This article summarises key proposed changes to the Capacity Market Rules and looks forward to the upcoming reviews of the Capacity Market by Ofgem and BEIS.

Ofgem has published details of the 38 proposed changes to the Capacity Market Rules (CMR) that it intends to take forward. Some of these changes will take effect prior to the next auction. Others are likely to be implemented once further preparatory studies have been undertaken.

The proposed changes stem from Ofgem’s open letter in September 2017, which invited proposals for changes to the CMR for consideration during Ofgem’s statutory consultation. Ofgem received an unprecedented 112 proposals from stakeholders and delivery partners and also raised several proposals of its own.

In March 2018, Ofgem launched its statutory consultation. As part of the consultation, Ofgem hosted a stakeholder workshop to discuss the proposals. This article summarises the issues that appear to have generated the most interest among potential Capacity Market participants.

Restrictions after opt-out of T-4 Auction

Capacity Market Units (CMUs) that opt-out of the T-4 Auction for a delivery year on the basis that they expect to be closed down by the start of the delivery year, are currently prevented from participating in the T-1 Auction for such delivery year. Proposal CP293 from EP UK Investments seeks to remove this restriction.

This would resolve the current inconsistency that CMUs opting out of the T-4 Auction on the basis of intending to be operational during the delivery year, are not currently barred from participating in the T-1 Auction. Therefore, under the current rules, if a plant wishes to maintain the option of participating in the T-1 Auction, it is incentivised to opt out of the T-4 Auction as intending to remain operational. Such action could result in inaccurate market information on future plant availability.

Ofgem plans to take forward proposal CP293 on the basis that it should improve auction liquidity and market transparency on future plant availability and therefore increase the competitiveness of the auction process.

Secondary trading rules

Proposals by Alkane Energy and Welsh Power seek to amend secondary trading rules to allow CMUs that have not prequalified for an auction to be acceptable transferees, provided that they are able to fulfil all prequalification requirements ahead of the delivery year.

Ofgem agrees that opening up secondary trading to more providers should benefit consumers by increasing liquidity and reducing non-delivery risk. Ofgem also expressed confidence that the risk of ‘gaming’ is low given that the CMR already contain provisions aimed at preventing market manipulation.

Transmission connected CMUs: private wire

A proposal by WWA seeks to create consistency between the treatment of distribution and transmission connected CMUs in relation to private wire networks. The proposal would allow new CMUs to be transmission connected via private wires (as is currently permitted for distribution connected CMUs).

Ofgem rejected the proposal on the basis that it would create consequential changes, including amendments to the definition of ‘private network’ under the CMR. Ofgem appears not to oppose the proposal in principle; its view is that further work is required to find a workable solution.

Addition of renewables to the list of Generating Technology Classes

Another proposal is that renewable energy generators that are not in receipt of low carbon subsidies should be added to the list of Generating Technology Classes in Schedule 3 to the CMR. The proposer, E.ON, argued that now that certain established renewable technologies, such as onshore wind and solar, are no longer able to receive low carbon support, these forms of generation will qualify to participate in the Capacity Market. E.ON therefore thinks that the CMR need to be expanded to accommodate them.

Ofgem’s view is that adding new technologies to the Capacity Market is not straightforward. Currently the CMR do not contain a methodology to derate wind or solar technologies. Ofgem considers that before adding renewable technologies to the list of Generating Technology Classes, there must be a comprehensive assessment of the appropriateness of derating methodologies and the existing framework of obligations. This change is not going to be implemented in time for the next auction.

There may be some frustration among supporters of renewable technologies that this analysis and implementation could not be undertaken within the same tight timescale as that for storage last year. Ofgem, however, is likely to be mindful of wider policy questions that the government may wish to discuss and consider carefully beforehand.

Five year reviews of Capacity Market

Pursuant to the Electricity Capacity Regulations 2014, Ofgem is obliged to carry out a review of the CMR within five years of them coming into force. The first review is due later in 2018. Workshop attendees were informed that, in contrast to the current approach of incremental change on a year-by-year basis, Ofgem is open to considering a fundamental redesign of the CMR.

Ofgem’s review is intended to dovetail with the wider review of the Capacity Market by the Department for Business Energy and Industrial Strategy (BEIS) later this year. The potential for significant changes to the Capacity Market was flagged earlier this year by Claire Perry, the Minister for Climate Change and Energy. She confirmed that BEIS's review would consider issues such as penalties for non-delivery, contract lengths, and potentially opening up the Capacity Market to new renewable technologies.

Conclusion

With the deadline for responding to the statutory consultation on 3 May 2018, closely followed by the five year reviews by both Ofgem and BEIS, the Capacity Market looks set to be subject to further changes in 2018 and beyond. What remains to be seen is whether the government will stick with a regime that has to date delivered the required levels of generation capacity at a much lower than predicted cost to the consumer, or choose to create a revised regime that incentivises, in the shorter term, the build-out of a greater number of new generating stations