Five Years In: Minding the Gaps of the Capacity Market

BEIS issued a call for evidence to review the capacity market (CM). It suggested two themes on which the market needs to focus; the inclusion of solar and wind in the CM and the growing participation of interconnector.  Here are our thoughts about why these themes are a priority and what was left behind in this review.

Reviewing the Capacity Market

The CM legislation was passed five years ago in 2013. The government established a statutory requirement to review the CM every five years. The performance was regularly reviewed through analysing the auction outcomes and frequent engagement between the government and different stakeholders.

Five formal consultations have taken place so far and many analysis and commentary pieces were published criticising the CM or highlighting which way the change should be headed towards. We, at N-ERGY, have published articles on this matter sharing our thoughts, concerns and ideas about the CM.

The Department of Business, Energy, and Industrial Strategy has launched the first step of the Fifth-anniversary review through a Call for Evidence to ensure the CM is a market-wide, technology neutral, and is fit for purpose.

Neglected Objectives

The CM was established for the objectives of security of electricity supply, cost-effectiveness, and avoiding unintended consequences (including complementing the decarbonization agenda). However, from keeping a closer look at the CM, it focused on achieving the first objective which is securing electricity supply but neglected the other two.

Prices have hit bottom low in the latest auction and this made the market a bit unattractive for newcomers. Cost-effectiveness should not be in favour of one specific market segment over the others (for example interconnectors vs. national power our existing vs. new builds).

The CM is a relatively new approach to complement the generation market and to meet the demand. Validating and tuning it is a needed ongoing process to come up with a model that is fit for purpose, cost-efficient and serves other objectives.

But some lessons can be learned from the conventional generation market; security of supply cannot be achieved without a diverse energy mix.

The government's target is to reduce the UK's greenhouse gas emissions by at least 80% of 1990 levels by 2050 and in order to complement the decarbonization agenda, the CM as well realises the need allow non-dispatchable generation contribute to energy supply.

 

Technology Neutral Market

Wind and solar have been excluded from the CM for being non-dispatchable sources of energy. Moreover, on-shore wind is not considered a technology class yet and the CM requires more economic and technical parameters before adding it as a technology class.

The reason behind not allowing wind and solar to participate in the CM was the availability of alternative schemes for them (Contracts for Difference and Renewable Obligations, etc.) and the nature of these technologies (non-predictable).

In 2027, some Renewable Obligation (RO) agreements would have finished their contracts and will be available to participate in the T-4 auctions in 2023 for the delivery year 2027.

We think the design of the CM is rigid and some flexibility should be put in place to cater to different technologies if the CM wants to become technology neutral and diverse.

 

Wind and Solar Participation

The extreme weather events that the UK witnessed in 2018 including the beast from the east and the heat wave have taught us a few lessons, one of which is that wind and solar work better in different times, their highs and lows are mostly opposite.

The notion of solar not having the capability to contribute to the security of energy supply in the UK is false especially with the wind drought the country has gone through in August. With the CM being on the verge to include other technologies, some flexibility in the rules are to be introduced to cater to different technologies;

1.       The introduction of hybrid systems that contain more than one source of energy (possibly at different locations) and/or backed by storage.

2.       De-rating renewables to guarantee the security of supply by coupling it with storage, a conventional energy source or a dispatchable renewable energy one. A ratio between the capacity of the dispatchable and non-dispatchable energy source can be set.

3.       Developing a new penalty regime for different technologies to make it fair for renewable energy. This can be done by limiting the generation calls to daytime for example if the CM unit is a solar one.

The Downs of Interconnectors

Interconnectors are one of the two main themes that the CM wants to focus on in the upcoming changes. They contribute to 6% of energy supply in the UK coming from three different countries, France, Ireland, and the Netherlands. The CM has witnessed an increase in the awarded interconnectors from 1.6 GW in 2015 to 4.6 GW in 2018 and this is expected to increase even more.

The growth of interconnectors participation in the CM is expected to ‘diminish’ its contribution to the security of supply. Some concerns were raised about the ‘double commitment’ of interconnectors in different CMs and the increased number of renewable energy projects. Neighbouring countries tend to experience the same weather conditions and stress events and that might affect the delivery of interconnectors.

On the other hand, Interconnectors are exempt from taxes and are over-compensated for the energy they provide, and this might seem unfair to other national participants.

New de-rating should be applied on interconnectors to guarantee the security of the supply. Different penalty schemes or different clearing prices can be a solution.

Unresolved Issues

The call for evidence mentioned that the performance of interconnectors could be predicted based on historical data. The same could be said about renewable energy. Data on wind speed and solar insolation are available and can be an indication of the performance.

Two topics that we believe are essential to be reviewed are energy storage and the attractiveness of the market for new builds especially with the coal phase-out happening by 2025. The latest battery de-rating came unfair to existing battery systems and the timing of the changes was worrying.

The first company to deploy a Tesla PowerPack project in the UK went into administration after failing to find buyers for prospective battery projects whereas Germany reached 100,000 home battery storage installations. 50 per cent fall in prices since 2013 and a governmental rebate for equipment purchases have encouraged people to invest in battery storage.

At this stage, battery storage in the UK is still in its infancy and different government schemes and markets must adopt it and subsidise it to make it more mainstream.

If the right changes of rules are introduced, the CM has a chance to meet its three objectives and help the government in its ‘Road to Zero’ by switching to low carbon emissions and including more emerging technologies.