UK government proposes removing ‘possible advantage’ for embedded diesel generation from capacity market

It is proposing a new method of calculating the capacity market supplier charge as part of proposals to “simplify and improve accessibility” of the auction process. The change would prevent certain generators from being able to claim what is effectively a “double payment”, based on their participation in the capacity market as well as reductions to the supplier charge, according to a consultation, which closes on 23 December.

Under the proposed method, the supplier charge would be calculated based on gross rather than net demand, according to the consultation.

“Where a policy has potential to over-reward market participants and distort the market then it is appropriate that government should take any necessary action to address this,” the Department for Business, Energy and Industrial Strategy (BEIS) said in its consultation.

The current system risked giving certain generators “a competitive advantage and potentially distorting the outcome of capacity market auctions”, BEIS said. It could also “be causing inefficient despatch decisions, where small embedded generators are displacing larger more efficient capacity”.

“One of the intended benefits of net charging was to incentivise generation over peak periods in order to reduce demand, and so reduce the amount of capacity that needs to be secured through the [capacity market],” it said in the consultation. “However, where the majority of the capacity incentivised to behave in this way also holds capacity agreements, this effect is unlikely to be realised as their generation cannot be factored into demand estimates.”

Other technical changes proposed in the consultation include amending deadlines related to metering assessments; applying termination fees “in all circumstances” where a generator no longer complies with the general eligibility criteria; and enhancing the transparency of the information published about the capacity market.

Introduced under the 2013 Energy Act, the UK’s capacity market auction system is intended to boost energy security by allowing energy sources and generators to bid to provide a share of capacity when the system needs it in exchange for a regular revenue stream. The government has now confirmed its intention to seek 53.6GW of capacity for delivery over the winter of 2017/18 as part of plans to speed up the introduction of the scheme, which was originally due to begin over the winter of 2018/19.

Energy market regulator Ofgem is currently reviewing the treatment of small-scale embedded generation to address perceived unfair competitive advantages this type of generation is obtaining from the transmission charging regime more generally. The government said that its planned reforms to the capacity market were “consistent with the direction of travel” of that review.

Energy market expert Jeremy Chang of Pinsent Masons, the law firm behind Out-Law.com, said that the treatment of embedded benefits was a “complex issue”, and one that was “hotly debated” among developers.

“Certainly, the impact of reducing the availability of embedded benefits risks potentially delaying or constraining investment in embedded generation projects at a time when investment into generation is critical as the UK grapples with unprecedented strain on energy supply and demand,” he said. “However, it is equally true to say that the success of diesel generation in the capacity market was an outcome which was not intended from a policy perspective.”

“Both Ofgem and BEIS must take a holistic approach of the complexities of tackling such important reforms to avoid creating further unintended consequences which may well require corrections in the future,” he said.