Government consults on Capacity Market reform for demand-side participants

The Department for Energy Security and Net Zero (DESNZ) published three CM-related documents on 16 December, following the publication of the Clean Power 2030 Action Plan on 13 December.

The three include several policy proposals on consumer-led flexibility (or DSR). The ambition is to support the 30-40GW of short duration flexible capacity the National Energy System Operator (NESO) estimates the country will need by 2030.

The documents published were:

• A call for evidence (CfE) on consumer-led flexibility
• A consultation on modernising CM rules and improving participation and delivery assurance of DSR
• The Ten Year Review of the CM

We’ve summarised the first two documents with regards to the key aspects for energy consumers providing DSR in the CM.

Consumer-led flexibility

This CfE seeks views and evidence for several potential policy proposals for DSR in the CM. It builds upon proposals from the CM Phase 2 CfE published in 2023.

It proposes disaggregating DSR into different categories, or generation technology classes (GTCs), to reflect the different types of DSR. These include behind the meter (BtM) storage, BtM generation, and genuine DSR (including turn down). This will better reflect the availability of different DSR technologies and help improve de-rating factor accuracies. The Government is also seeking views on whether there’s a need to create an additional GTC for EV charging and V2G bidirectional charging technologies.

Using historical data from the Short-Term Operating Reserve (STOR), the same de-rating factor currently applies across all types of DSR. Since 2022, this de-rating has increased by 7% to 79%, due to STOR’s movement from seasonal fixed procurement to day-ahead. The Government is concerned this may be higher than some DSR assets can provide, creating potential risks of under-delivery or dissuading providers from CM participation.

The review doesn’t foresee any significant changes to the overarching concept of de-rating. However, the Government will consider diversifying the evidence base for DSR response rates, utilising non-balancing mechanism STOR, and seeking alternatives for the DSR de-rating methodology. It may also consider the adoption of duration limited methodologies.

Duration limits reflect the ability of a unit to respond to system stress events (SSEs), and currently only apply to storage. While responders expressed a willingness to turn down for extended periods of system stress, they’d be deterred by a requirement for longer durations for DSR tests. Suggestions include adopting a similar approach to the one used to calculate storage de-rating factors in the CM. This would mean using an Equivalent Firm Capacity (EFC) approach to normalise security of supply contribution of non-conventional adequacy resources.

The Government also seeks to change baseline methodologies. This is important because the methodologies set the baseline used to measure DSR response against. The current system allows capacity providers to choose which settlement periods to use in the baseline calculations. The Government is concerned there’s a risk of providers exaggerating the capacity available during an SSE. This raises the question whether the CM should seek to align its methodologies with others in wider markets.

There were other limitations that would primarily affect CM providers that aggregate DSR units. These include notes that creating new GTCs for DSR would lead to Capacity Market Unit component switching becoming more difficult. In addition, it may only be possible with GTCs of the same type. However, the Government is concerned this will increase participation barriers.

The Government is also considering a proportionate approach to the management and administration of multiple small scale assets (e.g. in domestic or small business settings) in the CM. It’s also looking at introducing completion milestones for DSR CMUs ahead of the T-1 auction (end May each year). This would allow for the replacement of lost capacity ahead of the delivery year. Failure to meet a completion milestone could result in a loss of credit cover. This would reduce the risk of non-delivery, as well as the risk of the Capacity Provider paying a termination fee.

Improving participation and delivery assurance of DSR

In this consultation, the Government proposes three ways to improve the participation and delivery assurance of consumer-led flexibility via DSR mechanisms. Most of the proposals affect timing and fees for non-delivery for CM providers. In summary, the proposed changes include:

• Better facilitation of applications from large aggregated domestic portfolios, by allowing identical components to collate into a single business model entry. This reduces the burden in the application process for Unproven DSR.
• Introducing a separation period between the DSR test period and notifying DSR components and metering assessment and metering tests. This would be 10 working days (WD) in a T-1 auction and 20WD in a T-4, to prevent capacity bottlenecks and support effective delivery.
• Allocating a £5,000/MW termination fee for failure to provide a DSR Test certificate. This is in addition to the loss of credit cover, and aims to improve delivery assurance by providing an incentive to deliver without imposing excessive barriers to market entry.