Last week, the government announced that both wind and solar would be allowed to compete as participating technologies in the Capacity Market (CM).
Energy UK has long called for renewables to participate in the CM. This welcome news underlines our belief that, as well as remaining the most appropriate way to ensure security of supply at least cost to customers, the CM can also evolve to further support decarbonisation by giving more opportunities to low carbon sources – as well as newer technologies like storage and demand side response (DSR).
But while it is a well-established mechanism within the energy industry, it is perhaps worth reiterating why GB needs a CM.
The CM came about as part of the wider Electricity Market Reform (EMR), set up in 2014 to support the transition to a less carbon intensive energy system. In addition to the CM, EMR brought forward the Contracts for Difference (CfD) mechanism to incentivise low carbon generation by providing a long-term contract that provides a stable and predictable income for developers.
Further schemes like the Renewables Obligation (RO) and Feed-In Tariffs (FIT), have also supported a huge increase in low carbon generation on Great Britain’s energy system - but as these include intermittent sources dependent on weather conditions, these cannot always generate when there is demand.
So, the EMR addressed the need to incentivise low carbon technologies and support decarbonisation but also the challenge of ensuring security of supply when intermittent generation is unavailable.
This is where the CM comes in. It provides financial incentives to providers of reliable capacity to be available during periods of particularly high demand and/or low intermittent generation – known as a ‘high stress’ event. While the recent record-breaking periods of coal free generation illustrate the ever-increasing contribution of renewables and other low carbon sources, we still need to be able to cope if there are high stress events, particularly, in the winter months when demand is higher and sources such as solar are less productive.
The CM operates through transparent auctions at the four-year ahead (T-4), and one-year ahead stages (T-1) and this competitive process has driven down prices consistently through the life of the CM - so delivering security of supply at the least cost to consumers.
But if the CfD is meant to support intermittent generation like wind and solar, why do they need to participate in the CM? The role of intermittent generating technologies in ensuring the security of supply cannot be underestimated. During periods of particularly high demand, they can still be available to provide capacity, particularly when coupled with electricity storage systems. Providing a CM that is technology neutral and opening the field to all, can ensure it remains the most cost-effective way to secure capacity while supporting those sources and technologies that are driving decarbonisation.
But given that the weather inevitably affects the availability of some generation, we still currently need thermal generators as well as DSR providers to quickly respond to increases in demand. It is to reflect their level of availability that all technologies have a ‘de-rating’ factor – in short, the size of payments you receive as a generator or provider of capacity are in proportion to your reliability. As de-rating factors stand, it is unlikely that the numbers will add up so that a renewable generating station is developed solely off the back of a CM agreement. However, the integration of renewables into the CM is required in order to allow them to play their part now and in the future.
Of course, we can’t look at this subject without referring to the most urgent issue facing the CM right now – the fact that it is currently in suspension due to a legal challenge by Tempus Energy, which has led to the current European Commission review of its compatibility with State aid rules.
The admission of renewables to the CM does counter the claim made in that legal challenge that it is skewed against newer technologies and participants. Indeed, DSR has already been gaining a bigger share in successive auctions (rising from 174MW in 2014 to over 1GW in 2016/7 – added to another 1.5GW picked up in other auctions). And, of course, another relevant factor for the CM in the near future is that the government plans to phase out the UK's last coal-fired plants by 2025, so plans to replace this capacity are crucial.
Having outlined the importance of the CM - and its undoubted success in fulfilling its role - it’s vital for the industry that it’s reinstated as soon as possible. As well as the unwelcome and damaging uncertainty the suspension has caused to capacity providers and suppliers – with £1 billion of apparently guaranteed income disappearing overnight - it also threatens security of supply for next winter.
This would also be bad for customers, the vast majority of whom will rightly have little awareness of the CM - because it’s been doing exactly what it was intended to do. Keeping the lights on at times of high demand plays an essential role in maintaining confidence in decarbonisation and it has banished those scare stories you used to read warning about ‘wafer thin’ capacity over the winter months. A return to those days would not be in anyone’s interest so the energy industry would welcome a speedy conclusion to the European Commission’s review before next winter - so the CM can get back to doing its important job.
Matthew Deitz, Policy Manager