I beg to move,
That the Committee has considered the draft Electricity Capacity (Amendment) Regulations 2025.
Good morning, everyone. It is a pleasure to serve under your chairmanship this morning, Mr Twigg, and to be back so soon in the year to talk about the capacity market. The draft instrument, which was laid before the House on 16 December 2024, seeks to make technical improvements and changes to the capacity market scheme—the Government’s main tool for ensuring security of electricity supply in Great Britain. To achieve clean power by 2030, electricity market reform is critical; to paraphrase our clean power action plan, we must reform the capacity market to provide clear and viable routes to decarbonisation for unabated gas, enable low-carbon flexible capacity and incentivise investment in existing capacity.
Before outlining the provisions in the draft instrument, I will briefly provide some context. Great Britain’s capacity market was introduced in 2014 and is designed to ensure that sufficient electrical capacity is available to meet future predicted demand in order to maintain security of electricity supply. It is a well-established, technology-neutral scheme, in which existing and new build electricity capacity receives revenue based on capacity. Participants secure agreements through auctions, which require them to make capacity available at times of system stress.
The capacity market is our main tool for ensuring security of electricity supply and provides all forms of capacity with the right incentives to be on the system to deliver when needed. It covers generation, storage, consumer-led flexibility—formerly known as demand-side response—and interconnection capacity. Through capacity market auctions, which are held annually one year and four years ahead of delivery, we secure the capacity needed to meet future peak demand under a range of scenarios, based on advice from the capacity market delivery body, the National Energy System Operator.
Since its introduction in 2014, the capacity market has contributed to investment in just under 19 GW of new, flexible capacity, which is needed to replace older, less efficient plants as we transition to a net zero economy. To date, the capacity market has been successful in ensuring that Great Britain has adequate electricity capacity to meet demand, and it continues to be required in order to maintain security of supply and provide investor confidence. To ensure that the capacity market continues to function effectively, we regularly make adjustments to the implementing legislation, based on our day-to-day experiences of operating the scheme. On that note, let me turn to the details of the draft instrument.
The draft instrument makes changes to eight regulations, to deliver technical improvements and changes that support the functioning of the capacity market and that have been identified and explored through consultation. This is about improving security of supply and, by accelerating investment in low-carbon technologies, increasing the role they play in the capacity market, thus supporting the Government’s 2030 clean power mission.
Stakeholder feedback in the consultations identified a need to review the wider timescales associated with the settlement body’s penalty calculation activities, to ensure that timelines for settlement remain appropriate. The settlements body is the Electricity Settlements Company, which is a private company owned by the Secretary of State for the Department and established to oversee the settlement of payments to and from suppliers and capacity providers. The draft instrument amends the timelines for the settlement body’s determinations so that they are in line with those concerning penalty charges.
As part of the requirements under the capacity market rules, some capacity market units must complete an extended performance test. This provides assurance that a capacity market unit from a storage-generating technology class can deliver capacity for the relevant duration. Effectively, extended performance tests are a sub-function of the satisfactory performance days requirement, which requires a capacity provider to demonstrate availability during a delivery year. The policy intent is that failure to meet extended performance tests should have the same consequence as failure to meet satisfactory performance days. The draft instrument ensures that the regime is consistent and that the two demonstrations of performance are treated in similar fashion when failed.
To assist industry when pre-qualifying for the capacity market, the draft instrument further clarifies that a capacity market unit can be pre-qualified only where no contract for difference has been awarded, unless the contract for difference in question has expired or been terminated. The draft instrument further clarifies that a contract for difference means a contract for difference, or an investment contract entered into with the contract for difference counterparty, which has always been the policy intent.
Finally, multi-year agreements provide greater revenue certainty and are likely to incentivise further low-carbon participation in the capacity market, which improves market liquidity and can lead to a greater diversity of technologies. A new nine-year capex threshold introduced by the draft instrument will ensure that new and refurbishing projects, with costs that fall between the existing thresholds, are not prevented from entering the capacity market.
The draft instrument also enables participants to access a three-year agreement with a capex threshold of £0 kW, which is available to low-carbon new build and unproven demand-side response capacity. That will remove barriers for low-carbon, low-capex technologies to access longer agreements in the capacity market. To ensure that projects meet the definition of low-carbon capacity, the draft instrument introduces an emissions-related determination, which is a decision that the delivery body may take, as a further reviewable decision type.
Let me turn now to the two consultations carried out by the Government—indeed, the previous Government—on the measures in the draft instrument. The instrument contains the second phase—phase 2—of the capacity market reforms, which were consulted on towards the end of 2023. These strengthen security of supply and accelerate investment in low-carbon technologies, and respondents were broadly supportive of the proposals. We have also made a number of technical amendments to the capacity market rules, which support the regulations and which were laid before the House—many Members here today were also present then—on 16 December 2024.
In conclusion, the draft instrument introduces a number of technical provisions and changes to enable the continued efficient operation of the capacity market, so that it can continue to deliver on its objectives. These reforms will be critical on our pathway to achieving clean power by 2030. They will improve security of supply and, by accelerating investment in low-carbon technologies, increase the role that those play in the capacity market. We need clear routes for the decarbonisation of unabated gas and for the rapid acceleration of low-carbon, flexible capacity, and today we make another step towards that. I commend the regulations to the Committee.