In this insight paper, director Johnny Gowdy and project manager Ellie Brundrett explore the development of the current Capacity Market design, its evolution to date, and the role it should play in the energy system of the future.
Following on from our response to the recent Capacity Market consultation, This insight paper forms part of our work exploring market reform, as part of the ongoing Review of Electricity Market Arrangements (REMA) process. In Regen’s previous insight paper from January, director Johnny Gowdy analysed the emerging details of the government’s new Electricity Generator Levy (EGL).
The Capacity Market has been a critical element of the current electricity market arrangements since its introduction in 2013. Its key purpose is to ensure that there is sufficient capacity adequacy by providing a subsidy to existing capacity that would otherwise exit the market, and to encourage investment in new capacity. However, an enhanced and optimised Capacity Market has the potential to deliver a lot more than just capacity adequacy. It could add to our overall system resilience, incentivise flexibility and other system capabilities, and support the net zero transition; and do so at a lower cost to the consumer.
Regen’s recommendations for Capacity Market reform as part of the REMA process:
- Strengthening and accelerating the decarbonisation of the Capacity Market by setting tougher (and earlier) carbon intensity limits and reducing/removing annual carbon allowances.
- Developing the “Optimised Capacity Market plus Flex” REMA design that recognises the system value of attributes and capabilities such as flexibility and responsiveness which will be critical to ensure system resilience and manage more dynamic and diverse system events in the future.
- Extending the use of a separate Strategic Reserve (including an option to bring assets into public ownership) to a) ensure capacity adequacy, b) send a strong decarbonisation signal c) reduce price pressure within the Capacity Market and ensure value for the consumer.
- Linking the Capacity Market to a new code of behaviour and generator obligations in the Balancing Mechanism to ensure that CM participants do not then exploit their market position, or ‘game’ the market, to earn super-profits through system balancing.