Capacity Market Standstill: The Perfect Time To Move Forwards

The Capacity Market is facing an uncertain future as Government await the outcome of a new review conducted by the European Commission. Head of Regulatory Affairs, Colin Prestwich explores how the review offers an opportunity to implement changes for the better…

It’s now been 3 months since the European Court of Justice suspended the Capacity Market (CM). In the meantime, Government have consulted on options to keep the scheme running during the standstill period, and industry itself has begun to explore other arrangements, via Balancing and Settlement Code (BSC) modification P378, for collecting charges. It comes as no surprise then, that the wider design of the scheme has come under the spotlight.

Tempus Energy’s original challenge, which led to the suspension, was based on a claim that generation is unfairly favoured over Demand-Side-Response (DSR) in the CM. Currently, DSR projects can only bid for one-year contracts, whereas generation can bid for contracts for either 3 or 15 years.

This penalises both investors in DSR projects and limits the number of potential DSR providers who can compete in the CM auctions.

By allowing both DSR and generation to bid for contract lengths across the same spectrum (e.g. 1-15 years) then new project developers can create business cases over the long-term, gaining the necessary support for investment.

Equally, existing assets would be able to choose how long they wish to offer their flexibility for. Making changes to existing business processes, as well as investment in new infrastructure to participate in DSR, still typically requires noticeable payback periods which must be justified.

Making these changes will begin to unlock access to higher levels of DSR in the UK and help fill the capacity gap being left by coal plants shutting down - as it comes offline ahead of 2025. It will also replace capacity originally earmarked for new-build gas. The CM has failed to bring this forward in any great quantities, whilst both proven and unproven DSR have continually won contracts and successfully deployed.

By stepping into the breach left by these two technologies, DSR not only offers a zero-carbon solution, but will also help reduce consumer bills by lowering network reinforcement costs.

Changing rules around delivery can also help. If aggregators were to be allowed to add and remove assets within their CM Unit (CMU) easily, rather than having to explicitly deliver from those MPANs which passed pre-qualification testing at a set point in time, then all technology types (including DSR) can realise more opportunities in the event of CMUs failing to deliver.

An improved secondary trading market would also be required to help ensure this, so it was great to see Ofgem taking this issue forward as a priority within their five-year review of the CM Rules. That said, due to the challenge, the 5-year-reviews of the CM being run by BEIS and Ofgem are essentially now on hold in the background. Once the European Commission’s new State Aid decision is received, these two consultations will provide the vehicle to make the changes needed to allow DSR to compete more fairly with generation.

Whilst we’re waiting for that, clear and swift decision making is required from both BEIS and Ofgem. Government are currently considering responses to their consultation – which proposed to allow the Electricity Settlement Company (ESC) to restart the collection of Capacity Market Supplier Charges – but need to mindful that P378 is being run concurrently. Unless a decision is made quickly, industry (following approval from Ofgem) may end up putting the BSC solution into practice before government have the chance to implement their preferred approach.

As flexibility becomes more and more prevalent on the system, policy needs to change with it in real-time. By implementing these changes – and enabling greater participation of DSR – we can facilitate and accelerate the transition to a lower-cost, lower carbon, more flexible system.