Update on Electricity Market Reform: The Capacity Market

Interesting article finishing up a series on U.K. electricty reforms.  Jurisdictions implementing programs to spur generation from variable renewable energy sources lack of clear path to ensuring sufficient firm capacity for meeting demand at all times

Update on Electricity Market Reform: The Capacity Market | Reed Smith - JDSupra: 

There are therefore two aspects to the proposed Capacity Market:

• Increasing potential supply, by ensuring that there is sufficient “spare” capacity that is able to generate during periods of high demand when additional electricity is required. In terms of the Capacity Market, we are talking not of traditional plant margin but instead about generating capacity which is only called upon in times of potential generating shortfall.

• Reducing demand, whether this means electricity users agreeing to limit their electricity use in periods of high demand (Demand Side Response (DSR)), or through incentivising permanent electricity demand reduction.

To increase potential supply, as well as incentivise DSR, the Government is planning to hold auctions in which companies bid either to provide an increased supply of electricity, or agree to limit their electricity use to a certain level, on short notice.
The mechanism will be technology neutral; that is, it will be open to both new and existing generation assets, as well as companies offering DSR, to bid for a “capacity agreement”, subject to a minimum capacity of 2MW. However, importantly, entities will not be able to participate if their plant already benefits from ROCs, a CfD or the small-scale FiT regime. It also appears that, at least initially, the auctions may not be open to non-UK-based generators.

read the entire article:

UPDATE:  
As soon as I posted the reference, a new report appeared: Demand Side Response and the Capacity Market in focus

The report, written with the assistance of international law firm Bird & Bird, commends the government for proactively engaging in reforms that are designed to address the nation’s future energy needs, but cautions that the pace of the Capacity Market reforms risks damaging the future demand side response industry.

• Long-term investment in DSR is likely to benefit from a delay in the production of the design for the DSR aspects of the Capacity Market (as against the Government's proposed timetable).

• DSR should not be seen as monolithic and there is a strong case for offering a variety of DSR product arrangements within the Capacity Market mechanism.

• DSR should be granted a level playing field free from a one-size-fits-all approach that may favour one type of capacity.

• The Capacity Market should have the ambition of opening up new sources of capacity, and innovative new markets, rather than relying predominantly on existing players and mechanisms.

In some ways this seems like variable renewable energy sources round two - when the talk is of "a level playing field" requiring the avoidance of applying the same rules to all, there is cause for caution in interpretting the report.

Statements in the report on the PJM market experience with DSR is instructive:

DSR and decarbonisation
PJM is one of the best examples of a capacity market which integrates DSR (see Box 3). Nevertheless, a significant proportion of DSR in that market comes from back-up generation, the overwhelming majority of which is powered by fossil fuels.
While back-up generation may combat security of supply issues, the balance to be struck between security of supply and decarbonisation is worth considering in the implementation of DSR in the Capacity Market.
We believe that:

• a clear GB vision on the interplay between decarbonisation and energy security would enhance investor certainty; and

• Government should consider whether carbon intensity should be reflected in the rewards available through the DSR Capacity Market mechanism.

A level playing field requires that negative externalities (such as carbon impact) are taken into account.

It seems to me the way to take carbon impact into account is to price carbon emissions - not to remove penalties for capacity salesman that fail to provide capacity when required, nor by using capacity payments as a backdoor method of subsidizing industry.

Still, an interesting report dealing with demand response as a candidate for providing capacity.