Government is proposing to cap capacity payments made to generators that have received financial support via risk financing schemes. The rule changes will only apply to generators that have not yet been commissioned and will not apply to those awarded contracts in auctions to date.
The department of Business, Enterprise and Industrial Strategy (BEIS) is consulting on the changes and wants responses by 21 October. It intends to implement the changes ahead of this winter’s capacity auction.
The former Department of Energy and Climate Change (Decc) had previously mooted ruling out generators that had received certain risk financing via Enterprise Investment Scheme, the Seed Enterprise Investment Scheme and Venture Capital Trusts. However, BEIS has noted concerns that such a retrospective move would damage investor confidence. It believes capping payments will retain a sufficient number of bidders in the auctions to deliver reasonable liquidity.
The rule change is the latest in a string of tweaks to the capacity market as government tries to incentivise large new build gas plant, rather than small-scale capacity, much of which has been diesel and gas reciprocal engines.
It comes as Ofgem plans changes to embedded benefits. These are payments to distribution connected generators for services such as avoiding congestion on the transmission network. The so called Triad payment makes up a significant chunk of embedded generators’ revenue. However, government and parts of industry believe they are distorting the capacity market, taking the view that the increasing value of embedded benefits effectively makes capacity payments a windfall. Ofgem plans to first cap and then cut those benefits.
National Grid, through the Connection Use of System Code panel, is also looking at the issue. Proposals include stopping generators with the Triad payments entering the capacity market.
Meanwhile, Defra is working up emissions rules which will effectively rule out unabated diesel plant from bidding into the capacity market – rules which it has warned may apply retrospectively from the 2016 auction onwards.
The intended result is a much higher auction outturn, although industry experts predict even doubling the capacity payment is unlikely to incentivise large new-build gas plant.
See the BEIS consultation here.