The Energy Transition | UK government outlines reforms to Capacity Market

This week we look at the government's proposed reforms to the Capacity Market, the new Energy Bills Discount Scheme, the government's responses to a consultation on a market-based mechanism for low-carbon heat and NG ESO's yearly review.

Government outlines reforms to Capacity Market

The government published its proposed reforms to the Capacity Market (CM) on 9 January 2023. The CM is designed to ensure security of energy supply and decrease the risk of blackouts by providing payments to encourage investment in new capacity or for existing capacity to remain open. According to the government, capacity market auctions held to date have secured the majority of Britain’s capacity needs to meet forecast peak demand out to 2025/2026. The reforms are part of its plan to deliver a net zero power system and increase security of supply following the Russian invasion of Ukraine.

Changes proposed to align the CM with net zero include significantly reducing the emissions intensity limits applicable to new build plants from 1 October 2034 to end "the inconsistency between our decarbonisation commitments and the 15-year CM agreements available for unabated fossil fuel generation". It has been proposed that carbon capture and hydrogen should be used to decarbonise and reduce the running hours of fossil fuel generators. Greener, more flexible technologies will also be incentivised to compete in CM auctions with multi-year contracts being offered for low carbon flexible capacity.  These will includesmart demand side response technologies and smaller-scale electricity storage without a requirement to meet capital expenditure thresholds. The government is also seeking stakeholder views on creating pathways that would enable existing CM Units to exit multi-year contracts in order to decarbonise.

Proposals on security supply include reforms to the CM's approach to performance testing in order to ensure that, as early as possible, capacity can meet demand in winter, and reforming the way that connection capacity is assessed, to ensure a higher degree of accuracy in knowing how much power a generator, battery or demand side response unit can provide to the network. The non-delivery penalty regime will also be strengthened by changing the figure used in setting the regime. It is hoped that this will make it clear to Capacity Providers that delivering in a stress event is vital to the effectiveness of the scheme.

The consultation on the proposed reforms opened on 9 January 2023 and will close on 3 March 2023. The government aims to publish a response in spring 2023. 

UK government announces Energy Bills Discount Scheme

The government has announced a new Energy Bills Discount Scheme for UK businesses, charities and the public sector. 
This scheme will run from April 2023 for 12 months and has been announced ahead of the end of the current scheme  in March of this year. It is aimed at non-domestic consumers and hopes to help those who signed contracts for their supply of energy prior to recent falls in prices. The new scheme will provide £5.5 billion of support.

From 1 April 2023 non-domestic customers who have a contract with a licensed energy supplier will benefit from a discount of up to £6.97/MWh on their gas bill and to £19.61/MWh on their electricity bill, both of which will be automatically applied. The amount of discount in each case will be decided by reference to a wholesale price threshold which will be set by reference to the support given to domestic customers. The price threshold will be £107/MWh for gas and £302/MWh for electricity. Any business with costs below these levels will not receive any support.

For any eligible energy trade and intensive industries, the support will be in the form of a discount which reflects the difference between the price threshold and the wholesale price. The price threshold will be £99/MWh for gas and £185/MWh for electricity. This will be subject to a maximum discount of £40/MWh for gas and £89.1/MWh for electricity. 
The government has also announced £13.6 billion of business rates bills support for businesses in England and a £2.4 billion fuel duty cut.

UK government publishes responses to consultation on market-based mechanism for low-carbon heat

The government has published the responses it has received to its consultation on a market-based mechanism for low-carbon heat. The consultation set out a proposal on introducing a market-based mechanism which will support a UK market for low-carbon electric heat pumps. It sought views on the scope of technologies, the choice of target for the mechanism and scheme administration, penalties and enforcement.

There were 67 responses to the consultation, the majority of which were in support of the proposal. Respondents did highlight the need for wider policy changes in order to facilitate the government's aims, with suggestions including consumer protection, energy pricing and public engagement.

Those who supported the proposal generally were in favour of placing an obligation on manufacturers of fossil fuel heating appliances to meet an increasing low-carbon standard, rather than placing heat pump obligations on energy suppliers. Respondents also highlighted a desire to limit administrative complexity.

The responses broadly supported focusing on hydronic heat pumps over wider low-carbon technologies. They also supported excluding domestic scale heat pumps from the scope and focusing on units sold and installed rather than average efficiency of appliances.

The government now intends to take forward the obligation on manufacturers of fossil fuel heating appliances, in the hope it will incentivise firms to invest in the low carbon heating market. The government will also develop a mechanism based on the number of heat pump sales to end-consumers as a proportion of a firm's fossil fuel boiler sales.

NG ESO publishes its yearly review

National Grid ESO (NG ESO) published its 2022 review on 6 January, highlighting that 2022 was the UK's second greenest year on record after 2020. The greenest day occurred on 28 December, with 52g CO2/kWh being produced. Electricity generated from wind turbines has also become a more important part of the generation mix, with over 20GW of electricity being produced by wind for the first time ever in November 2022. On 29 January 2022, 64% of energy was produced by wind. On the whole, zero carbon sources are outperforming traditional fossil fuels, by providing 48.5% of electricity this year, compared to gas and coal's 40%.

• In its annual Operability Strategy Report, NG ESO outlined its proposed solutions to the obstacles that are anticipated as it moves towards its ambition of being able to operate a network using 100% zero carbon electricity by 2025. This includes issues associated with the fact that achieving decarbonisation necessitates less dispatchable generation (such as oil and gas), more asynchronous generation, more variable sources of generation and generation moving to different areas. Asynchronous generation refers to the increase in generators connected by inverter-based technologies such as battery and solar. Newer technologies such as domestic scale solar and increased demand side participation will also need to be integrated across the system.

This article was written with the assistance of Saskia Zant-Boer and Hannah Wooderson, trainee solicitors.