The government seeks views on changes to the capacity market that would affect both existing and future contracts.
It proposes to change the regulations so that the capacity market supplier charge is collected based on gross, instead of net demand.
That would effectively remove a large chunk of revenue from embedded generators with capacity market contracts. Currently, those generators receive an income stream both from the capacity market contract itself, and the money suppliers pay them for helping them to reduce their use of the transmission system. By changing the charging methodology, government will remove the latter element, which it suggests is worth around £15/kW – almost as much as capacity market payments.
What is more, the changes will affect contracts already awarded, as the department for Business, Energy and Industrial Strategy said grandfathering of existing contracts is not on the cards.
According to the consultation document, “the Government recognises the challenge to investors in absorbing changes to revenue streams that they may have factored into business cases. However, to the extent that an investor/CM participant assumes a future revenue as a result of embedded benefits from a CM levy, they ultimately do so at their own risk; and as such they should factor in the possibility that this levy could be subject to change in future and discount it accordingly, as with other variables that an investor needs to consider,” it states. “The Government does not, therefore, propose to introduce grandfathering arrangements.”
The action is part of a pincer movement by BEIS, Defra and regulator Ofgem in trying to curb unintended consequences of interventions in the energy market. They believe small plant operators may be over-rewarded for the generation they deliver, with payments to maintain the transmission system affected as a result.
However, some analysts believe sweeping changes by Ofgem to the embedded benefits regime without a proper review could be disastrous for firms with onsite generation as well as dedicated small power plants.
In addition, by making retrospective changes to contracts, government may open itself up to the possibility of legal challenge.
See the consultation here.