The UK Government has published its Capacity Market response, setting out changes it plans to introduce to improve the market’s design.
The document, titled Capacity Market consultation response: future improvements, emission limits and coronavirus easements, follows on from three separate consultations.
The consultations with industry have been on future improvements, which ran between 3 February and 2 March 2020, and on carbon dioxide emission limits, which ran between 22 July 2019 and 13 September 2019.
The most recent consultation was on proposed easements in response to the coronavirus pandemic, which ran between 24 to 30 April 2020.
The UK Government intends to reduce the minimum capacity threshold for participating generators and assets from 2MW to 1MW and enable secondary trading of capacity obligations under the minimum capacity threshold if an entire capacity obligation is being traded.
For a partial trade of a capacity obligation, the minimum capacity threshold will still apply.
The Government will provide “legislative underpinning” for the long-standing 50% set-aside commitment for T-1 auctions and the methodology for determining the minimum amount of set-aside.
“This formalises that commitment and methodology as part of the auction parameter setting process for all capacity auctions going forward. We have made no changes to our consultation proposals,” stated the document.
Another key change is to allow demand side response assets and generators to apply to prequalify to bid for all the agreement lengths available in the Capacity Market, up to 15 years, if they can demonstrate they meet the relevant capital expenditure thresholds, in line with the original proposals in the consultation, with some “minor refinements” to reflect feedback from respondents.
A formal, annual review of new capacity technologies not currently competing in the Capacity Market, but which could “effectively contribute” to security of supply, also form part of the changes proposed by the Government.
A reporting and verification mechanism for the introduction of carbon dioxide emission limits in the Capacity Market in line with original proposals in the consultation, will also be introduced, with some technical changes to address feedback from respondents.
The Government will remove the exclusion on long-term short-term operating reserve (STOR) contract holders competing in the Capacity Market, in line with the original proposal.
The document also stated the “minimisation of fraud and error” in the Capacity Market “remains a priority” to the Government, though it will not implement these proposals before further investigation and stakeholder engagement.
“We will consider fraud and error again in due course and, if necessary, will consult on updated proposals,” the response stated.
Renewable Energy Association (REA) chief executive Nina Skorupska said: “The changes to the Capacity Market today will help make it easier for cutting-edge clean technologies to compete.”
Skorupska added: “In particular, we welcome the introduction of emission limits with mandatory reporting and verification. This should help push out some of the highest carbon-emitting plants and redirect funding to cleaner means of ensuring the security of supply.
“Reducing prequalification rules will also be helpful, as will allowing demand response projects to bid for longer contract lengths. The reduced capacity thresholds will additionally ensure a greater number of smaller sites can participate.”
A total of 29 responses were sent to the Government’s Capacity Market consultation relating to Covid-19, from stakeholders that included trade associations and capacity providers.
Changes that will be implemented include enabling for the current 2019/2020 delivery year only, any capacity payments that have been suspended as a result of a CMU failing to comply with its satisfactory performance requirements, to be paid if and when the CMU meets its requirements.
The Government will also extend the deadlines associated “with a number of milestones”, where capacity providers that meet eligibility requirements can demonstrate their project has been affected by the coronavirus pandemic.
Ashurst renewables partner Antony Skinner said: “The design of the capacity market regime is such that, as acknowledged by the Government, there is no general relief, such as a force majeure clause, for delays caused by external events outside the control of capacity market participants.
“It is therefore good news that the Government has decided to proceed with introducing extensions of time and other relief for participants directly impacted by COVID-19. This is consistent with the approach taken by the Government in other areas – recognising that the pandemic is an extraordinary set of circumstances that cannot be easily managed by energy companies in the same way as other risks.”