Utility Week

14 | SEPTEMBER 2021 | UTILITY WEEK Policy & Regulation Analysis A capacity market fit for net zero? BEIS hopes the fundamental changes signalled in its latest consultation will enable the capacity market to deliver on both resilience and decarbonisation. L abour's shadow energy spokesman was withering in his assessment of the capacity market recently. During a House of Commons debate in July, Alan Whitehead slammed the scheme for giving suppliers "free money" to provide power they would have furnished anyway. It's not the first potshot directed against the capacity market since its establish- ment by the coalition government in 2014 to ensure security of supply through upfront payments for reliable sources of electricity. The most serious challenge occurred three years ago when a European Court challenge by Tempus Energy triggered the scheme's temporary suspension. The low carbon investor's case was prompted by its concern that the scheme unfairly favoured fossil fuel plants. While that particular case ultimately went nowhere, decarbonisation concerns were a key factor behind the publication last month by the BEIS (Business, Energy and Industry Strategy) department of a new consultation paper setting out its thinking on the future of the capacity market. Marlon Dey, GB head of research for con- sultancy Aurora, says the capacity market's structure is increasingly out of kilter with the UK's ambition to decarbonise its power supply. "To date, the capacity market has procured and brought forward primarily car- bon-intensive capacity to guarantee security of supply: it has been predominantly gas," he says. Dey points out that the capacity market is already locking in about 7GW of flexible gas generation into the 2030s, of which around 3GW is contracted post-2035 when the gov- ernment has said unabated gas should be phased off the grid. He says: "If the status quo continues, it will jeopardise our ability to hit net zero. If there is no action, we will continue to pro- cure capacity that is not compatible with net zero." The "enormous" proportion of gas in the capacity market means that it is "not aligned to net zero, agrees Jill Cox, balancing ser- vices manager at Flexitricity. This all adds up to a "very strong need" to reform the capacity market, concludes Dey: "The direction of travel is very clear that the capacity market has to be reformed so it doesn't continue to procure unabated gas beyond 2035." Intermittency In addition, the capacity market's role to ensure security of supply will grow during the next two decades as the UK becomes increasingly reliant on more intermittent wind and solar power. The BEIS call for evidence paper says around 20GW of existing baseload capacity is expected to retire over the next ten years. Dey points out that is mainly nuclear and gas generation. This gap is unlikely to be filled by hydro- gen and plants fitted with CCS (carbon capture and storage), given the relatively immature nature of both these technologies, which are the main low carbon but "firm" options for providing power, he says. The BEIS paper sets out the balancing act facing the capacity market. The mechanism's first "immediate challenge" is to help less carbon-intensive but still evolving technolo- gies to come forward. The second is continuing to support more carbon-intensive forms of capacity, such as unabated gas, which the paper says will continue to play an "essential" role in main- taining security of supply as its economics become "increasingly challenging". How gas plants compete economically in an environment where cheaper renewable prices dictate the market much of the time cannot be ignored, says Tom Edwards, senior modelling consultant at Cornwall Insight. "There will be periods of low prices so any power station reliant on baseload will require some other form of support other- wise it will be switched off. "Assuming that the underlying market doesn't change, the capacity market becomes more important." One of the key solutions suggested in the paper, which is a call for feedback on ideas under consideration rather than a formal Capacity needs to be guaranteed for when the when the wind doesn't blow

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