The Department for Business, Energy and Industrial Strategy (BEIS) has proposed tweaks to the capacity market rules to prevent participants from being over-compensated.

The changes concern schemes such as the Enterprise Investment Scheme and Seed Enterprise Investment Scheme which help investors to raise finances for riskier ventures. The mechanism could end up in breach of EU state aid rules without the reforms.

“To ensure the amount of aid under the capacity market is limited to the minimum needed and that there is no cumulation or over-compensation, the total amount of aid should not exceed the amount awarded in the capacity market auction,” the department said in a consultation document.

The “risk finance schemes” in question were amended last year to prevent them being used to fund new reserve generating capacity. However, BEIS said investment raised before the changes were enacted “may have been used, or may continue to be used, to fund prospective capacity that also secures a capacity agreement in a future capacity market auction.”

The now defunct Department of Energy and Climate Changes suggested in a consultation in March that capacity being built with investment secured through risk finance schemes should be excluded from future auctions.

BEIS said the responses received raised concerns that an outright exclusion could “create risks to auction liquidity and create a new barrier to companies and investors who have already taken investment decisions in good faith”.

It has therefore proposed to instead offset any financial support received through the schemes, and invested in new generating capacity, from capacity market payments secured in future auctions.

The new rules will not apply to existing generating or interconnector capacity as well as any contracts secured in the two auctions which have already taken place in 2014 and 2015. If enacted, they will require bidders into the capacity market to submit a declaration detailing any support they have received alongside their ‘financial commitment milestone’ report.  

BEIS is now consulting with industry on the new proposals. 

What to read next