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Proposed change to Capacity Market rules

Published: 24 August 2017
Sector: Energy

Proposed change to Capacity Market rules will cause a potential headache for battery storage developers

In the 2016 Capacity Market auction, approximately 500 MW of battery storage projects were awarded contracts. It is anticipated that the number will increase significantly this year. However, proposed changes to the Capacity Market rules proposed by the Department for Business Enterprise & Industrial Strategy (BEIS) in a consultation document issued in July 2017 entitled Capacity Market Consultation – Improving the Framework may cause that prediction to be revised. The deadline for response to the consultation is 8 September 2017.

What is BEIS concerned about?

BEIS has identified three concerns: 

  • The period on which a project is called on to supply electricity under the Capacity Market (known as a “stress event”) may be longer than the period that the battery is capable of supplying power.Evidence from National Grid shows that stress events can last up to two hours on average although few are expected to last longer than four hours.However, battery projects cannot generally provide electricity for this long – in many cases the battery will be fully discharged after thirty minutes.
  • Batteries degrade over time and this will affect their ability to supply electricity for a prolonged period
  • Some batteries would not be fully charged at the commencement of a stress event, e.g. because they have been supplying electricity before the stress event for another service such as frequency response.

BEIS are concerned that the increase in battery storage projects in the Capacity Market, which displaces other types of generation that are capable of generating for the full period of a stress event, could cause security of supply issues.

What are BEIS’s proposals?

BEIS intends to address these concerns by taking duration into account when setting the de-rating factors for storage Capacity Market Units (CMUs) which would not be able to provide capacity for the full duration of probable stress events. This would include not only battery storage but other types of storage such as hydro.

BEIS proposes to break down the storage technology class into multiple categories, differentiated by the amount of time for which a CMU can generate at its full connection capacity without recharging. Technologies that can generate for a minimum of four hours will continue to be de-rated as present (this means that pumped hydro will continue in accordance with the current arrangements). Storage technologies that have a shorter duration will be defined as “energy limited” and de-rated in accordance with their “Equivalent Firm Capacity”. This is a measure of firm capacity required to replace them to make the same contribution to security of supply. It is likely that the categories will be based on multiples of minimum thirty-minutes duration.

BEIS proposes that, for Capacity Market auctions in future years, storage CMUs will be able to self-select, at pre-qualification, the duration category and associated de-rating factor that should apply to them.

For the 2017 auction, there won’t be time for this to happen so storage CMUs will be required to confirm which duration category they are in following publication of the final auction guidelines. If the de-rating factor is different to that which applied when the application was made, the bidder can withdraw from the auction, provided that the withdrawal is no later than 10 working days before the first bidding round.

There will be ongoing verification of the ability of the CMU to continue performing for the required duration during the term of the Capacity Market agreement. BEIS regards this as important because of the fact that batteries are likely to degrade over time. One option would be for CMUs to carry out annual tests to prove their ability to generate for the required duration. Another option would be, either separately or in addition to the testing requirement, to require the CMU to provide a copy of the battery manufacturer’s guarantee stating the duration for which the battery can generate at its connection capacity which would need to be valid for the tem of the agreement.

Comment

It is understandable that BEIS should be concerned to ensure that projects receiving Capacity Market agreements are able to generate for the full duration of stress events. The proposed solution that BEIS has come up with is preferable to possible alternatives of requiring storage CMUs to prove their ability to generate for a prolonged period that would take many projects out of the game; or of imposing severe penalties for failing to generate for the duration of a stress event, which may cause projects to be unable to get financed because of the risk to the project revenue stream.

However, it does seem unfair for bidders who prequalify on the basis of the current de-rating factor and then find that the new proposed de-rating factor that they need to adhere would require them to withdraw from the bid because of the financial impact on the project. Perhaps it would be fairer to impose the new requirements from the 2018 auction onwards.

With respect to the verification requirements, CMU owners will need to ensure that their operation and maintenance contracts require the contractor to perform the annual tests to be stipulated by the CM agreement. They will also need to check their battery supply agreements to determine whether the required guarantees are included.

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