A new Department for Business, Energy and Industrial Strategy (BEIS) consultation paper proposes reforms to the UK Capacity Market, the contract system which provides incentives to electricity providers to ensure security of supply is maintained. The potential changes to the market are designed to boost investment in cleaner alternatives to the gas-fired power stations that have so far dominated this market, with most of them being existing plants.
Controversially, some old inflexible nuclear plants have also been subsidised under the scheme- for example 4 in the 2021 four year ahead (T4) contract round. BEIS doesn’t mention that, but says energy storage systems and flexible grid/demand response services ought to be encouraged now, along possibly with Carbon Capture, Utilisation and Storage plants, although it’s worth noting that the gas plants with CCUS are likely to be less flexible. But, for good or ill, as we shall see, some gas plants will be allowed to run if their emissions can be abated.
As Business Green notes, the Capacity Market operates through a series of competitive auctions that are designed to ensure there is enough reliable capacity to meet Great Britain's peak electricity demands (typically around 50 GW), so as to safeguard against the possibility of future blackouts. Firms bid for contracts are made for non-CfD supported projects which require them to ensure an agreed level of capacity is available at given times, providing sufficient back-up to ensure the grid remains reliable during periods of peak demand or low renewables output. The costs is all passed on the consumer via a levy, and BEIS seems aware this is now a key issue, and keeps stressing consumer value for money as a criteria for policy choice. You might hope that costs will fall as the technology and the market develops. The ‘four year ahead’ (T4) auction clearing price did fall from around £23/kWh/yr in 2016 to £16 in 2020, although the ‘one year ahead’ (T1) clearance price rose from around £8/kWh/yr in 2018 to £40-50 /kW/yr in 2020.
BEIS says the consultation aims to explore a range of reforms and plans to ‘ensure the scheme keeps pace with [the] transition to cleaner energy sources and technologies - often cheaper than fossil fuel counterparts – and can support the delivery of a decarbonised power system by 2035, without compromising security of supply’. So it seems quite optimistic that costs will fall.
The main proposal is to incentivise greener, flexible technologies to compete in CM auctions by offering multi-year contracts for low carbon flexible capacity, such as smart ‘demand side response’ technologies and smaller-scale electricity storage, supporting the move towards delivering secure, clean and affordable British energy in the long term. Some one year inter-connector contracts may also be include. Underpinning these efforts, there is also a proposed new lower emissions limit in the Capacity Market, which will kick in for new build plants from 1 October 2034, meaning any new oil and gas plants receiving long term agreements through the CM will be obliged to lower emissions, through decarbonising their capacity by introducing carbon capture, hydrogen and other low carbon methods into their generation and by reducing running hours. So that’s squeezing natural gas out slowly- maybe too slowly, with some possibly being admixed with hydrogen.
There are also some operational adjustments proposed to strengthen the scheme’s ability to deliver security of supply by reforming the CM’s approach to performance testing to ensure confidence as early as possible in the winter that capacity is available; and also strengthening the non-delivery penalty regime to send a clear signal that capacity must deliver in times of system stress.
There has been some evidence ‘incumbent influence’ and existing regime resistance in the design and operation of the Capacity Market so far. Inevitable, when the Capacity Market was set up back in 2014, most of what was available for flexible back up was old gas plant- it what was used to meet demand peaks, along with some coal capacity. Despite new storage and demand management technology emerging, gas plants stayed dominant- the new stuff was initially more expensive. But that was seen as only an interim stage. In 2019, National Grid Electricity System Operator (ESO) said that by 2025, the power grid would be able to operate ‘safely and securely at zero carbon’, whenever there was sufficient renewable generation online and available to meet demand, with Bloomberg seeing that as indicating that gas plants would not be needed so often.
In the event, although there was a stage when new gas plants were being considered, subsidised by the CM, it doesn’t look likely to work out quite like that, given that, whatever else it may be, gas is certainly no longer cheap or reliable, whereas flexible smart grid systems and storage of various types and scales are moving ahead by leaps and bounds. Unlike nuclear. But then that always seems to break all market rules. So we may yet still see some nuclear in the new Capacity Market.
The ostensible aim of the capacity market has been to get the cheapest grid balancing options via a competitive auction system. Not everyone thinks that it has done that or that market competition is the best was to balance energy systems. Certainly so far it has meant that the new, arguably technically best options, energy storage and demand side management, have mostly been left out, in favour of existing fossil and old nuclear plant - which in effect get an extra subsidy. You could argue that it would make more sense to support the new technologies in the interim to help them get cheaper. That would be a subsidy too, but arguably a more productive and sustainable one.
As I commented in my 2019 book covering the political history of UK renewables, including the CM, it was odd to subsidise old fossil plants and ‘what we may be seeing here is what happens if you try to let markets run the choice of technology i.e. some potentially contradictory results, with old dirty technology being favoured. Arguably, it would be better to use a system which delivered what was needed for effective balancing with low emission debts. It may be that, gradually, the market system will deliver that, but not if the incumbents continue to dominate and the new options are not helped to develop’. With grid balancing and power supply security now even more of a concern, it will be interesting to see what emerges in response to the BEIS consultation.
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