On 1 March 2016, the Department of Energy & Climate Change (“DECC”) issued a consultation (“Consultation”) on proposals to reform the Capacity Markets and published its response (“Response”) to the autumn 2015 consultation on the same subject. The Consultation is available here and the Response is available here

According to the Government, the focus of the Consultation is to ensure that sufficient, reliable capacity is available in 2017/2018 and beyond by encouraging investment in the energy system and infrastructure. The Government has repeatedly stated that Capacity Markets are an important addition to the energy market and are needed to ensure that there is sufficient reliable capacity to secure the supply of electricity.

An additional capacity market auction in 2017

In line with both warnings from National Grid about the potential risk of black-outs and industry criticism of the investment signals the current Capacity Market has provided thus far, the Consultation seeks views on introducing an additional early capacity market auction in 2017. Under these plans, an early capacity auction would take place in January 2017 for delivery in winter 2017/18 which will follow the existing design for T-1 auctions. As no T-4 auction was held for 2017/2018, the early auction will procure the entire capacity for that year. National Grid will provide a recommendation on the volume in its 2016 Electricity Capacity Report.

Emphasis on delivery of capacity

The Consultation also includes proposals for giving DECC further powers to impose tougher penalties for new generation units that have failed to take reasonable steps to deliver their Capacity Market contracts (as illustrated in Figure 1, reproduced from the Consultation.) This, the Government hopes, would further disincentivise speculative bids in the Capacity Market.

Click here to view image.

The Consultation proposals include: 

  • revising the financial commitment milestone (“FCM”) to include a test of financial close with an increased post-auction credit cover requirement of £15k/MW on those new build Capacity Market units that do not achieve their FCM within 11 months after the auction results day. Providers not achieving their FCM by this deadline would need to lodge and maintain increased levels of credit cover, with the risk of having the capacity agreement terminated if they fail to do so. 
  • disqualifying new build projects from further auctions for two years where these providers have failed to meet either their FCM or their minimum completion requirement.
  • amending the calculation of termination fees for an unproven demand side response capacity unit prior to the start of the delivery year by subtracting from the termination fees any previously drawn down collateral. 
  • increasing the current termination fee of £25k/MW where capacity agreements are terminated because of certain termination events. 

Further, DECC is seeking stakeholder views on whether the de-rating factors appropriately capture the potential differences between new and existing CCGT plant, which is important particularly in relation to the calculation of connection capacity.

Review of Capacity Market Rules and other proposals

The Consultation also includes other proposals that are of a more procedural nature, including: 

  • Changing eligibility criteria for transitional arrangements (“TA”) by lowering the minimum capacity thresholds for entry into TAs and by either removing generation resources from TAs or requiring a minimum percentage of “load reduction” demand side response within capacity market units. 
  • Changing prequalification timings relating to capacity auctions and TA auctions. 
  • Extending the derogation allowing appellants to provide additional information at a Tier 1 appeal for the 2016 T-4 auction. 
  • Extending the auction parameter to ten working days in time for prequalification for the 2016 T-4 auction. 
  • Excluding future participants who have raised finance under the Enterprise Investment Scheme or Venture Capital Trust Scheme from participating in the Capacity Market. 
  • Clarifying that DECC has an obligation to periodically review the Capacity Market rules that were made or amended from 1 July 2015 as well as any rules conferring functions on Ofgem or DECC.

Diesel generation in the Capacity Market

DECC also announced that it is working closely with DEFRA and Ofgem on further action to be taken on diesel generators participating in the Capacity Market. The consultation notes that DEFRA will consult later this year on options which will include the regulation of relevant air pollutants from diesel engines and that Ofgem is reviewing whether it would be in consumers’ interests to change the current charging arrangements for distribution connected generators.

Next steps

The DECC consultation will close at 5pm on 1 April 2016. DECC’s intention, subject to Parliamentary process, is to implement the amendments to the Electricity Capacity Regulations 2014 and the Capacity Market Rules 2014 prior to the opening of the 2016 Capacity Market prequalification in August 2016. In addition, the proposals for the “additional auction” would require an extension to the existing State Aid approval for the UK Capacity Market. 

DECC anticipates the third T-4 auction taking take place in December 2016 and the early capacity auction taking place in January 2017. It also plans for a second transitional arrangements auction in March 2017.