When the Capacity Market (CM) was dreamt up nearly a decade ago, it was essentially designed to secure sufficient back-up gas plants to ensure the UK’s energy security.
“The unofficial objective was to get more gas CCGTs and provide revenue certainty for large plants,” says Sam Hollister, head of markets and engagement at LCP Delta.
Even at the time, the scheme was controversial in some quarters because it supported fossil fuel generation. And its design has looked increasingly out of step with the wider thrust of energy decarbonisation policy over the past decade, which has seen the UK’s key 2050 climate change target ratcheted up from 80% of 1991 emissions to net zero,
Meanwhile, Russia’s invasion of Ukraine last year resulted in energy security becoming a more pressing issue than at any point since the oil crisis of the early 1970s.
To tie in with next year’s tenth anniversary of the CM, the Department of Business, Energy & Industrial Strategy (BEIS) last month published a consultation paper on its future. Given the seismic shocks the energy system has experienced over the past year, perhaps the most surprising aspect of the document is how much of the broad thrust survives from a previous call for evidence on the CM, published in 2021.
Josh Buckland, a director at public affairs company Flint Global, believes it is “really good” that the government has pushed ahead with the CM review at all when it could have wrapped the exercise into the longer-term and more fundamental Review of Electricity Market Arrangements (REMA) process.
The new consultation maintains the previous document’s commitment to bring the operation of the CM into line with the government’s wider push to cut emissions to net zero by 2050.
The key proposal for achieving this is a lower maximum emissions limit in the CM, which will kick in for new-build plants from 1 October 2034. A proposal in the earlier document to run separate auctions for low carbon and fossil fuel capacity has not been taken forward.
The proposed ceiling on emissions intensity, which new-build CM units must meet in order to secure multi-year agreements, has been cut from 550 to 100gCO2/KWh.
This new limit would enable lower carbon sources of combustion, such as CCS (carbon capture and storage) and hydrogen plants, to qualify for these multi-year CM contracts but not those fired by unabated gas.
Unabated gas
Existing unabated gas plants will continue to qualify for support through the CM beyond 2035 under the paper’s proposal not to change the yearly limit on emissions, which is the alternative route units can use to access the support scheme.
Retaining this unchanged yearly limit for existing units would enable unabated gas plants with 40% thermal efficiency to operate up to around 750 hours per annum, according to the BEIS consultation. Plants look set to be able to trade emissions within this cap from one year to another in line with fluctuations in demand.
Having these two limits will give unabated gas generators an incentive to either abate emissions or operate on a limited basis as peaking plants, it says.
For many, the 2034 introduction of the emissions limit deadline looks like too little, too late. However Buckland believes this approach, which he describes as “gradual evolution rather than fundamental change”, strikes the right balance in current conditions, especially given the CM’s key function of maintaining emergency power supply.
He says: “It makes sense because of the level of concern around security.
“They are obviously aware that they need to maintain supply and within that potentially there’s a role for gas as a back-up.”
The proposed changes are “sensible”, says LCP’s Hollister: “I don’t think any government policy is going to want to put at risk security of supply.
“In most scenarios, we still have some unabated gas running for a significant period and beyond 2035,” he says, noting that even the Climate Change Committee contemplates some non-CCS gas plants on the energy system in the next decade.
Adam Berman, deputy director for investment at Energy UK, agrees: “The timeline that the government has sketched out seems to be fairly consistent with their goal of a net zero power system by 2030.
“It’s about ensuring that we can create a reasonable exit pathway for unabated gas from the system without creating a crunch point in the early 2030s, where we might have high renewable coverage but not necessarily quite enough flexibility provision. There’s the possibility of this period coming about where you can’t quite make everything add up.
“Whilst the capacity market does have a role to play in bringing forward investment to facilitate low carbon assets, its primary purpose should remain security of supply. Over the last few months we’ve seen the importance of having really robust mechanisms and not blurring the line too far between those that do quite different things.
“The key thing that the government needs to do now is to ramp up low carbon flexibility because it is unfortunately all too easy to envisage a scenario in which we have a really firm gas decarbonisation trajectory but that is not matched by a clear programme to ramp up alternatives to the unabated gas.”
However, this timeline also provides a signal to investors that unabated gas is on its way out, says Hollister: “When we need to be decarbonising our system, it’s the right thing to be not signing agreements for unabated gas way out into what the mid to late 2030s.”
Regarding lower carbon generation options, like CCS and hydrogen plants, he believes the CM may be a “useful tool” for providing some guaranteed revenues.
However it won’t be the key mechanism for supporting such projects, Berman adds. “The CM revenue stream would play a part, but at the same time we very much are looking to the government for bespoke revenue stabilisation mechanisms for those types of technologies.”
Another significant move in is to ease the process of exiting from CM contracts, which is designed to make it easier for temporary shutdowns of gas plants so they can be upgraded with carbon capture equipment.
This is another sensible move, says Buckland: “We don’t want the CM to be a barrier to retrofitting lots of plant.”
Alongside proposals to tighten emissions from CM generation, the consultation paper also introduces new three-year contracts for flexible low-carbon technologies, such as demand-side response (DSR) and storage.
In a bid to stem a stagnation in the level of the DSR coming forward via the CM, the three-year contracts will help such projects to cover costs, such as for setting up and maintaining metering and communications equipment, says the paper. Until now such projects have had to rely on the one-year contracts that the CM offers.
“A three-year contract is probably more appealing than a one-year contract: providing a multi-year framework certainly provides a stronger signal,” says Hollister.
But he is not sure that these longer timeframes will provide investors with sufficient comfort to undertake investment.
A place for batteries?
For battery projects, the CM tends to provide top-up revenue with arbitraging of prices and service contracts providing stronger streams of cash, says Hollister: “It’s not a thing at the moment that is going to make people jump and invest in batteries.”
Buckland, who advised Theresa May on energy and climate change issues during her spell as prime minister, says: “The challenge with those technologies has always been the fact that they haven’t necessarily been proven at scale and in a security related event.
“It’s a really important next step in ensuring that flexible capacity comes forward but we need to be realistic that we have a considerable way to go.”
Consultation on the paper’s proposals only ends on 3 March. This means the changes outlined in the consultation paper will not come in time for the next round of the CM, which is due to take place next month, says Marlon Dey, GB head of research for consultancy Aurora.
However, the proposals send “a very clear signal” about the scheme’s future direction, he say s: “While there might not be a direct link to the contracts people are bidding in for here, people will see this and take it into consideration when bidding.”