Capacity Market and Emissions Performance Standard Review: call for evidence

Energy Systems Catapult has responded to the Department for Business, Energy and Industrial Strategy (BEIS) call for evidence on the Capacity Market and Emissions Performance Standard Review.

BEIS is conducting a review of the Capacity Market and the Emissions Performance Standard as it is 5 years since the legislation introducing the policies – the Energy Act 2013 – was passed.

This call for evidence is the first step in the review process. It seeks views and evidence on the performance of the policies and on any opportunities to consider in improving them and ensuring they remain fit for the future.

See also: Evaluation of the transitional arrangements for demand-side response: phase 3, published alongside this call for evidence.

Key points
  • The capacity market is key to the current market arrangements for security of supply and resource adequacy in the GB electricity system. We do not advocate a rapid move to withdraw it.
  • We support the intention to improve its design and operation over the next few years, where supported by strong empirical evidence and analysis. The proposed changes should improve the alignment of market signals and underlying impacts on system reliability.
  • However, as the call for evidence makes clear, ‘the capacity market is now a major driver of the future technology mix’. The ESC is concerned that continued reliance on the capacity market could risk stifling innovation and misallocating investment in the medium and long term.
  • Experience in a number of jurisdictions points to inherent complexity of capacity mechanisms and the difficulty of achieving a design that is genuinely technology-neutral. The ESC’s concerns about the medium and long-term reliance on centrally-designed contracting mechanisms are informed by our work on a number of projects.
    • The Future Power Systems Architecture project (a collaboration of the Institution of Engineering and Technology and the Energy Systems Catapult)1 has used systems engineering techniques to examine the impact of new technologies and business models on energy system functions. This has highlighted the need to handle increasing operational complexity and the growth of ‘behind the meter’ technologies and business models. Systems will need to accommodate the aggregate behaviour of millions of devices, consumers and businesses, all interacting in more price-sensitive markets. Change of this kind should be reflected in how resource adequacy is conceived of and assessed. Thinking in terms of aggregate system-wide available capacity for predicted system stress events may no longer make sense. More granular spatial and temporal approaches may be needed, as system risks change and potentially become less predictable.
    • As part of the Smart Systems and Heat (SSH) programme (commissioned by the Energy Technologies Institute)2, we analysed potential future market architectures. This work suggests that digitisation and decarbonisation are leading to:
      • greater interdependence of customer-side and resource-side decisions, with customers playing a larger role in system balancing;
      • greater interconnectedness between energy vectors, such as electricity, heat and transport. This is manifested in the emergence of hybrid products such as hybrid heating systems and plug-in hybrid electric vehicles;
      • New business models based on digitalised control to more actively manage both the customer experience and distributed energy resources behind the meter.
    • We commissioned Poyry earlier this year to work with us to assess alternative approaches to capacity remuneration under an energy service provider (ESP)-led future market model, based upon market design concepts developed through our SSH work (see above). Poyry examined capacity remuneration approaches in a number of jurisdictions. The report (Broad Model for a Capacity Remuneration Mechanism in an Energy Service Provider-led Market) discusses the potential for more decentralised, market-led capacity remuneration, with energy service providers taking greater responsibility for service reliability.
    • We worked on an ETI-commissioned project with Frontier Economics to develop a Framework for Assessing the Value for Money of Electricity Technologies. Part of this project involved analysis of the value of policy support to investors under current market arrangements (including both CfDs and the capacity market). The analysis showed that current market arrangements are not aligned with the value delivered to the system (and therefore to consumers) by different technologies. This work has been published by the ETI and was shared and discussed earlier this year with BEIS and HM Treasury staff. This misalignment of market signals will condition investment choices and is likely to reduce the overall cost-effectiveness of UK investment in decarbonisation.
  • Our broader analysis of energy system transitions suggests that the mix of technologies and business models best suited to deliver reliable, low carbon electricity, and support wider decarbonisation, is inherently unpredictable. As well as a portfolio of low carbon generation with different performance characteristics, we may also need innovation in business models to unlock greater supply and demand flexibility over a range of timescales and geographies. The future timing and configuration of ‘system stress’ events will also change, with the electrification of significant parts of heat and transport energy demand. Reliance on centrally designed, directed and defined mechanisms will risk stifling new opportunities opened up by digitalisation and new distributed technologies.
  • This inherent uncertainty, and the need for innovation in low carbon technologies and services, points towards the advantages of flexible markets and innovative contracting between buyers and sellers of system services. The alternative of continued reliance on complex, centrally specified contracting mechanisms, is likely to mean that the competitive playing field (and therefore the incentive to innovate) is heavily conditioned by administrative decisions. Market arrangements that internalise service reliability and decarbonisation objectives within the prices and incentives facing market players could better enable innovation in both technologies, digitalisation and new service propositions to maximise system flexibility in the face of stress. They could also more straightforwardly deliver a level playing field for competition between different technologies and business models.
  • For these reasons we believe that BEIS should consider evidence on a broader range of medium term market designs to deliver security of supply, particularly those which place greater responsibility on service suppliers to ensure reliability, as the electricity system moves to a low carbon future.
  • There are important links here to inter-related market design issues including transmission and distribution system operator roles and interfaces, wholesale and balancing market designs, and the approach to network charging, including locational signals. These are likely to become increasingly important in a system in transition, reshaped by digitalisation and with a fluctuating portfolio of large scale and decentralised technologies.