UK Government: ‘The devil is in the details’ for allowing RE in Capacity Market

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A conference held by the Westminster Energy, Environment and Transport Forum (WEETF) in London on November 13 set out to examine the next steps for the U.K.’s Electricity Market Reform (EMR) – the policy framework governing the country’s electricity sector.

The Capacity Market and Contracts for Difference (CfDs) schemes comprise part of the EMR, which was introduced in December 2013 via the Energy Act 2013.

According to the legislation, the government must carry out a review of six EMR chapters, including the Capacity Market and the CfDs, after five years of policy implementation.

The renewable energy industry, including solar, is following the review process closely not only because of the CfDs, which is the only policy scheme currently supporting large-scale renewable projects in the United Kingdom, but also because the government has also held consultations on allowing renewable energy capacities to bid in future Capacity Market auctions.

Capacity market

Part of the review process for the Capacity Market specifically was a call of evidence launched by the U.K. Government in August.

Charles Phillips, Head of the Capacity Market at the Department’s of Business, Energy and Industrial Strategy (BEIS), told the WEETF conference that the call, which expired on October 1, attracted over 80 responses.

BEIS is presently evaluating these responses and aims to submit its policy proposals for public consultation some time between the end of 2018 and the beginning of 2019, Phillips said.

It is set to respond to the new consultation in the spring of 2019, while the formal EMR review will be published in the summer, before the prequalification process for the next round of Capacity Markets starts.

Based on this timeline, one understands that should renewable energies be allowed to bid in the Capacity Market, this will not happen before January or February 2020, when an auction is expected to take place.

Nevertheless, the most important message of Phillips’ presentation is that the government prefers to consider “the stability versus the urgency of policy changes for the Capacity Market.”

In other words, he said, the government has received the message that investors do not like abrupt changes. As such, it is not interested in introducing policies that bring sudden change to the market, but rather which change things incrementally.

Regarding renewable energies’ entry to the Capacity Market, Phillips told the event that in principle the idea was met with general support in the recent call for evidence, however he never tired of repeating that there is “much devil in the detail” and that “BEIS is keen for evidence of the market.”

The ‘de-rating’ factor

There is no doubt that one of the details Phillips referred to is the so-called ‘de-rating’ factor of renewable energy technologies.

Such a factor is applied to all forms of electricity generation and energy storage, as it is assumed that electricity generation technologies cannot be available 100% of the time.

This is because power plants can break down, while solar and wind generation is variable. Therefore, the government is applying a ‘de-rating’ factor to each technology, determining how much electricity is required to meet the government’s reliability standards.

The critical detail is that de-rating a technology equals a reduction in the revenues of the projects.

Battery storage technologies, for example, which were awarded a number of Capacity Market contracts in auctions held in December 2016, were later de-rated resulting in less battery storage being contracted in the January 2018 auctions.

An attendant of the WEET Forum from the energy storage industry told Phillips that as a result of de-rating battery storage, the price signals that conventional power receive in the Capacity Market auctions are now five times higher than the price signals battery projects receive.

Phillips answered in turn that de-rating battery storage was a technical issue and that BEIS did not want to discourage energy storage.

Emma Pinchbeck, executive director at RenewableUK, the U.K.’s wind and marine energies association, told the event that wind and solar energies should be able to compete in the Capacity Market; however it is absolutely vital that the U.K. Government engage with the industry on the de-rating issue and show them how they carry out their technical calculations.

Subsidy-free solar

Aled Moses, senior regulatory affairs advisor at Ørsted, a renewable energy company that has been awarded CfD contracts for large offshore wind parks, told the Forum that these are projects with large capital expenditure (capex) and therefore they cannot rely on Capacity Market contracts alone. They also need CfD contacts to be realized.

Therefore, solar PV and onshore wind projects, which have much lower capex requirements are first in line to benefit for an entry of renewable energies in the Capacity Market scheme.

In fact, Steve Davies, head of wholesale market regulation at E.ON UK, told the event’s attendees that the Energy Act 2013 legislation allows renewable energies to compete in the Capacity Market, as long as they do not receive subsidies from any other policy scheme. It is the U.K. Government that has blocked this development via additional Capacity Market rules.

Should the forthcoming EMR review scrap these rules and allow renewable energy to compete, the development of subsidy-free PV projects via the Capacity Market route will depend on the de-rating factor of the PV technology and whether such projects are also able to source additional revenue streams via different business models.