The Capacity Market phase 2 consultation: Further policy updates from government

Background  

To strengthen security of supply and accelerate investment in low carbon technologies, the UK government consulted on proposed reforms to the GB Capacity Market regime (the “CM Regime”) (see our previous commentary here). In July 2023, the Department for Energy Security & Net Zero (“DESNZ”) published a summary of the responses (“Phase 1 Consultation Response”) to the Consultation. A subsequent Phase 2 consultation ran in late 2023 to consult on alignment with the government’s net zero goals and set out the call for evidence to inform the government’s statutory Ten-year Review of the CM Regime (“Phase 2 Consultation”).

In July 2024, DESNZ published the first of the Phase 2 consultation responses which built on the Phase 1 Consultation Response (“Phase 2 Consultation Response”) (see more on this in our commentary here). We focus here on the proposals which were not introduced prior to the 2024 prequalification window which the government intends to implement by the 2025 window. The latest reforms are reported on in the October 2024 policy update (“Phase 2 Remaining Policy Decisions”) and should be read alongside the Phase 2 Consultation Response.

1. Improving security of supply

1. Timelines for calculating non-delivery penalties
   
   The government intends to align the Electricity Settlement Company (“ESC”) timescales with Regulation 41(2).^[1] The amendment changes the Adjusted Eij for the purposes of Rule 8.6 (where “E” is energy delivered, and “i" is the relevant CMU, and “j” is the relevant Settlement Period in which that CMU delivers energy) to 34 working days and updates Rule 10.5 timescales including extending the Capacity Volume Register publication dates. The government will also implement a corresponding amendment to extend the Volume Re-allocation window in the event that a CMU has over- or under- delivered against its capacity obligation during a System Stress Event. An adjustment to the volume re-allocation timelines for calculating over-delivery payments may be required as a result.
    
2. Extended Performance Tests (“EPTs”) and further aligning Regulation 50 with policy intent
   
   The government will amend Regulation 50 such that it aligns with CM Rules. Failure to meet EPTs will now be dealt with in the same way as failure to meet SPDs by suspending payments following the closure of the SPD/EPT window.
    
3. Changes to the regulations clarifying non-permitted Capacity Market and Contract for Difference participation
   
   While currently not inconsistent with policy intent, in accordance with the majority views of respondents, the government will proceed with making Regulation 16(2) more explicit to clarify that a CMU can only be prequalified where no CfD has been awarded. For more detail on the proposal and stakeholder response, see our previous Law-Now here.
   
   The government aims to support flexible plants which have the potential to contribute to both security of supply and decarbonisation. For instance, the government intends to ensure that a plant transitioning from a CM to Dispatchable Power Agreement (DPA) does not face unnecessary regulatory obstacles in addition to potential technology challenges.
   
   The government confirms there is currently no policy change associated with this clarificatory amendment although it will consider introducing a targeted exception to enable transitioning plants with a CfD to participate in the CM Regime.

2. Accelerating investment in low carbon technologies

1. Multi-year agreements for low carbon, low Capex technologies and Capex thresholds 
   
   To incentivise low carbon participation in the CM Regime, the government intends to implement both proposed policies:
   
   1. 3-year agreements with a Capex threshold of £0/kW, only available to low-carbon New Build and Unproven DSR capacity; and
   
   2. Introducing a new 9-year Capex threshold for low carbon projects to act as a midpoint between 3-year and 15-year thresholds.
   
   The government will also implement the policy to define the 100gCO²/kWh ceiling on eligibility for "low carbon" status in the CM. However, the government still intends to review appropriate methodologies for biomass and other technologies with emissions not from fossil fuel sources.
   
