Reforms for Britain's Energy Capacity Market

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12 January 2023

Improved energy security and a more secure transition to net-zero are set to be delivered through the UK government’s significant proposals to reform Great Britain’s Capacity Market (CM).

The Capacity Market is the scheme that sits at the heart of the government’s strategy for ensuring the security of electricity supply in Great Britain, using competitive auctions to make sure there is enough reliable capacity to meet Great Britain’s peak electricity demands, safeguarding against the possibility of future blackouts.

The announcement may bring some hope to businesses that are struggling with current energy prices, mainly credited to our reliance on imported natural gas which has currently been politically compromised. 

A new package to help UK businesses manage rising energy costs is set to replace the current Energy Bill Relief Scheme – the Treasury's new Energy Bills Discount Scheme (EBDS) will run from 1 April 2023 to 31 March 2024 and will give businesses a per-unit discount on their energy bills.

“As we move towards cleaner and cheaper energy, it is essential that the UK provides secure and affordable energy for all,”

 

– Graham Stuart
Energy and Climate Minister

The Energy Market Movements

Since its introduction in 2014, the landscape in which the Capacity Market operates has shifted with renewable energy now making up a significant proportion of our electricity generation system. To ensure the Capacity Market is fit for the future, the government is today publishing action plans to ensure the scheme keeps pace with this transition to cleaner energy sources and technologies – often cheaper than fossil fuel counterparts - and can support the delivery of a decarbonised power system by 2035, without compromising the security of supply.

This includes consulting on new contracts for low-carbon technologies to incentivise their participation in CM auctions, creating new timelines and requirements for oil and gas generators to reduce emissions from 2034, such as through implementing carbon capture and hydrogen to decarbonise, reducing running hours, and strengthening the scheme’s ability deliver security of supply in times of electricity system stress.

“As we move towards cleaner and cheaper energy, it is essential that the UK provides secure and affordable energy for all,” said Graham Stuart, Energy and Climate Minister.

“The plans will deliver this reliable energy and ensure the scheme that sits at the heart of Britain’s energy security is fit for the future.”

Meeting Future Demands

Through competitive auctions between technologies such as batteries and gas-fired generators, the Capacity Market secures the capacity needed to cope with future demand peaks at least cost to consumers.

Innovative technologies, such as batteries, are playing an increasingly important role in keeping the lights on across Great Britain. New technologies, such as Carbon Capture, Utilisation and Storage (CCUS) and hydrogen power and storage, are expected to come online over the coming decade, as the UK continues to lead the world in decarbonising.

To accommodate this, the government is setting out the following proposals to reform Great Britain’s Capacity Market.

• Incentivising greener, flexible technologies to compete in CM auctions by offering multi-year contracts for low carbon flexible capacity, such as smart ‘demand side response’ technologies and smaller-scale electricity storage, supporting the move towards delivering secure, clean and affordable British energy in the long term.
   
• Ensuring a clear pathway for carbon-intensive forms of capacity as the UK transitions to net-zero and the capacity mix of the CM diversifies, by sending a clear signal to oil and gas generators about the timelines and requirements for emissions reduction in the 2030s and seeking evidence on mitigating any barriers this capacity may face in decarbonising.
   
• Underpinning these efforts with a proposed new lower emissions limit in the Capacity Market which will kick in for new build plants from 1 October 2034, meaning all new oil and gas plants receiving long-term agreements through the CM will be obliged to lower emissions, through decarbonising their capacity by introducing carbon capture, hydrogen and other low carbon methods into their generation and by reducing running hours.
   
• Taking steps to strengthen the scheme’s ability to deliver security of supply by reforming the CM’s approach to performance testing to ensure confidence as early as possible in the winter that capacity is available and strengthening the non-delivery penalty regime to send a clear signal that capacity must deliver in times of electricity system stress.

This announcement forms part of the government’s work to reduce the UK’s exposure to volatile global gas markets and energy costs for consumers in the long term as part of the Review of Electricity Market Arrangements (REMA). The government continues to seek views on a wide range of energy reform options, with an update on REMA expected early this year.

"It’s vital that we decarbonise our electricity system completely by 2035, so this consultation represents an important step forward in that process," said RenewableUK’s Chief Executive Dan McGrail. 

"We need to incentivise more investment in new low-carbon flexibility in our modern energy system based on renewable technologies including wind, solar, tidal stream and green hydrogen. This will strengthen the UK’s energy security, enabling us to move closer towards energy independence in the years ahead.

Despite this, the government’s recent endorsement of a new coal power plant has come under scrutiny for being a move in the wrong direction. A letter from Mr Gove, agreeing with the planning inspector's recommendation, says he was "satisfied that there is currently a UK and European market for the coal” and that carbon “emissions would be relatively neutral and not significant". This still aligns with the government’s policies on curbing carbon in our own nation.

Picture: electricity transmission towers against a sunset. Image credit: Unsplash.

Article written by Bailey Sparkes | Published 12 January 2023

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