Green light for GB capacity market

Capacity markets are designed to ensure that there is always sufficient generating capacity available to produce enough electricity when needed. Electricity demand can change quickly, owing to the time of day, changes in the weather and the seasons.

At the same time, a growing proportion of clean renewable energy capacity is being connected to the grid to meet climate change targets. This introduces variability in supply, for example through the installation of solar and wind farms.

Back-up capacity is required to meet these variations on both the supply and demand sides, and can come from a range of sources such as conventional thermal power plant, storage technologies, such as batteries, or demand-side response, whereby a large electricity user for example, agrees to have their supply interrupted for a limited period to help rebalance the system.

The GB capacity market was introduced in particular to ensure security of electricity supply during a transition period in which coal-fired plant is being phased out and large amounts of new renewable energy are being installed, the aim being to reduce power sector greenhouse gas emissions.

This back-up capacity is secured by capacity market payments, which are awarded through competitive auctions. This competitive process ensures that security of supply requirements are met at the lowest cost to consumers.

Why the delay?

In July 2014, the European Commission found the capacity mechanism proposed by the UK government to be compatible with EU state aid rules. However, this decision was appealed to the General Court, a constituent court of the European Court of Justice.

The appeal was brought by a demand-side response operator who argued first that the capacity market was unfair to demand-side operators and second that the European Commission had not followed the correct procedure in approving the scheme without a formal investigation.

The appeal was upheld on the second count and payments under the capacity market were suspended.

In February 2019, the European Commission started its formal investigation, resulting in the decision October 24 that the capacity market does not unfairly advantage or disadvantage any particular technology, including demand-side response.

The decision confirms that the GB capacity market covering the period 2014-2024 complies with EU state aid rules and, in particular, with the 2014 Guidelines on State Aid for Environmental Protection and Energy.

The UK government has also committed to improving the mechanism further in future, for example by lowering the minimum capacity threshold for participation in auctions, which will help demand-side operators, and further enabling the participation of external electricity supplies via interconnectors to the European continent and Ireland.

Following the judgement, the UK government said capacity market payments suspended by the General Court appeal decision will reach capacity providers in January 2020. In addition, three capacity market auctions planned for early 2020 will go ahead to secure capacity needs out to 2023/24.

Low price results

Competitive auctions to secure capacity went ahead in the UK despite the suspension of the system on procedural grounds, while the European Commission conducted its investigation.

These auctions were generally oversubscribed forcing prices down. The latest T-1 capacity auction for delivery in 2019-2020 concluded on June 12 this year, resulting in the award of 3,626 MW of capacity at a record low price of £0.77/kW.

No coal-fired generation was successful in this auction, with gas-fired capacity securing 2,030 MW, interconnectors 1,025 MW, demand-side response 195 MW, waste-to-energy 264 MW, biofuels 76 MW and battery storage 8 MW.