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The Capacity Market is back

The European Commission has ruled that the UK Government’s Capacity Market scheme can be resumed following its its suspension in November 2018, and the subsequent investigation which began in February 2019 [1]. The role of the Capacity Market is to ensure that there is adequate energy supply in reserve for the National Grid over winter months when demand is at its highest, so the UK can ‘keep the lights on’ [2].

The Capacity Market secures the supply of energy by awarding contracts that require energy generators to have a certain amount of generation capacity set aside for when the Grid needs to call upon it [1], these contracts run into the hundreds of millions, and the total amount that will be paid to suppliers is around £1bn [2].

The suspension was due to a complaint made by a clean technology company, who argued that the contracts awarded to energy producers were in breach of state aid rules [1], the scheme has come under scrutiny for allegedly favouring fossil fuel generators over cleaner energy sources [3]. However, following a yearlong investigation, it has been ruled that there is no evidence that it puts any particular category of energy provider at a disadvantage in bidding for payments [4].

Historically, Capacity Market contracts have gone to gas, coal, and nuclear energy generation plants [3], although renewables will be included in future auctions. The major obstacle to renewables involvement in the Capacity Market is that generation is at the mercy of the elements, generation forms such as solar and wind cannot be switched on and off as required.

Outcomes

The key outcome of the decision is that the capacity market will continue largely as before the suspension, however, the Government will be looking into the case for long term Demand Side Response (DSR) contracts in an upcoming review [5]. DSR contracts assist with balancing the Grid which involves large energy users reducing their demand by utilising on-site generation at peak times, supplying energy to the Grid or increasing demand to absorb excess supply.

Capacity Market contracts will be awarded in 2020 for agreements through to winter 2023/24 [1], but beyond this, the Government’s strategy may change. Whilst it was not found to disadvantage cleaner sources of energy, it equally does not incentivise them over fossil fuels, which may be one way in which they revise the mechanism in future.

Energy storage has the ability to harness renewable generation and respond quicker than other assets meaning it can deliver on CM contracts whilst supporting the decarbonisation of the UK. Energy storage solutions including Powerstar VIRTUE, that can be integrated with other smart technologies, will certainly play a role of heightened importance in the future, and already have a wide uptake by organisations looking to reduce their energy costs and carbon emissions. Through an Energy Optimisation System (EOS), such as that developed by Powerstar, activities can be intelligently and automatically prioritised to optimise output for a whole site, supporting businesses that are preparing for the flexible power future.

It is clear that energy storage will become integral to those hoping to bid into the Capacity Market with renewable energy generation sources, as the generated energy can be stored and used when required. This allows businesses to overcome the intermittent nature of sources like solar and wind, and will allow them to commit to Capacity Market contracts in the future.

1. https://www.energylivenews.com/2019/10/24/eu-approves-uks-capacity-market-scheme/
2. https://www.thetimes.co.uk/article/energy-stocks-light-up-with-brussels-poised-to-approve-anti-blackout-plan-czzjqjstw
3. https://www.theguardian.com/business/2019/oct/24/brussels-allows-uk-to-subsidise-fossil-fuel-generators
4. https://www.current-news.co.uk/news/european-commission-clears-capacity-market-scheme-to-continue
5. https://theenergyst.com/capacity-market-cleared/