Update to the Capacity Market Rules: Government response to consultation, June 2021

The government recently undertook a consultation on certain amendments they proposed for improving the Capacity Market (CM). The government's response to the consultation on improvements was published in June 2021. Below we have summarised the amendments that are now being made.

The government will publish an updated Guidance document ahead of the 2021 prequalification window and will continue to review the requirements to ensure that they remain fit for purpose.

Emissions limits

The government has, through a series of amendments to the Capacity Market since 2019, introduced emission limits in the Capacity Market. The recent consultation included a number of proposals to refine the emission related requirements.

Carbon Capture, Utilisation and Storage (CCUS)

In the consultation, the government noted that it had been informed that a potential CCUS equipped plant wished to participate in future CM auctions. The government therefore proposed a specific regime to adjust the fossil fuels emissions calculation for captured CO₂ so that the overall emissions of such plants could be accurately considered in the CM auction.

The government has decided to introduce a dedicated formula, the 'Transferred CO₂ Factor', for calculating the carbon emissions of a generating unit equipped with CCUS technology, which a person may choose to apply. The formula allows for the exclusion of CO₂ captured from a plant's emissions in all circumstances irrespective of the end uses of the captured CO₂, other than if it is simply released after capture. The government acknowledged in the response that the CCUS arrangements will need to be kept under review as wider CCUS and net zero policy develops.

Capacity Market Units (CMUs) in the Combined Heat and Power (CHP) Technology Class

Previous revisions to the CM arrangements had reflected the government's acknowledgement that CHP facilities were more efficient than non-CHP facilities and this efficiency should be reflected in the emissions calculations.

For CMUs in the CHP Generating Technology Class, the government has now decided to introduce a revised formula to ensure that all CHP CMUs prequalifying from 2021 onwards, including those not producing high-pressure steam, are able to provide an accurate reflection of their efficiency based on the certification provided under the Combined Heat and Power Quality Assurance (CHPQA) programme. This will include a dedicated 'Design Efficiency' formula for use when determining carbon emissions of a generating unit in the CHP Generating Technology Class.

Plant burning mixed fuels

The government had decided to introduce a dedicated methodology for calculating the emissions of a generating unit using more than one fuel which will apply to capacity market agreements from the 2021 Prequalification Window onwards. The formulae calculate the fuel share for each fuel used and its emissions factor. The government's intention is to make emissions calculations more accurate for multi-fuel plants and to 'future-proof' the CM, for example, in relation to the blending of hydrogen into CMU's fuel mix.

The formulae will use data from the previous 12 months rather than estimates or standardised values. Each Fossil Fuel Emissions Declaration (FFED) submitted during prequalification will require the most recent data to be used. The CMU will not be able to rely on a previously submitted declaration. Specific arrangements are proposed for circumstances where 12 months' data is not available.

CMUs applying multiple additional formulae to determine Fossil Fuel Emissions

CMUs will be able to apply more than one of the additional formulae introduced by the government when calculating Fossil Fuel Emissions and specific formulae will be applied to specific classes of plant e.g. CHP CMUs which burn mixed fuels. For example, the government noted that a CCUS-equipped CHP scheme applying both CCUS and CHP formulae would receive an undue advantage as the declared fossil fuel emissions would be those from electricity only, but the CCUS adjustment would be in respect of all CO₂ captured.  This is, therefore, to be addressed through specific rules for plants within this class, and is one of a number of areas the government will keep under review.

Other points of interest

• The Rules governing emissions limits at the time a Capacity Agreement is awarded will continue to be effective for the duration of the Capacity Agreement in question.
• Irrespective of how long a traded Capacity Agreement is held, providing a FFED is a prerequisite to a CMU taking part in secondary trading.
• FFED will not need to be independently verified until the start of prequalification in 2022. Thereafter, the FFED will need to be verified by an Independent Emissions Verifier.
• CM participants will be required to commit in the prequalification process not to exceed the carbon emissions limits during the Delivery Year (rather than the commitment only being given in the FFED).
• The government intends for disclosure and publication of the emissions data to be made through the Capacity Market Register from the 2022 prequalification period onwards.

Secondary trading and plant closures

In the consultation, the government noted that there had been a number of CMUs that had closed prematurely during their Capacity Agreement term, and the rules around secondary trading and CMU closure needed clarifying. The government has concluded that adjustments will be made to enable certain secondary trades to continue if the transferor's Capacity Agreement is terminated. These apply to all Capacity Agreements and include:

• partial secondary trades will be not be cancelled when the transferor's Capacity Agreement is terminated;
• secondary trades submitted for registration to the Capacity Market before receipt of a Termination Notice will remain effective for the remainder of the Delivery Year but transfers for future Delivery Years will not be covered; and
• insolvent transferors that have received a Termination Notice will be able to continue to secondary trade until the end of the relevant termination period. However, if the full capacity obligation is traded away after receipt of a Termination Notice, the Capacity Agreement will be terminated.

The government considered whether to adjust the termination fees payable where a secondary trade has occurred, but concluded not to, to avoid gaining risk.

Coronavirus easements

Recognising the continuing impact of Covid on the market, the government has confirmed adaption of a number of measures, whilst noting they are not expected to have a significant impact on security of supply. For example, a Long-Stop Date Extension of 12-months will be available to CMUs that qualified for the extended Long-Stop Date last year and T-4 CMUs that have a Long-Stop Date of 30 September 2021 and have not yet had an extension. 2021 T-1 CMUs will not be able to extend their longstop date.

Additional points to note

• The Minimum Capacity Threshold will be maintained at 1MW.
• The consultation noted there is early evidence that exemptions in carbon pricing for smaller generators is distorting the CM. The government is working with Ofgem and other stakeholders to consider this further in light of other government policy.
• The Refurbishing CMUs Long-Stop Date will be made consistent with the New-Build CMUs' date. Refurbishing CMUs, and those in development yet to commence delivering capacity, will have the option of a 12 month Long-Stop Date.
• The government intends to require CMUs to register as BMUs in the future. However following the consultation, the government has decided not to implement this change for 2022 prequalification and will undertake further work with NGESO, Elexon and Ofgem on how and when to implement the change.

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