Following the release of details of the next Capacity Market auctions, the Department for Business, Energy & Industrial Strategy (“BEIS”) is proposing a number of changes to the Capacity Market (“CM”) Rules in a consultation published on 24 July 2017 (the “Consultation”).
In the Consultation, BEIS states that these changes to the CM Rules are required to better align the CM Rules with the original policy intent, particularly in relation to security of supply, and improve the functioning of certain areas. BEIS intends these changes to be in place in time for the next CM auctions to be held in early 2018, even though Ofgem recently published its decision on the amendments to the CM Rules.
Short duration storage and security of supply
BEIS is concerned that, due to current market and economic signals, a large proportion of the new build energy storage projects currently participating or due to participate in the CM are sized for discharge at their full connection capacity for between 30 minutes to an hour. This was highlighted in the recent Electricity Capacity Report. In particular, the Consultation highlights that:
- Length of System Stress Events: System Stress Events may last longer than the duration of the relevant energy storage project, as the initial estimates from the Delivery Body suggest that System Stress Events could last up to two hours on average. There is a concern that the current penalty regime in the CM does not sufficiently address this risk.
- Degradation: The declining performance of batteries over time (which is dependent on depth of discharge and cycles) is another risk factor, which could exacerbate the security of supply concern.
- State of Charge: Some storage projects may also be less than fully charged when the System Stress Event starts, e.g. if the project is simultaneously participating in multiple commercial services as part of its revenue stack, which would mean its ability to meet its Capacity Obligation could be further reduced.
Rather than changing the CM penalty or testing regimes, the Consultation suggests that these risks could be addressed by:
1. Amending the storage technology class: The storage technology class would be broken down into multiple categories, based on the amount of time for which a CM unit (“CMU”) can generate at its full connection capacity without recharging. The Consultation contains the following table to demonstrate of how this might look:
2. De-rating: considering the duration and Equivalent Firm Capacity when setting the de-rating factors for each storage technology class, such that the lower expected availability of shorter duration storage during System Stress Events is reflected. This would result in the 96.11% de-rating factor included in the Capacity Market Auction Guidelines published on 7 July 2017, being amended for all storage projects that have a duration of less than 4 hours. However, the exact de-rating percentages for the next CM auctions have not yet been established. This is despite the fact that many developers will have already secured grid connections, land rights and planning consent for projects with shorter durations in order to be able to pre-qualify for the next CM auctions in early 2018.
Whereas the Consultation proposes that storage CMUs self-select their technology class in future CM auctions, the participants in the next CM auctions would need to confirm their technology class once the final CM auction guidelines are published (and, as a result, such participants would be provided with the right to withdraw from that CM auction). </p
The Consultation also considers how the technology class selected can be verified. There are two options:
- Testing: On one occasion per Delivery Year, each storage CMU would be required to prove that it can discharge its full connection capacity for at least the number of consecutive settlement periods equivalent to the minimum of the duration category such project had selected.
- Warranties: Every storage CMU would be required to provide a copy of the equipment manufacturer’s guarantee stating the duration for which the battery can discharge at its connection capacity. In our experience, the warranties provided by battery manufacturers are dependent on a number of other factors, for example, around usage of the project and therefore the practicality of this suggestion will need to be considered further.
The Consultation suggests that not meeting the expected annual testing requirement or failure to provide a valid guarantee at the required time would lead to termination of the CM agreement.
Strengthening Satisfactory Performance Days
BEIS considers that the Satisfactory Performance Days (“SPDs”) arrangements within the CM Rules need to be reinforced in order to improve confidence that Capacity Providers can meet their Capacity Obligations. The Consultation proposes to strengthen the arrangements regarding SPDs as follows:
- requiring that three SPDs are completed within the same Delivery Year;
- at least one SPD must take place between January - April of the relevant Delivery Year (as this is the time that System Stress Events are most likely to occur);
- if there has been a failure to complete the required SPDs or failure to respond to a System Stress Event, then Capacity Payments will be suspended until a further three SPDs are completed within the same Delivery Year;
- failure to comply with the additional three SPDs would result in termination of the CM agreement, with a termination fee of £35,000 per MW being payable (though for New Build CMUs this would only apply after the first full Delivery Year after achieving the Minimum Completion Requirement).
The Consultation also includes the following further proposals:
- Metering re-assessment: amending the CM Rules in order to make clear that Capacity Providers can re-take the metering assessment.
- Planning consent deadline: shifting the planning consents deadline for T-4 CM auctions by a few days in order for it not to fall between Christmas and New Year.
- Technology class: disaggregating some of the current generating technology classes in order to improve transparency, support analysis and allow for more specific application of de-rating factors in the future. Aside from the storage classifications outlined above, new technology classes would include reciprocating engines and energy from waste.
The Consultation expressly welcomes any evidence by stakeholders as to the cost impact of the proposed amendments in order for BEIS to make an informed assessment before making its final decision.
Responses to the Consultation are required to be submitted by 8 September 2017. Nevertheless, the proposals also need to be consulted on by the Delivery Body pursuant to the CM Rules and reviewed by the Panel of Technical Experts. However, BEIS has made clear that it intends to implement the changes contained in the Consultation in time for the next CM auctions to be held in early 2018.