My Lords, this instrument, 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.
The capacity market was introduced in 2014 and is designed to ensure that sufficient electrical capacity is available to meet future predicted demand, to maintain the security of electricity supply. It provides all forms of existing and new-build 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, 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, or NESO.
Since its introduction in 2014, the capacity market has contributed to investment in just under 19 gigawatts of new, flexible capacity needed to replace older, less efficient plant 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 continues to be required 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.
The draft instrument makes changes to eight regulations, to deliver technical improvements and changes that support the functioning of the capacity market, which have been identified and explored through consultation. This will improve security of supply. It will also accelerate investment in low-carbon technologies, increasing the role that they play in the capacity market, supporting the Government’s 2030 clean power mission.
Stakeholder feedback has identified a need to review the wider timescales associated with the settlement body’s calculation activities. This ensures that timelines for settlement remain appropriate. The “settlement body” refers to the Electricity Settlements Company, a private company owned by the Secretary of State, 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 determination 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. In effect, 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 prequalifying for the capacity market, this draft instrument will further clarify that a capacity market unit can be prequalified only where no contract for difference has been awarded, unless the contract for difference in question has expired or terminated. The instrument also further clarifies that a contract for difference means a contract for difference or an investment contract entered into with a contract for difference counterparty, which has always been the policy intent.
Finally, multiyear 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 this 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 instrument also enables participants to access a three-year agreement with a capex threshold of nought per kilowatt hour, available to low-carbon new build and unproven demand-side response capacity. It 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, a low emissions determination, which is a decision that the delivery body may take, has been introduced by this instrument as a further reviewable decision type.
Two public consultations were conducted on the measures in this instrument. It contains a second phase of capacity market reforms, which was consulted on towards the end of 2023, on strengthening security of supply and accelerating investment in low-carbon technologies. Respondents were broadly supportive of the proposals included in this instrument.
We have also made a number of technical amendments to the Capacity Market Rules that support the regulations, which, as I said earlier, were laid before the House on 16 December 2024.
In conclusion, this is another instrument that follows from work that the previous Government did. It is self-evident that these technical changes are helpful and necessary, and I commend the regulations to the Committee. I beg to move.