Government says it will consider multi-year agreements for demand-side response in the Capacity Market – if there is evidence to support they are required.
The department for business, energy & industrial strategy (Beis) is mulling a number of Capacity Market changes as part of its five-year review, many relating to demand-side response (DSR).
The Capacity Market (CM) is currently suspended pending the outcome of an investigation by the European Commission. It was halted after the European Court of Justice ruled that the Commission had failed to effectively scrutinise the CM’s compatibility with state aid rules.
The ruling came about after Tempus Energy launched legal action in 2015. CEO Sara Bell claimed the market was anti-competitive because DSR could only bid for one-year CM agreements whereas new build generation could bid for 15-year agreements. Bell argued that the Commission did not conduct a proper investigation into state aid compatibility – which the ECJ upheld, ruling in Tempus’ favour.
The government believes the CM will be reinstated without requiring major changes later this year, but said it intends to review potential issues related to DSR. These include contract lengths, de-rating factors, delivery assurance and the 2MW minimum threshold, which may be brought down to 1MW.
“Our preference is to maintain one year agreement lengths wherever possible, unless there is strong evidence to deviate away from this,” states the document. “Regarding DSR, no quantitative evidence, or any other sufficiently strong evidence [has come forward] that could be used to inform a policy decision on whether multi-year agreements for DSR are necessary.”
However, Beis said it “remains open” to considering multi-year agreements for DSR if evidence supports that view. It committed to research DSR contract lengths and engage with industry and the EMR Delivery Body as part of evidence gathering.
The department pointed out that 15-year agreements represent 2 per cent of the total capacity secured to date through the CM and three year agreements represent less than 1 per cent – though it expects a greater number of multi-year contracts in future.
Penalties and credit cover
Beis intends to impose stiffer penalties for non-delivery during stress events. It is also considering suggestions from industry to “progressively release credit cover as DSR components are registered over time, with an increase in cover required just ahead of T-1 for any remaining unfilled capacity at this time”. It thinks stiffer penalties will also boost secondary trading.
Transparency and derating
Beis said there is a need for transparency of DSR components to ensure de-rating factors are fair and accurate. For example, generation or storage behind the meter acting as ‘DSR’ would currently receive an 86 per cent de-rating factor, whereas a half hour battery registered as a battery capacity market unit is de-rated as low as 10 per cent. The department said it would work with the Delivery Body on de-ratings for DSR – including the need for a duration component.
Based on the results of T-4 auctions to date, Beis believes that up to 70 per cent of DSR may currently be behind the meter generation.
DSR made up of generation assets will also have to consider new EU emissions limits designed to stop dirtier assets receiving capacity payments.
As of this month, any new plant that emits more than 550g/CO2 of fossil fuel origin per kWh and more than 350 kg CO2 of fossil fuel origin on average per year per installed kWe, cannot receive capacity payments.
By 2025, those limits apply to any existing plant. The emissions limits “will affect coal, diesel and possibly some old inefficient gas generation, including any such fossil-fuelled components included as part of DSR capacity market units”, states Beis.
As such, the department is consulting on Capacity Market rule changes to accommodate the legislation, such as contract lengths for refurbished plant likely to exceed the emissions limits, and how to police and penalise false or inaccurate fossil fuel emissions declarations.
See the CM emissions limits consultation here.
See the CM five-year review document here.
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