Post: Government sets out Capacity Market parameters and modifications

Government sets out Capacity Market parameters and modifications

Secretary of State for energy and net zero, Ed Miliband has confirmed the parameters for the next Capacity Market auctions – the T-1 and T-4 auctions planned for March 2025. The same day the government published its response to the Phase 2 consultation and 2024 rule amendments to support auction liquidity.

The auction parameters confirmed, on 22 July, that the T-4 auction for the 2028-29 delivery year has a total target capacity of 45GW of which 1GW has been set aside for the associated T-1 auction (2027), leaving a target capacity of 44GW to be procured through the T-4 auction itself. The T-1 auction for 2025-26 delivery year has a target capacity of 6.5GW, following the Panel of Technical Expert’s Advice to reduce the target by 0.3GW.

In 2023, the government consulted on proposals to reform the Capacity Market aimed at improving security of supply, aligning the scheme with government’s net zero goals, and improving the functioning of the scheme. In the response to the Phase 2 consultation it was confirmed that a number of reforms will not be implemented ahead of the 2024 prequalification window, however, due to the limited availability of parliamentary time. These will be progressed on a longer timescale.

The proposals intended for implementation include:

• Allowing the roll over a temporary amendment to enable mothballed plants to prequalify for the CM auction – Government will seek to extend the existing temporary measure in relation to mothballed plant. This was put in place for the 2022 and 2023 Prequalification Windows and allowed existing generating CMUs that could not meet the requirement to provide performance data that was older than 24 months prior to the end of the Prequalification Window. The extension of this measure will apply to the 2024 Prequalification Window only and the associated 2025 auctions. These plants will still have to demonstrate satisfactory performance during the delivery year, like other capacity partaking in the CM. This temporary change has not been applied to secondary trading entrants
• Permitted Augmentation for Storage – battery CMUs The government also said that battery augmentation is a recognised tool for maintaining the capacity of battery energy storage systems. To address the perceived barriers a definition of ‘Permitted Battery Augmentation’ for battery Storage CMUs will be introduced within the CM Rules. Permitted Battery Augmentation will allow CMUs in a ‘Storage Generating Technology Class that is Duration Limited’ to replace and/or add batteries at an existing CMU site, to enable batteries to maintain the level of capacity required to meet EPT requirements. Permitted Battery Augmentation will not allow a Capacity Provider to supplement a CMU’s capacity with capacity from another CMU, or increase its Auction Acquired Capacity Obligation. 
• Adjusting the extended performance testing (EPT) requirement through secondary trading – recognising that managing degradation is key to enabling ongoing battery participation in the CM, and that augmentation will not be appropriate for all battery energy storage systems this policy to be revised. In line with the proposal outlined in the consultation, the CM Rules will be amended to enable the MW requirement of the EPT to be appropriately reduced when secondary trading occurs, and that the requirement will increase if the CMU is a CMU Transferee. Reducing ‘Adjusted Connection Capacity’ through secondary trading will align with the general principle that following a secondary trade, a Capacity Provider’s rights and obligations are rateably reduced. At the same time, the Rules will be amended so that the Adjusted Connection Capacity is increased where a Capacity Provider’s Capacity Obligation is increased by virtue of a secondary trade. Providers who trade before the first EPT having their test done based on their Capacity Obligations (CO) on the day of their first test. Following the first test, if the CO increases through secondary trading, the plant must perform another EPT within 60 working days/before the end of the Delivery Year (whichever is earlier). 
• introduction of 3-year agreements with no Capex thresholds for low carbon, low Capex technologies, and the introduction of a new mid-point 9-year Capex threshold for low carbon capacity – this proposal will not be implemented before the prequalification window in 2024 because of limited Parliamentary time. But to appropriately define which projects should be considered low-carbon, government will develop a definition, considering whether further consultation is needed, taking into account relevant information and appropriate evidence.
• Demand side response generating technology classes – Given the majority support for reform in this space, government intends to review this question further to put forward a specific policy proposal.

The government response to its 2024 consultation on proposals designed to support liquidity in future CM auctions by improving the operation of the CM emissions verification process was also published. The government said it intends to implement the following proposals so that they are in place for the 2024 Prequalification period for the 2025 auctions.

• Rules amendment to enable CM Applicants to have their emissions verified after the deadline for submitting Applications to prequalify for the CM. This is to ensure the CM against security of supply risks should Applicants be unable to secure a verification slot in time.
• Rules amendment to allow some CMUs to use a Combined Heat and Power Quality Assurance Programme (CHPQA) certificate which evidences their emissions for a given calendar year to better align with the definition of an ‘Emissions Year’ in the Rules.
• Rules amendment to require Applicants relying on previously verified Fossil Fuel Emissions Declarations (FFEDs) to resubmit the relevant document.
• Rules amendments to remove outdated sections of the Exhibit ZA and improve functionality.
• Rules amendments to enable older versions of the FFED to be accepted at prequalification, provided they are verified no later than four weeks after an updated version of the declaration was inserted into the CM Rules.

It was also confirmed that a 10-year Review of the CM is expected to be published later this year, which will include responses to the Call-for-Evidence review of the CM.

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