Amendments to the Capacity Market Rules came into force in June 2015

Background

The Capacity Market is part of the Government's Electricity Market Reform package. It is designed to make sure that in the future there is enough electricity available to meet peak demands. The gap between electricity supply (capacity) and demand is growing ever smaller, with many fossil fuel powered plants reaching the end of their useful life (the recent announcement that Ferrybridge coal power station will close next year being a prime example) and increasingly intermittent supplies from renewable energy sources like wind and solar PV.

The Capacity Market works like a reverse auction. Generators who have a non-renewable energy power station reaching the end of its life that might otherwise close, or who are planning to build a new plant, can bid to receive a steady payment from the Government (and ultimately from electricity bill payers) on top of the electricity that they sell. In return for this payment, under a Capacity Agreement, the generators promise that they will be able to provide extra electricity when it is needed, at times of peak demand, with penalties if they do not. Receiving a guaranteed steady income stream allows generators to keep an otherwise uneconomic plant open, or gives them the funds they need to build a new one.

Capacity Market auctions take place four years and one year ahead of when the capacity will be needed. The first auction took place in December 2014, with the results announced in January 2015. A total of 49.26GW of capacity was procured at a clearing price of £19.40kW, which was lower than expected. This capacity will be called upon from 2018/19. Auctions will then be held in December every year, assuming there is a need for capacity four years ahead (which will be decided in June).

Amendments to the rules

As the Capacity Market is a new mechanism, there were bound to be a few teething troubles, and DECC carried out a "lessons learnt" process after the first auction. This resulted in a consultation by DECC with industry stakeholders about making some changes to the rules and the underpinning legislation to iron out some of the issues.

Amendments to the 2014 Capacity Market Rules resulting from the DECC consultation came into force on 3 June 2015. They allow electricity interconnectors (generators in other countries, presently France, The Netherlands, Northern Ireland and the Republic of Ireland, that have a grid connection with the UK) to participate in the Capacity Market. They also set out detailed requirements for metering; and make some minor and technical amendments to the 2014 Rules. The amendments will apply going forward, and not retrospectively to Capacity Agreements already in place.

Once the Capacity Market Rules have been made, Ofgem is responsible for amending them. Ofgem also consulted on changes to the rules and on 19 June published some further amendments, in addition to the ones implemented by DECC on 3 June, which came into force immediately. Helpfully, Ofgem also published a consolidated version of the Rules which incorporates both the DECC and Ofgem amendments.

There are also two further amendments to the Capacity Market which are by way of statutory instrument, the Electricity Capacity (Amendment) (No.2) Regulations, currently in draft form but expected to be approved by Parliament shortly. These implement two of the points that came out of the consultation: to change the definition of "relevant grant" so that grants for feasibility studies or research will not prevent a generation unit from participating in the auction; and increasing from 5 to 15 days the time period for prequalified applicants to provide credit cover.