Britain's Clean Energy Future Secured Through Capacity Market Reforms

Improved energy security and a more secure transition to net zero are set to be delivered through the UK government's significant proposals to reform Great Britain's Capacity Market (CM).

The Capacity Market is the scheme that sits at the heart of the government's strategy for ensuring security of electricity supply in Great Britain, using competitive auctions to make sure there is enough reliable capacity to meet Great Britain's peak electricity demands, safeguarding against the possibility of future blackouts.

Since its introduction in 2014, the landscape in which the Capacity Market operates has shifted with renewable energy now making up a significant proportion of our electricity generation system. To ensure the Capacity Market is fit for the future, the government is today publishing action plans to ensure the scheme keeps pace with this transition to cleaner energy sources and technologies - often cheaper than fossil fuel counterparts - and can support the delivery of a decarbonised power system by 2035, without compromising security of supply.

This includes consulting on new contracts for low carbon technologies to incentivise their participation in CM auctions, creating new timelines and requirements for oil and gas generators to reduce emissions from 2034, such as through implementing carbon capture and hydrogen to decarbonise and reducing running hours, and strengthening the scheme's ability deliver security of supply in times of electricity system stress.

Energy and Climate Minister, Graham Stuart, said:

As we move towards cleaner and cheaper energy, it is essential that the UK provides secure and affordable energy for all.

The plans set out today will deliver this reliable energy and ensure the scheme that sits at the heart of Britain's energy security is fit for the future.

Through competitive auctions between technologies such as batteries and gas-fired generators, the Capacity Market secures the capacity needed to cope with future demand peaks at least cost to consumers.

Innovative technologies, such as batteries, are playing an increasingly important role in keeping the lights on across Great Britain. New technologies, such as Carbon Capture, Utilisation and Storage (CCUS) and hydrogen power and storage, are expected to come online over the coming decade, as the UK continues to lead the world in decarbonising.

To accommodate this, the government is setting out today the following proposals to reform Great Britain's Capacity Market.

Incentivising greener, flexible technologies to compete in CM auctions by offering multi-year contracts for low carbon flexible capacity, such as smart 'demand side response' technologies and smaller-scale electricity storage, supporting the move towards delivering secure, clean and affordable British energy in the long term.

Ensuring a clear pathway for carbon intensive forms of capacity as the UK transitions to net zero and the capacity mix of the CM diversifies, by sending a clear signal to oil and gas generators about the timelines and requirements for emissions reduction in the 2030s and seeking evidence on mitigating any barriers this capacity may face in decarbonising.

Underpinning these efforts with a proposed new lower emissions limit in the Capacity Market which will kick in for new build plants from 1 October 2034, meaning all new oil and gas plants receiving long term agreements through the CM will be obliged to lower emissions, through decarbonising their capacity by introducing carbon capture, hydrogen and other low carbon methods into their generation and by reducing running hours.

Taking steps to strengthen the scheme's ability to deliver security of supply by reforming the CM's approach to performance testing to ensure confidence as early as possible in the winter that capacity is available and strengthening the non-delivery penalty regime to send a clear signal that capacity must deliver in times of electricity system stress.

Today's announcement forms part of the government's work to reduce the UK's exposure to volatile global gas markets and energy costs for consumers in the long term as part of the Review of Electricity Market Arrangements (REMA). The government continues to seek views on a wide range of energy reform options, with an update on REMA expected early this year.

RenewableUK's Chief Executive Dan McGrail said:

It's vital that we decarbonise our electricity system completely by 2035, so this consultation represents an important step forward in that process. We need to incentivise more investment in new low carbon flexibility in our modern energy system based on renewable technologies including wind, solar, tidal stream and green hydrogen. This will strengthen the UK's energy security, enabling us to move closer towards energy independence in the years ahead.

Notes

Following the consultation period, the government will outline the final plans for reform and implementation.

Capacity market auctions held to date have secured the majority of Britain's capacity needs to meet forecast peak demand out to 2025 to 2026.

There are 4 key delivery partners within the CM: The Department for Business, Energy and Industrial Strategy (BEIS) who have overall ownership of the CM, Ofgem who ensure the market arrangements are working, the National Grid Electricity System Operator (NGESO) who advise on targets and requirements and oversee agreement management, and the Electricity Settlements Company (ESC) who oversee the payment process.

Summary of the government proposes

Strengthening security of supply

Strengthening the non-delivery penalty regime to send a clear signal that capacity must deliver in times of electricity system stress.

Reforming the CM's approach to performance testing to ensure we can be confident as early as possible in the winter that capacity is available and ready to deliver.

Reforming the way that connection capacity is assessed in the CM, to ensure a higher degree of accuracy in assessing how much power a generator, battery or demand side response unit can provide to the network.

Enabling plants that have been mothballed can enter the CM and provide capacity, with additional safeguards in place to ensure these plants are capable of delivering capacity.

Aligning the CM with net zero

Introducing a new lower emissions intensity limit in the CM from 1 October 2034 for future agreements - this will send a clear signal to new build carbon intensive capacity to lower emissions either by decarbonising or reducing running hours.

Agreements under the existing rules stand unchanged.

Reviewing the CM's capital expenditure thresholds to ensure that eligibility criteria for accessing multi-year CM agreements remains fit for purpose as the capacity mix of the CM decarbonises.

Incentivising increased participation in the CM from low carbon flexible capacity by enabling low carbon capacity with low capital expenditure to access multi-year agreements of 3 years without being required to meet capital expenditure thresholds.

Seeking stakeholder views on barriers to decarbonisation during existing long-term CM agreements, including whether to create managed exit pathways to enable capacity to transfer to new agreements or alternative support mechanisms to decarbonise.

Evaluating the role government energy policy has in supporting projects with long build times and the relationship between the CM and wider government support for large-scale long-duration electricity storage (LLES).

Additional improvements to the CM

Reducing administrative burdens for government and capacity providers wherever possible, and clarifying the mechanics of how auctions clear.

Ensuring that a transfer route between the CM and the Contracts for Difference scheme is operable for relevant projects and seeking evidence on the future of this transfer route.

Introducing a phased approach to emissions verification to ensure administrative processes run smoothly in upcoming auction rounds.