Utility Week

18 | FEBRUARY 2023 | UTILITY WEEK Electricity Analysis Capacity Market balances security and emissions goals The war in Ukraine has thrown into stark relief the diffi culty of reconciling the energy security and emissions reduction agendas. W hen the Capacity Market (CM) was dreamt up nearly a decade ago, it was essentially designed to secure su cient back-up gas plants to ensure the UK's energy security. "The uno cial objective was to get more gas CCGTs and provide revenue certainty for large plants," says Sam Hollister, head of markets and engagement at LCP Delta. Even at the time, the scheme was contro- versial in some quarters because it supported fossil fuel generation. And its design has looked increasingly out of step with the wider thrust of energy decarbonisation policy over the past decade, which has seen the UK's key 2050 climate change target ratcheted up from 80% of 1991 emissions to net zero, Meanwhile, Russia's invasion of Ukraine last year resulted in energy security becom- ing a more pressing issue than at any point since the oil crisis of the early 1970s. To tie in with next year's tenth anniver- sary of the CM, the Department of Business, Energy & Industrial Strategy (BEIS) last month published a consultation paper on its future. Given the seismic shocks the energy system has experienced over the past year, perhaps the most surprising aspect of the document is how much of the broad thrust survives from a previous call for evidence on the CM, published in 2021. Josh Buckland, a director at public aœ airs company Flint Global, believes it is "really good" that the government has pushed ahead with the CM review at all when it could have wrapped the exercise into the longer-term and more fundamental Review of Electricity Market Arrangements (REMA) process. The new consultation maintains the pre- vious document's commitment to bring the operation of the CM into line with the gov- ernment's wider push to cut emissions to net zero by 2050. The key proposal for achieving this is a lower maximum emissions limit in the CM, which will kick in for new-build plants from 1 October 2034. A proposal in the earlier document to run separate auctions for low carbon and fossil fuel capacity has not been taken forward. The proposed ceiling on emissions inten- sity, which new-build CM units must meet in order to secure multi-year agreements, has been cut from 550 to 100gCO2/KWh. This new limit would enable lower carbon sources of combustion, such as CCS (carbon capture and storage) and hydrogen plants, to qualify for these multi-year CM contracts but not those ¤ red by unabated gas. Unabated gas Existing unabated gas plants will con- tinue to qualify for support through the CM beyond 2035 under the paper's proposal not to change the yearly limit on emissions, which is the alternative route units can use to access the support scheme. Retaining this unchanged yearly limit for existing units would enable unabated gas plants with 40% thermal e ciency to operate up to around 750 hours per annum, according to the BEIS consultation. Plants look set to be able to trade emissions within this cap from one year to another in line with ¥ uctuations in demand. Having these two limits will give una- bated gas generators an incentive to either abate emissions or operate on a limited basis as peaking plants, it says. For many, the 2034 introduction of the emissions limit deadline looks like too lit- tle, too late. However Buckland believes this approach, which he describes as "gradual evolution rather than fundamental change", strikes the right balance in current condi- tions, especially given the CM's key function of maintaining emergency power supply. He says: "It makes sense because of the level of concern around security. "They are obviously aware that they need to maintain supply and within that poten- tially there's a role for gas as a back-up." The proposed changes are "sensible", says LCP's Hollister: "I don't think any gov- ernment policy is going to want to put at risk security of supply. "In most scenarios, we still have some unabated gas running for a signi¤ cant period and beyond 2035," he says, noting that even the Climate Change Committee contemplates some non-CCS gas plants on the energy sys- tem in the next decade. Adam Berman, deputy director for invest- ment at Energy UK, agrees: "The timeline the government has sketched out seems to be fairly consistent with their net-zero power system by 2030 ambition. "It's about how to make sure we can create a reasonable exit pathway for una- bated gas from the system without creating a crunch point in the early 2030s, where we might have quite high renewable coverage but not necessarily enough ¥ exibility provi- sion. There's the possibility of this period coming about where you can't quite make everything add up. "While the CM does have a role to play in bringing forward investment to facilitate low- carbon assets, its primary purpose should remain security of supply. We've seen, over the past few months, that we need to ensure we have a really robust mechanism and we're not blurring the line too far between mechanisms that do quite diœ erent things. "The key thing that the government needs to do now is to ramp up low-carbon ¥ exibility." However, this timeline also provides a signal to investors that unabated gas is on its way out, says Hollister: "When we need to be decarbonising our system, it's the right thing to be not signing agreements for unabated gas way out into what the mid to late 2030s." Regarding lower carbon generation options, like CCS and hydrogen plants, he believes the CM may be a "useful tool" for providing some guaranteed revenues. However it won't be the key mechanism for supporting such projects, Berman adds. "The CM revenue stream would play a part, but at the same time we very much are look- ing to the government for bespoke revenue stabilisation mechanisms for those types of technologies."

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