explored in a premium article, before the ESO’s methodology update, operators could bid on projects at a higher duration than the system really had.
Stephenson explained how in February’s T-4 auction this year, “we saw several projects enter with 9hr duration, despite that not representing the duration for which they could maintain their full export capacity output, since this gave disproportionate financial rewards”.
As such, the update will prevent the crowding of the market around a single duration.
He added: “The methodology update here makes de-rating factors basically proportional with storage duration, so assets are less incentivised to game the system in this way.”