   The government maintains that offering 3-year agreements with no Capex thresholds addresses participation barriers for low carbon capacity, whilst limiting consumer risk. The government intends to maintain competitiveness in CM auctions by retaining the longest agreements for high-Capex technologies and the use of Capex thresholds. The 15-year agreement threshold will be kept at its existing level ensuring a wide range of carbon technologies are eligible for long multi-year agreements. To ensure thresholds are more relevant to types of refurbishments competing in the CM, the government will also update the reference cost level for the 3-year threshold to link to the cost of refurbishing on Open-Cycle Gas Turbine (OCGT). The government is further consulting on changes to the 3-year refurbishment threshold in its latest consultation.
    
2. Extended Year Criteria, Total Project Spend and long build times
   
   The government intends to introduce a declared (12-month) long stop date and a declared additional (24-month) long-stop date. Access to the additional (24-month) long stop date will only be available through declaration at prequalification. To align with stakeholder suggestions, the Declared (Additional) Long Stop will not influence a CMU's role as Price Maker versus a Price Taker and will only be available for a maximum of 3 years from the proposal’s implementation. To limit risks to security of supply, the government will also introduce the applicability, prequalification requirements and operational parameters as consulted on at 6.3.2 of the Phase 2 Consultation.
   
   Addressing the stakeholder request for clarification on the approach for a suitable market mechanism for LDES technologies, the government reiterated that the CM Regime is unlikely to provide the necessary revenues to facilitate private investment in LDES technology.
   
   In line with the majority view of respondents, the government will amend the definition of Total Project Spend so that Refurbishing CMUs are aligned with new build CMUs to cover a period of 77 months prior to the commencement of the first Delivery Year. The government will also progress the amendment to Extended Years Criteria to clarify the requirement to replace a turbine, closer reflecting current CM Regime projects and technologies.
    
3. Demand Side Response participation
   
   With majority support for these proposals the government intends to implement both policies. The government plans incorporate a requirement to only publish the outward postal code (e.g. NE1) of residential addresses on the CM register and redact all other address information. Some respondents believe the redaction policy should be extended to residential MPANs and stakeholders indicated support for a wider review of information collection and storage requirements for DSR in the CM which the government will consider in future policy development.
   
   Based on stakeholder suggestions, and the need to balance the concerns outlined above, the government has confirmed it will allow DSR CMUs to reallocate up to the current limit of 40 components, or 20% of their portfolio size (whichever is higher). As a result, there will be no impact on DSR CMUs with less than 200 components.

3. Decarbonising the Capacity Market - Publishing Capacity Market emissions data

After considering responses and previous commitments the government confirmed its intention to publish independently verified emissions data via a separate Emissions section of the CM register ‘the CM Emissions Chapter’, to be updated quarterly. Please see the Phase 2 Policy Decisions for further information on the emissions data which will be shared. The fossil fuels emissions data will include emissions for components and a figure for total emissions for the CMU, which will be automatically calculated from the component data using a formula to be set out in the CM Rules. Carbon emissions reporting is important for achieving a decarbonised power sector. The government maintains that the benefits of publishing emissions data outweigh concerns around commercial sensitivities and data use.

4. Conclusion

The Phase 2 Policy Decisions further the government’s aim to facilitate investment in low-carbon developments and strengthen security of supply. Subject to parliamentary time constraints, the latest round of reforms are intended to be implemented before the 2025 prequalification window (currently expected in October 2025). In accordance with the Phase 2 Consultation Responses, the latest measures have generally been supported by industry stakeholders. In line with the evolving nature of such measures, the government has suggested it will incorporate stakeholder suggestions which were not implemented as part of these reforms into future policy considerations.

On 15 October 2024, the government published its latest consultation which complements the broader strategic considerations being raised through the Review of Electricity Market Arrangements (REMA). To encourage transition of additional projects in an evolving market, the government is conducting further engagement with stakeholders and industry to strengthen supply and reform the CM Regime to retain flexible generation capacity and support conversion of unabated gas plants to low carbon infrastructure.

Article co-authored by Lucy Delamere, Trainee Solicitor at CMS.
 

^[1] Regulation 41(2) Electricity Capacity Regulations 2014