Consultation outcome

Capacity Market: rules amendments to improve auction liquidity - government response

Updated 18 July 2022

Introduction

The government ran a consultation from 8 to 22 June 2022 (the “Consultation”), to seek stakeholders’ views on two proposed technical amendments to the Capacity Market (“CM”) Rules. The proposed changes were aimed at removing certain barriers to entry to the next round of CM auctions – scheduled for early 2023 – in order to support improvement of security of electricity supplies in winter 2023/24 and beyond^{[footnote 1]}.

In summary, our proposals were as follows:

• postponement of the introduction of the statutory requirement for independent verification of fossil fuel emissions: Given delays to the accreditation process there was no guarantee that there would be sufficient availability of accredited Independent Emission Verifiers (IEVs) for the 2022 Prequalification Window. We proposed this measure, which effectively rolls over arrangements from previous years, in order to mitigate the risk of Applicants failing to prequalify for the 2023 CM auctions as a result of potential inability to access emissions verification services.

• amendments to arrangements on mothballed plant: This proposed time-limited measure would remove a barrier to entry for existing generating CMUs that have been mothballed for longer than 24 months, and which would otherwise prevent their prequalification for the 2023 CM auctions.

The short consultation period was necessary to ensure that, should we decide to implement our proposed changes following consideration of Consultation responses, we would have time to do so before the Prequalification Window for the 2023 auction round opens in July 2022.

Summary of responses

We received 30 responses to the Consultation. Around half of responses were from Capacity Providers^{[footnote 2]} and trade associations representing multiple Capacity Providers. The other responses received were from NGOs and members of the public.

Question 1 sought views regarding the proposal to postpone the requirement for independent verification of Fossil Fuel Emissions Declarations. We received 29 responses in relation to this question, with industry respondents – that is, Capacity Providers and organisations representing them – overwhelmingly supporting our proposal.

Question 2 sought views regarding the proposal on mothballed capacity. It also asked whether respondents thought there would be unintended consequences, and whether respondents thought there were alternative ways to achieve the policy intent beyond the ways set out in our proposal. We received 25 responses in relation to this question, with an overwhelming majority of industry respondents broadly agreeing with our proposal.

Industry respondents also expressed a number of other views on the mothballed capacity proposal, including what they regarded as a risk that mothballed plants may fail to deliver capacity when required or experience technical limitations before the start of the delivery year and that relaxation of the rules on mothball capacity may disproportionately favour some parties.

The responses from 10 NGOs and members of the public expressed concerns that our proposals would facilitate an increase in coal-fired generation in future years. This was in relation to both proposals and the Consultation in general.

Government Response

The government is pleased to note the broad industry support for both proposals. For the reasons set out in the Consultation and also below, the government will implement its two proposals without amendment. We will make the relevant legislative amendments ahead of the opening of this year’s Prequalification Window.

The UK Accreditation Service (UKAS) had not completed any IEV accreditations at the time the Consultation was published. The government is aware that UKAS is now close to completing several IEV accreditations. However, since these are likely to be completed close to the Prequalification Window, certain risks outlined in the Consultation remain present – for instance, that bottlenecks could form as multiple Applicants seek to access limited IEV services in a compressed timeframe, leading to failures of otherwise potentially eligible capacity to prequalify if they cannot access these services. For this reason, we intend to proceed with the implementation of the postponement of the introduction of IEV verification of Fossil Fuel Emissions Declarations, to prevent the creation of this potential barrier to entry.

As set out in the Consultation, we will implement the proposal on mothballed capacity in a time-limited manner, in order to reduce the risk of any wider impacts or unintended consequences. It will only apply for the 2022 Prequalification Window and the associated auctions in 2023. We intend to review the CM Rules relating to operational performance data for existing generating CMUs again in due course, to assess whether they are working as intended and whether any enduring changes may be required.

Regarding the respondent views about risk of failure of, or technical limitations to, plants which have been mothballed for longer than 24 months, these plants will have to demonstrate satisfactory performance during the delivery year, as per all other capacity participating in the CM. We consider this sufficient for ensuring that they are performing correctly. Regarding the respondent views about the potential for the change to disproportionately favour some parties, the change has been implemented in a technology neutral manner for all existing generating CMUs. Therefore, all existing generating CMUs which have been out of operation for longer than 24 months are eligible. The change has not been applied to secondary trading entrants.

With regards to concerns raised by NGOs and members of the public regarding coal generation, these respondents appear to have misunderstood the purpose of our proposals, which will not impact coal generators’ ability to apply to prequalify to participate in the CM. We would like to make clear that our proposals are not intended to facilitate an increase in coal- fired generation. The Emissions Limits framework prevents unabated coal-fired generation from participating in the CM from October 2024 onwards; the postponement of the requirement for independent verification of Fossil Fuel Emissions Declarations will not alter this.

Furthermore, as stated in the Consultation, the government is not aware of any evidence of previous falsification of Fossil Fuel Emissions Declarations. Our amendments to remove a barrier for mothballed capacity to apply to prequalify for the upcoming 2023 auctions will not affect coal plants’ ability to apply to prequalify to participate in the CM auctions either.

1. 1 The full consultation document is available for download at https://www.gov.uk/government/consultations/capacity-market-rules-amendments-to-improve-auction-liquidity ↩

2. i.e. companies that hold Capacity Market Agreements ↩