Two more milestones in the implementation of UK Electricity Market Reform (EMR) have been passed in the last 24 hours (15/16 December 2014): the first EMR Capacity Market auction began, and it became clear that the first auction of EMR Contracts for Difference (CfDs) has been postponed until February 2015.
The Capacity Market aims to secure the availability of 48.6GW of reliably despatchable generating plant from the autumn of 2018. This is being procured by means of a series of bidding rounds in a “descending clock” auction which must be completed by 19 December 2014. The auction pits existing coal, nuclear, CCGT and peaking plant against each other and against new build gas and diesel generators, but only new build plant and existing plant spending £125/kW or more on refurbishment can act as “price makers” in the bidding process (see further National Grid’s Auction User Guide).
According to the previously advertised timetable, the first CfD auction should already have taken place in early December, with results being notified to applicants between Christmas and the New Year. Instead, the revised version of the Low Carbon Contracts Company’s GB Implementation Plan for CfDs, published on 15 December 2014, states that those seeking CfDs will be invited to submit their bids on 17 February 2015 (if, at that point, demand for CfDs exceeds supply under the allocation round budget).
The delay has been driven by appeals against decisions on the eligibility of applications. The Implementation Plan notes that a longer delay is possible if “Tier 2” appeals are not completed by 6 February 2015. It is interesting that DECC has chosen to delay the CfD auction rather than make use of the mechanism (provided for in Part 8 of the Allocation Regulations and Rule 21 of the Allocation Framework) that allows an auction to go ahead with disputed applications still “pending”.
While we await the eventual outcome of these two first-of-a-kind auctions, we can start to compare and contrast the CfD and Capacity Market processes.
One striking difference is in terms of transparency. The Capacity Market prequalification process results in publication and regular updating on the EMR Portal of a full list of applicants (both successful and unsuccessful) and their plants. By contrast, there is no published list of applications for CfDs or the decisions that have been made as to their eligibility to be allocated a CfD. In some ways this mirrors the bidding processes themselves: the successive rounds of the Capacity Market auction are rather more interactive and offer bidders some (albeit limited) visibility of each other’s behaviour; in the CfD auction, applicants must effectively put everything into their initial sealed bid.
A second major difference is in the scrutiny to which applicants’ claims to have fulfilled the criteria that make them eligible to bid are subjected. For example, under the CfD legislation, applicants’ claims to have the necessary planning permission for their generating stations have to be substantiated by submitting copies of the relevant documents, which will then be checked by National Grid (albeit possibly in a fairly mechanical way). By contrast, compliance with the parallel obligations to have any requisite planning permission before bidding in the Capacity Market auction is simply self-certified.
No doubt there will be further debate about these and other design features during 2015. Already, Ofgem is consulting on possible changes to the Capacity Market Rules. It has identified as priority areas for consideration the possible streamlining of the prequalification process, price maker memoranda, and rules about demand side response. Meanwhile, alleged discrimination against the demand side has prompted Tempus Energy to challenge the European Commission’s decision that the Capacity Market is compatible with EU state aid rules.
