Capacity Market consultation opens on demand side flexibility

On 16 December 2024, DESNZ published (i) a consultation on proposed changes to the Capacity Market (“CM”) to modernise the CM Rules and improve the participation of demand side / consumer-led flexibility and (ii) a call for evidence seeking views on improving consumer-led flexibility in the CM.

Flexibility in context

Consumer-led flexibility enables domestic, commercial and industrial energy consumers to voluntarily adjust their electricity usage in response to price signals and incentives, and essentially benefit from that ability to be flexible. The government’s recently published Clean Power 2030 Action Plan anticipates an increase in consumer-led flexibility from 2.5GW today to between 10 and 12GW by 2030.

Within the CM, consumer-led flexibility is delivered via Demand Side Response (“DSR”) mechanisms which allow consumers to be rewarded through Capacity Payments made via DSR providers. DSR providers act on behalf of consumers to reduce electricity demand on the grid at peak times.

This article outlines key takeaways from the CM consultation for consumer-led flexibility which will be of particular relevance to flexibility providers. Through the call for evidence, DESNZ is also seeking views on: establishing specific additional DSR Generating Technology Classes, de-rating methodology, de-rating duration limits, component reallocation within aggregated portfolios, management of aggregated small-scale assets, baselining methodologies and completion milestones.

Termination fees for failure to deliver a DSR test

If a Capacity Provider fails to meet or breaches requirements in their CM agreement, this can lead to termination of the agreement and resulting termination fees. There is currently no termination fee specifically linked to failure to provide a DSR Test Certificate for Unproven DSR Capacity Market Units (“CMUs”) but instead the consequence is loss of credit cover set at £5,000/MW of de-rated capacity. Unproven DSR CMUs will need to complete a DSR Test to have ‘proven’ DSR capacity – these CMUs can enter prequalification and defer their DSR Test but it will need to be completed before the relevant Delivery Year.

DESNZ is proposing a £5,000/MW termination fee for failure to provide a DSR Test Certificate by the required deadline in addition to the existing £5,000/MW loss of credit cover. According to DESNZ, the proposed termination fee is ‘designed to provide a sufficient deterrent to prevent the opportunistic withdrawal of capacity from Capacity Agreements without imposing excessive barriers to market entry.’

Streamlining requirements for proven DSR Business Model submissions

DSR CMUs are currently required to submit a business model which details each DSR component at application. For aggregated DSR portfolios, these components may number in the thousands and current rules require a business model to be submitted with an entry per component. To streamline this process, DESNZ is proposing that DSR CMUs collate identical components under a single business model entry at application. Capacity Providers would still be required to indicate the number of distinct components associated with that single line entry.

Introduction of a separation period between (i) the DSR Test Period, and (ii) notifying DSR components and Metering Assessment and Metering Tests

Due to increased component numbers within aggregated DSR portfolios, the CM Settlement Body is under significant pressure to complete validation processes. DESNZ is proposing introducing a separation period between (i) and (ii) above to allow the Delivery Body and CM Settlement Body to conduct validation processes more efficiently whilst reducing the risk of capacity bottlenecks.

Next steps

Both the consultation and call for evidence close on 17 February 2025. Depending on responses and subject to parliamentary time, the government aims to implement changes ahead of CM prequalification in 2025.