In Great Britain (GB), capacity margins are tightening. The Government is consulting to close coal-fired generation plants by 2025. New nuclear is due to come on line that year but delays are always possible with such large projects.
With a view to keeping the lights on, in 2014 the Government introduced the Capacity Market. This provides certain, regular payments to capacity providers in return for which they must be available and producing electricity (or reducing demand) in times of system stress. Failure to comply with the capacity obligation results in penalties, although these are subject to an annual cap of 100% of the annual capacity payment.
Capacity agreements are not, despite their name, private law contracts. Instead they are a bundle of rights and obligations under the Capacity Market Rules and the Electricity Capacity Regulations 2014 (the Regulations). Successful bidders will not enter into a bilateral physical agreement with the Delivery Body (a role fulfilled by National Grid) but will instead receive a “notice” recording certain details of the capacity agreement. The full extent of the rights and obligations of the successful bidder in respect of the relevant capacity and for the delivery year(s) are contained in the Regulations and Capacity Market Rules. The capacity agreement is therefore a creature of the Capacity Market Rules and the Regulations, a feature which raises interesting issues in relation to change in law risk.
The amount of capacity targeted in the auction is determined on an annual basis after National Grid (as Delivery Body) carries out a security of supply analysis on the amount of capacity required to meet the reliability standard set out in the Delivery Plan (currently set at 3 hours of Loss Load Expectation). National Grid’s report is then reviewed by a panel of technical experts and the Secretary of State sets the final estimate for the target capacity in the four-year ahead and one-year ahead auction.
This methodology takes into account the level of capacity that is expected to be available outside of the Capacity Market (for instance renewable generation) and it is adjusted after the pre-qualification process concludes to take into account capacity of plants that have chosen not to participate in the auction process but that will remain operational during the relevant delivery year.
For the T-4 auction 2015 (for first delivery in 2019/20), the Government set a target capacity of 44.665 GW, a lower figure than was set in 2014 when the Delivery Body recommended a volume of 53.3 GW. However, this year’s lower target takes account of 5.5 GW of new and refurbished plant which has already secured a Capacity Market agreement in the T-4 2014 auction.