Electricity Capacity (Amendment etc.) (Coronavirus) Regulations 2020 — House of Lords, 2020-07-02
Topic: Energy
Martin Callanan (Conservative, Centre-right): My Lords, before outlining the provisions made by this draft instrument, I will briefly provide some context for the benefit of noble Lords The capacity market is at the heart of the Government’s strategy for maintaining security of electricity supplies in Great Britain. It secures the capacity needed to meet future peak electricity demand under a range of scenarios through competitive, technology-neutral auctions normally held four years and one year ahead of the relevant delivery year. Those who win capacity agreements —known as capacity providers—commit to providing capacity during periods of system stress in exchange for receiving capacity payments. Capacity payments are funded by electricity suppliers, which recover this cost from consumers This draft instrument, together with capacity market rule changes, which have recently been laid, will ensure that the capacity market remains compliant with its state aid approval by giving effect to government commitments recorded in the state aid approval decision. It will also make temporary modifications to support capacity providers in the light of the effects of coronavirus I will now briefly outline the context of the capacity market’s state aid approval, before detailing the changes proposed in this SI. The Commission’s state aid approval of the capacity market in 2014 was annulled in November 2018 by a judgment of the General Court of the Court of Justice of the European Union. This introduced a standstill of normal operations of the capacity market until October 2019, when the European Commission completed its reinvestigation of the capacity market and granted state aid approval The Commission’s state aid approval in October 2019 recorded government commitments to make technical changes to the capacity market’s design to reflect recent market and regulatory developments, including reforms that my department had already identified through the statutory five-year review of the capacity market conducted in July 2019. Specifically, these draft regulations will reduce the minimum size of capacity which is permitted to compete in the capacity market from 2 megawatts to 1 megawatt. This aligns the capacity market with other domestic energy markets, making it easier for smaller providers, such as demand side response operators, to participate This draft instrument will also introduce the arrangements necessary to enable demand side response—DSR— operators, which provide capacity by reducing the import of electricity from the electricity grid, to compete for multiyear agreements if they can meet the relevant capital expenditure thresholds. This will bring arrangements for demand side response operators in line with generation and might encourage greater DSR participation in the capacity market The regulations seek to provide a legislative underpinning of the UK’s long-standing commitment to procure at least half of the capacity set aside for the one year ahead of delivery year auction. This is set aside when the target capacity for the auction four years ahead of delivery is set. This change will help provide some certainty around auction volumes and will assist market participants, particularly DSR operators. Finally, the draft instrument seeks to revoke an exclusion in place since 2014 that prevents a small number of holders of long-term contracts for the provision of an electricity market balancing service—the short-term operating reserve, or STOR—competing in the capacity market. In 2014, STOR contracts were expected to pay out very high revenues, and, to prevent windfall profits, holders of these contracts were therefore excluded. However, since then the energy landscape has changed significantly and revenues from STOR contracts have been much lower than originally anticipated. Therefore, it is no longer appropriate to maintain this exclusion I turn to the temporary modifications that this draft instrument seeks to make in recognition of the fact that coronavirus has impacted the ability of capacity providers to meet some of their obligations under the capacity market. The approach that we are taking of making temporary easements is similar to that adopted to support capacity providers during the capacity market’s standstill period last year. This draft SI will support modifications to the capacity market rules to allow a capacity provider which is late in demonstrating that it is ready to deliver capacity in this current capacity market delivery year to access capacity payments that have been suspended if the requirements are met by a later, specified date As the disruptive effects of coronavirus might lead to more capacity providers facing termination of their agreements, the regulations will increase the time for capacity providers to issue appeal notices to terminate their agreements to the Secretary of State. It also seeks to provide the Secretary of State with greater discretion when considering appeals: either extending the time for capacity providers to comply with requirements to avoid termination or directing that agreements should be terminated, without a fee, on the grounds that non-compliance was due to exceptional circumstances arising from the effects of coronavirus. That will reduce the risk of terminating capacity agreements where this would have an overall detrimental impact on security of supply In conclusion, this draft instrument will ensure continued security of electricity supply by ensuring that the capacity market continues to comply with its state aid approval. It will also reduce the burdens on capacity providers during the coronavirus pandemic. Finally, these changes will maintain confidence in the market. I commend these draft regulations to the House.