On the 24 October 2019, the European Commission (EC) granted State Aid approval to Great Britain's Capacity Market. This means that Capacity Market auctions will be run in the future, capacity payments will be restarted, and backdated payments will be paid to existing capacity providers.
The Capacity Market is the primary tool that the Government uses to ensure that there is enough power to meet peak demand in winter. Capacity providers can be businesses and public sector organisations that utilise a range of technologies to provide added flexibility to the grid, including DSR, battery storage and gas-fired generation. The requirement from these technologies will likely increase as coal and nuclear plants close in the 2020s.
For Capacity Market participants, the programme provides a reliable monthly revenue stream for making assets available to ensure grid frequency is reliably maintained. Assets can stack other revenue streams such as providing frequency response services to National Grid. As the system transitions to a low-carbon, more decentralised system, it is expected that National Grid’s requirements will increase providing further revenue opportunities. The recent 9 August 2019 power outage demonstrates that National Grid will likely need to increase its frequency response procurement.
Why was the Capacity Market suspended?
The Capacity Market was suspended on 15 November 2018, due to an appeal from Tempus Energy that meant no payments could be paid to capacity providers.
Tempus’ successfully appeal against the Capacity Market was awarded on procedural grounds, due to the European Commission not carrying out a full, thorough investigation in to whether the Capacity Market’s design discriminates against DSR. Subsequent to the appeal, the European Commission with support from the British Government carried out an in-depth investigation in to the Capacity Market.
Centrica maintained its support for the Capacity Market and continues to believe it is the right policy to ensure security of supply and therefore we have supported the Government in its efforts to reinstate the Capacity Market. As a result, we welcome the decision to re-open the Capacity Market.
The European Commission’s investigation confirmed that the scheme is necessary to guarantee security of electricity supply in Great Britain. The European Commission did not find any evidence that the Capacity Market’s design put any specific technologies at a disadvantage.
Therefore, all backdated payments will be paid to capacity providers; we expect these to be paid in January 2020. Capacity agreements won in June’s T-1 auction for delivery in 2019/20 are now confirmed and usual monthly payments for all capacity agreements will be reinstated in January.
Capacity providers that have been terminated will now be required to pay relevant termination fees.
What happens next?
Pre-qualification for the next set of auctions in 2020 ran in the summer, with results expected shortly. The positive decision on the Capacity Market is good news as it means these auctions will definitely be run. The upcoming auctions are:
Whilst we are still waiting to see the detail of the European Commission’s decision to re-approve the Capacity Market, we expect that the Government will be required to make some changes to the mechanism for future prequalifications.
We will work closely with the Government to ensure these are properly implemented. Additionally, Centrica supports the British Government making changes to ensure that smaller, customer-focused assets can better access the CM. This is done by reducing pre-qualification burden and lowering participation barriers.
To find out more about how Centrica Business Solutions can help your organisation access the Capacity Market and generate revenue from your energy assets, get in touch.
Jack Presley Abbott
Jack is a Senior Regulatory Manager for Centrica, drawing upon experience in a number of commercial and policy roles. Jack is an expert on regulatory areas that are of interest to Centrica Business Solutions. Jack has expertise and experience across a range of topics which includes the capacity market, balancing services and carbon pricing, and regularly engages with external stakeholders on these subjects.
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