What’s the Capacity Market – and why does its return matter to businesses?
8th November 2019
The Department for Business, Energy and Industrial Strategy (BEIS) suspended the Capacity Market (CM) almost a year ago. This was a result of an EU General Court decision that the market needed re-approving under EU state aid rules. Now, BEIS has reinstated the CM - but what is it and why should businesses care?
The Capacity Market (CM) was introduced in 2014 with the intention of making sure that offices, factories and homes across Great Britain always have the electricity they need. The CM’s role in underpinning security of electricity supply is vital. This is particularly true as more ‘intermittent’ generating capacity (like solar and wind power) comes on stream and more traditional fossil-fueled generators are closing.
In November 2018, the EU General Court ruling led to the suspension of the CM. This threatened to restrict investment in additional capacity, potentially having an impact upon GB’s ability to keep the power flowing in periods of peak demand. Thankfully, the subsequent European Commission investigation found that the CM is compatible with EU rules on state aid – so the operational activities of energy users aren’t affected.
Some suppliers, including Haven Power, anticipated this approval of the CM and continued to collect monthly instalments from pass-through customers – based upon their winter consumption. This protected customers from the risk of paying a large reconciliation amount on the bill following the reinstatement.
The auctions, inviting energy companies’ bids to provide electricity to the grid when it’s needed most, happen four years in advance (with a top up year-ahead auction for any shortfall). Then, the successful bidders are paid to generate when called upon under the CM throughout the term of the CM agreement.
The government intends to hold three auctions early in 2020 to make sure the GB Grid has sufficient capacity to meet demand for electricity up to 2024.
Drax – Haven Power’s parent company – is one of the existing CM contributors through its various generation assets, such as its pumped storage hydroelectric power station at Cruachan in Scotland.
Will Gardiner, Drax Group CEO, welcomed the reinstatement decision: “This is great news for the GB energy system. The Capacity Market helps to ensure Britain has the flexible and reliable power generating capacity needed to support the economy as it continues to decarbonise, keeping the lights on at the lowest cost for millions of homes and businesses.”
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