The Government has published proposals in a consultation for changes to the Capacity Market (CM) on 15 October 2024. The Department for Energy Security & Net Zero (DESNZ), as part of its Clean Energy Mission, is looking to increase deployment of low carbon technologies including Carbon Capture, Usage and Storage (CCUS), Hydrogen to Power (H2P) and Long Duration Energy Storage (LDES). As part of that, the Government is looking to prepare non-renewables (such as unabated gas) to allow them to transition away from such technologies while remaining part of the Capacity Market.

The Government's proposals include: (a) lowering the capex threshold for 3-year CM agreements to incentivise the retention of existing Capacity Market Units (CMUs); (b) adding in requirements to demonstrate compliance with the Government's Decarbonisation Readiness (DR) proposals; and (c) allowing a means by which unabated gas plants can decarbonise by allowing multi-year CM agreement holders to transfer to a Dispatchable Power Agreement (DPA).

3-Year CM Agreements

DESNZ explains that as Great Britain moves towards low carbon technologies, there will be greater need for firm, flexible capacity on the CM including for the moment unabated gas plants while Great Britain is still transitioning. Such gas plants need to enter into "refurbishing" CM agreements to refurbish gas plants to run for longer. In order to be added onto the CM, gas plants can enter into CM agreements with varying length terms. 1-year CM agreements do not require a capex threshold to be met, while 3-year CM agreements have a capex threshold which currently sits at £165/kW (originally set at £125/kW but adjusted for inflation)[1]. Studies conducted for the Government by Baringa suggest that 1-year agreements do not offer sufficient revenue certainty for BMUs and the capex threshold for 3-year CM deals is too high to present a good economic case for investment.[2] The Government, therefore, proposes lowering the capex threshold for refurbishing CMUs to £50/kW.

Decarbonisation readiness

The Government will implement new DR legislation expected to come into effect from 28 February 2026 that require combustion plants power plants to demonstrate DR through conversion to H2P or retrofitting among other requirements. There is a concern that plants looking to secure agreements on the 2026 T-4 auction may have agreement lengths of up to 15 years but will not be subject to DR legislation which is yet to come into force. The Government proposes to address that with 3 possible proposals:

Option A: Requiring applicants to the CM to apply for an environmental permitting regulations (EPR) permit, which would include DR requirements ahead of their first delivery year.

Option B: Applicants would need to apply for an EPR permit but provide evidence of having secured it no later than 10 working days prior to T-4 auction opening taking place in the calendar year prior to the start of the relevant delivery year.

Option C: Similar to Option B but the requirement to obtain a DR permit is included in the Existing Years Criteria provision in CM Rule 8.3.6B so failure to provide DR requirements would result in the agreement being shortened to three delivery years.

Dispatchable Power Agreements

In December 2020, the Government proposed the development of DPAs, a business model used to incentivise private investment in CCUS by allowing unabated gas plants to transition to retrofit carbon capture equipment and convert to CCUS without penalty. Currently, under the CM Rules there are no means by which unabated gas plants can take immediate steps to decarbonise and move to CCUS, for example, without terminating their CM agreement. DESNZ proposes a Pathway A by changing the CM Rules to allow for unabated applicants to leave a multi-year CM agreement and transfer to a DPA. The Government has proposed eligibility criteria such as that the CMU must be exiting from a multi-year obligation of up to 15 years, the applicant must intend for the CMU to convert to CCUS and the applicant must be able to demonstrate that the DMU is party to a DPA before using a managed exit. Pathways B-D are also being proposed with more details to come in due course.

Response

The consultation will close on 10 December 2024 and DESNZ will provide responses in early 2025. If you have any further questions on the regulatory regime for the Capacity Market or the wider Energy sector, our team of Energy experts can help. Please contact James Stanier or Russell Evans for more information.

Footnotes

1 p.12, "Capacity Market: proposals to maintain security of supply and enable flexible capacity to decarbonise" published 15 October 2024.

2 Ibid.