Capacity Market: December Publications

Michael Shanks Excerpts

Monday 16th December 2024 Written Statements

[The Parliamentary Under-Secretary of State for Energy Security and Net Zero (Michael Shanks)]

I am tabling this statement to inform members of three publications relating to the capacity market. The publications consist of a consultation on improvements to capacity market rules and treatment of consumer-led flexibility in the capacity market; a call for evidence inviting further views on improvements to consumer-led flexibility in the capacity market; and a statutory report summarising the capacity market’s performance over the last five years.

This Government have committed to delivering clean power by 2030 and accelerating progress towards net zero, while ensuring the security of supply. Making Britain a clean energy superpower by 2030 is one of the Prime Minister’s five missions. To deliver this mission, we will increasingly rely on renewable power. The Government have set targets to double onshore wind, treble solar and quadruple offshore wind by 2030.

Introduced in 2014, the capacity market provides Great Britain with its ultimate safeguard to ensure security of supply. It serves to ensure enough capacity is available to provide a reliable electricity supply during peak demand periods and system stress events. The funding provided through the capacity market incentivises investment in new and existing generation, interconnectors, batteries, and demand side response mechanisms that enable consumer-led flexibility to ensure sufficient available capacity when required. This capacity is acquired through annual auctions held at intervals four years ahead and one year ahead of its delivery years. The Government regularly amend the capacity market prior to auction cycles to ensure it is cost-effective and meets broader strategic objectives such as clean power by 2030.

The transition to clean power will see changes in the patterns of energy production and consumption, with flexibility playing an increasingly important role. In October, we published a consultation and call for evidence exploring proposals to maintain security of supply and to enable flexible generation capacity to decarbonise. Today, we build upon this work by publishing a consultation and call for evidence on proposals to modernise the capacity market rules and improve consumer-led flexibility within the capacity market.

Consumer-led flexibility involves voluntary actions taken freely and directly by energy consumers to shift their electricity use. This includes residential customers using smart technologies, such as smart-charging EVs and heat pumps, as well as industrial and commercial units adjusting demand and utilising behind-the-meter generation or storage. This enables consumers to be rewarded with cheaper electricity by flexibly adjusting their usage to times of lower demand on the grid.

The consultation sets out policies to streamline how consumer-led flexibility, delivered by demand side response mechanisms, participates in the capacity market. As participation in the capacity market from aggregated domestic demand-side response portfolios increases to enable increased consumer-led flexibility, it is important that capacity market rules are updated to better incorporate and enable access from emerging technologies that can respond flexibly to times of high energy demand. It also seeks views on the introduction of a termination fee for new demand-side response mechanisms that fail to demonstrate agreed capacity, improving delivery assurance to enable the capacity market to fulfil its central principle of ensuring security of supply.

The consultation also outlines proposals on capacity market rule improvements. The capacity market rules govern how the capacity market operates. It is integral that the rules are clear and consistent in their operation to ensure the market remains accessible for new entrants seeking to invest in new sources of capacity. The consultation outlines proposals to improve the accessibility and clarity of the capacity market rules to ensure greater understanding and adherence to them. The proposed changes will enable capacity market units to change their opt-out status following a change in their operational circumstances, and will remove rules on transitional and coronavirus arrangements that are no longer required. These changes should ensure the capacity market rules remain fit for purpose and continue to allow new, innovative technologies to participate in the capacity market without facing unnecessary administrative hurdles. The proposed changes also extend a policy to allow existing generators to use data older than 24 months to pre-qualify for auctions held in 2026. This will further increase auction competitiveness and lower the costs of the capacity market for consumers’ energy bills.

The call for evidence seeks views on potential changes to the capacity market to improve consumer-led flexibility. It builds on proposals laid out in the capacity market phase 2 consultation, which was published in October 2023 to invite views on how the demand-side response mechanisms that enable consumer-led flexibility could be better categorised and integrated into the capacity market. It also seeks feedback on how these mechanisms can be better supported through improved portfolio management, while maintaining the high levels of delivery assurance expected within the capacity market.

Finally, we have published the second statutory five-year review, covering the years 2019 to 2024 of the capacity market’s performance—referred to as the 10-year review. This review provides a summary of how the capacity market has performed against its original objectives. It draws on evidence gathered from a Government-commissioned independent process and impact evaluation of the capacity market scheme in September 2021, and on responses to a call for evidence published in October 2023.

The review has taken place as the Government consider larger strategic questions through the review of electricity market arrangements programme, whose remit includes how a future capacity market can meet Government objectives on security of supply. The review does not seek to pre-empt the outcomes of the review of electricity market arrangements.

These publications consider actions to improve accessibility to and functionality of the capacity market, while continuing to uphold its primary objective of ensuring security of supply. As the capacity market reaches its 10-year milestone as a key pillar at the heart of the Government’s strategy for ensuring security of electricity supply in Great Britain, these proposals seek to ensure that it remains fit for purpose and continues to play a crucial role in achieving the clean power mission.

[HCWS314]