Utility Week

UTILITY WEEK | SEPTEMBER 2021 | 15 Policy & Regulation package of proposals, is to run dedicated auctions for low carbon capacity. These would run before the main capacity market auction with low carbon capacity permitted to qualify for both exercises. Once the first auction has been run, any low carbon capacity that has failed to net a contract would be able to enter the main one. The paper suggests that running this twin auction process would boost the mar- ket's potential liquidity and encourage competition The paper suggests the target in the low carbon auction could be ratcheted up as lower carbon technologies, such as CCS- enabled gas and hydrogen-fired generation, become more widely deployable in the late 2020s or early 2030s. The scope for "significant" competition in the low carbon auction could result in lower clearing prices for capacity secured through this avenue, the call for evidence suggests. Edwards says these two types of auction will spur the bringing forward of low carbon technologies through the capacity market. "They are essentially trying to redesign the capacity market so that they can guaran- tee the procurement of low carbon capacity," says Aurora's Dey. "For the government to even propose something like that is radical," says Flexitric- ity's Cox. Commitment issues The document also shows the government is wary about being locked into long-term capacity contracts, which can currently last as long as 15 years, notes Edwards. The problem identified by the government is that keeping existing maximum capacity market agreement lengths could soon mean committing to supply, which will then be baked into the mix in the 2040s. This could mean up to 20GW of new-build unabated gas is still on the system, which would be "detrimental" for the wider decar- bonisation agenda, says the BEIS paper. Cornwall's Edwards says: "They are clear that they want to move away from 15-year agreements because they think there is going to be lot of spend down the line. There is a lot of concern about locking in infrastructure." The paper suggests that eligibility for 15-year capacity market agreements could be limited to "very low or zero carbon" types of capacity, such as renewables, storage, demand-side response, CCS-enabled gas, and hydrogen-fired generation. But while the government is tightening the agreement lengths, it is looking at giving developers more leeway when bringing for- ward capacity market infrastructure. Under current rules, the capital expendi- ture for new-build capacity market units must be completed within six-and-a- half years of the day when the auction is announced. The paper suggests that the time this clock starts ticking could be postponed until the start of the first year for delivering the project. Longer lead-in times for projects could provide an additional spur for CCS (carbon capture and storage), hydrogen and pumped hydro storage projects, says Dey. The latter in particular take a long time to plan and build, which is difficult to accommodate within the capacity market's existing time frame. In line with this, the government says it intends to review the capacity market to ensure that technologies such as new-build pumped hydro can continue to compete in the market with no unintended barriers to entry. However, BEIS expects carbon-intensive capacity, such as unabated gas generation, will be required over at least the next decade until "alternative" forms of low carbon dis- patchable generation are more widely avail- able. It envisages that the job for gas-fired plants will be to provide capacity to help guarantee security of supply at peak times. And the paper suggests unabated gas plants may be allowed to continue to access long, multi-year agreements if their running hours are restricted in line with an annual cap on emissions. Edwards suspects that the upshot could be some form of annual emissions limits for units participating in the capacity market rather than the current system, which bases eligibility on the CO2 emissions produced per kilowatt-hour of electricity generated. The document shows that it could be pos- sible for unabated gas plants to be treated as low carbon capacity if they only run occa- sionally, such as 5 per cent of the time, says Edwards: "As long as the load factor is below a certain percentage, it will be below that." He believes that some form of emissions cap will be a feature of a new-look capacity market alongside shorter agreement lengths. He says investors' appetite for the capac- ity market will depend on whether they pre- fer to take the financial guarantees it offers or gamble on securing very high per kilo- watt-hour prices during those short periods when supply is scarce. But Flexitricity's Cox believes that the lat- est paper marks progress. She says: "In the main it's very good for the capacity market and is long overdue. It's a step forward with- out a doubt." David Blackman, policy correspondent ● "They are clear that they want to move away from 15-year agreements." Tom Edwards, senior modelling consultant, Cornwall Insight ● "If the status quo continues, it will jeopardise our ability to hit net zero. If there is no action, we will continue to procure capacity that is not compatible with net zero." Marlon Dey, GB head of research, Aurora Out: unabated gas Out: diesel In: pumped storage In: new technology such as hydrogen

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