The government says separate auctions for low-carbon generation may need to be introduced to the Capacity Market to balance security of supply and the need to decarbonise.
The Department for Business, Energy & Industrial Strategy (BEIS) issued a call for evidence today (26 July) as a bridge between the five and ten-year reviews of the Capacity Market. It examines how the mechanism could better align with wider net-zero ambitions and respond to increasing security of supply challenges.
It points out that Capacity Market has operated the same auction design since its inception in 2014 and that while this has delivered the required capacity at low costs to consumers, it has also brought forward predominantly higher-carbon technologies. It states that with no change to the design it is likely that a significant proportion of the demand for new-build capacity could be met by new gas-fired generation as the most cost-competitive new-build technology.
A split auction could allow low-carbon technologies to be more competitive while not inflating the clearing prices for other forms of capacity, the document says.
BEIS’ suggestion, which would only apply to the four-year ahead auction (T-4), poses two possible designs – a separate auction alongside the main T-4 round or introducing multiple clearing prices into a single auction.
In addition, BEIS is considering expanding the scope of the “price taker threshold”, the maximum price at which a bidder can withdraw from an auction, so that it could act as a price cap. Under this model, if an auction cleared above this threshold, capacity designated as price takers would receive the threshold price. However, if it cleared under the threshold, price taker capacity would receive the clearing price.
Elsewhere, the call for evidence looks at agreement lengths and whether its preference for one-year terms where possible, as set out in the five-year review, should be reconsidered. It acknowledges that multi-year agreements give investors in emerging low-carbon technologies confidence but also notes that they risk locking in high-carbon generation for years to come.
As a result, BEIS is consulting on new eligibility criteria for these multi-year agreements, including an emissions limit. However, it recognises that higher-carbon bidders may still need access to contracts lasting longer than one year, in order to ensure security of supply.
The document addresses the particular challenges low-carbon, long-build-time technologies, such as pumped hydro storage in accessing the Capacity Market. It considers introducing a declared later delivery year as a way of removing unintended barriers to entry for these kinds of technologies.
The call for evidence also suggests strengthening the penalty regime to address concerns raised in the Five-year Review to ensure delivery during stress events in incentivised.