DECC consultation on proposed changes to the Capacity Market (CM): full CM costs could be charged one year earlier

Delivering energy security has been re-iterated as the number one priority for the  Department of Energy & Climate Change (DECC) and as a result they have been reviewing the Capacity Market (CM) mechanism to ensure it remains fit for purpose.

Tightening capacity margins as a result of recent plant closure announcements; a shortage of new capacity being procured through the CM; and concerns over National Grid’s balancing reserve distorting the market has led to some proposed changes being issued yesterday, 1^st March 2016: 

DECC’s consultation proposes some key reforms, perhaps most significantly:

• The first CM delivery year is proposed to be brought forward by one year to October 2017-September 2018, with a new auction held in January 2017.  The first auction for 2018/19 resulted in a forecast cost of around £1billion/annum so costs of this magnitude may now be recovered from suppliers, and ultimately consumers, a year earlier than expected in 2017/18.

Further changes have also been proposed including:

• Buying more capacity, and buying it earlier. DECC expect the next CM “T-4” auction in December 2016 to buy materially more capacity than might otherwise have been the case;
• Tightening delivery incentives on those who have agreements to deliver against them and to penalise those who renege more severely.

Furthermore, new legislation covering diesel engines is proposed and an Ofgem review of embedded benefits is also noted, with potential changes to the charging regime to be published in the summer.

Impact: Although changes won’t be confirmed until the summer, they seem likely to go ahead given DECC’s concerns and priorities. While the reforms may lead to an improved security of supply outlook, it will come at a cost to consumers one year earlier than expected. CM charges are based on consumption between 4-7pm on working days from 1 November to the end of February. Customers with the flexibility to move their consumption away from this period will avoid a proportion of the costs.

Further information

The Capacity Market mechanism is one of the key parts of the UK Government’s Electricity Market Reform (EMR) programme and will ensure that there is always enough power generation capacity to keep the lights on, even when demand for power spikes. To find out more visit the Electricity Market Reform (EMR) page on our website.