After a lengthy legal challenge, Business Secretary Andrea Leadsom has announced that the UK’s Capacity Market can now resume.
She also confirmed that both payments to generators and charges to consumers for the last year can be backdated. With Capacity Market payments approaching £1 billion, ultimately passed through to businesses and consumers, understanding how both the disruption and market resuming may affect your business is crucial.
What is the Capacity Market?
The Capacity Market is used to ensure that there is sufficient reliable generation capacity available to meet peak periods of electricity demand. Effectively, it protects against the risk of future blackouts by providing payments to generators to ensure sufficient capacity is available, if required.
Although more renewable energy capacity continues to be added to the grid each year (mainly off-shore wind turbines), we need to ensure that reliable back-up is always available for the winter nights when wind speeds are low.
This is achieved by offering payments to generators to keep generation capacity on standby, ready to provide emergency backup, if called upon.
National Grid forecasts energy demand several years in advance and generators are asked to bid into an auction, where they guarantee to have certain amounts of generation capacity available.
The primary, T-4 auction is used to line up capacity four years in advance, while the T-1 auction is used to top up capacity to account for changes in forecast peak demand.
For non-half hourly meters, costs are applied to all consumption and spread across the entire year. For bill payers with half-hourly metered supply, charges are instead applied to all consumption between 4pm and 7pm between November and February and, for both last winter and this coming winter, is around £80/MWh.
Why Was the Market Suspended?
A legal challenge in the European Court of Justice in November 2018 resulted in the UK’s Capacity Market being suspended. The challenge came from a British clean technology company that argued the scheme gave an unfair advantage to fossil fuel generation at the expense of Demand Side Response (DSR) technology options.
Since then, the market has been in a ‘standstill period’ that prevented the Government from holding capacity auctions, making capacity payments, or taking any other actions that would be deemed as state aid, until the case was resolved.
After a lengthy investigation, the European Court cleared the scheme to continue, having found no evidence that the scheme put any generators at a disadvantage or that it distorted competition.
What Can Businesses Do?
Despite the market having been suspended, suppliers have generally continued to collect Capacity Market changes from bill payers, following indications from Government that the scheme would resume and past contracts would be honoured.
This means that for most businesses, 2018/19 CM charges have already been paid. However, if for any reason a business withheld these payments or the supplier didn’t collect them, they will now be required to pay up.
With CM payments representing a significant additional non-commodity cost, for many businesses it is worth exploring the options available that would reduce exposure by better managing consumption profiles. This also delivers the additional benefit of further reducing the impact of other peak charges, such as Triads.
Such flexibility may offer opportunities for additional revenue streams both within the capacity market and also in the frequency response auctions.
This could be either via the ability to provide flexibility of demand, reducing consumption to compensate during periods of peak demand, or using on-site generation to offer additional capacity.
Levies for the upcoming 2019/20 Capacity Market will be applied from the start of November. As this period also coincides with the beginning of Triad season, now is the time to take action to reduce exposure to peak charges.