Clarity on Capacity Market renewable ratings, but gap in government policy remains

On 7 January, National Grid ESO published its consultation on the new de-rating factor methodology to be used for renewables participating in the Capacity Market (CM). The document forms a key part of the five-year review of the CM, for which a government call for evidence was published in August 2018.  

In previous auctions, wind farms that attempted to participate exited the process during the pre-qualification period. In the past, there has been no technology-specific de-rating factor for wind or solar, despite the rules stating that any capacity without a subsidy is eligible to participate. The government has an express policy to facilitate renewable participation, so this consultation is a welcome step in clarifying an element of how this will work.

Those familiar with the de-rating methodology used for duration-limited storage will be accustomed to the approach proposed by National Grid, in its role as the Electricity Market Reform (EMR) Delivery Body, for the setting of de-rating for solar and wind farms.

The proposal is to use an Equivalent Firm Capacity (EFC) approach. This looks at the level of security of supply the technology provides and works out how much “firm” capacity would be needed to provide the same level of security. For example, if 1MW of wind provides the required three hours Loss of Load Expectation (LOLE) and 0.25MW of firm capacity can do the same, then the de-rating is 25%.

Security of Supply can be measured in LOLE (a risk metric) or Expected Energy Unserved (EEU) – the MWhs undelivered. In this latest consultation, National Grid proposes using EEU, as it provides more stable results and is in line with the methodology used in the de-rating for duration-limited storage in the CM.

The proposed methodology is based on the idea of the incremental marginal effect of an additional MW of wind or solar capacity on security of supply. An Unserved Energy Model is used to simulate the risk of unserved energy events in a year, using assumptions about the level of wind on the system.

If the proposed incremental method is adopted it will mean that the de-rating factors for these renewable technologies will be based on the contribution of additional onshore and offshore wind or solar projects added to the system, not the contribution of the total fleets for these respective technologies. As more wind and solar is added over time, then under this approach the de-rating factor would fall as a result of the diminishing effect of security of supply from adding more of the same technology.

It is widely expected, and reasonable, that the final de-rating factors for renewables will be at these levels. Some industry participants may have looked to National Grid’s EFC for wind in its Winter Outlook as a benchmark, which is 15%. This is higher than the de-rating factor proposed for either onshore or offshore wind in the most recent consultation. Others may have looked to Ireland’s Capacity Remuneration Mechanism (CRM), where solar load factors are 5% and onshore wind 10%. But in both cases the comparison is imperfect. EFC’s serve a different purpose for the Winter Outlook than the Capacity Market, and Ireland has a very different market context.

Subsidy-free schemes being developed outside the Contracts for Difference (CfD) scheme, and projects that are reaching the end of their subsidy in the Renewables Obligation (RO) or Feed-in Tariff (FiT) and considering repowering will be following this consultation closely.

For subsidy-free schemes, most developers were already aware that CM de-rating levels would lead to the CM being additional revenue rather than a scheme to underwrite their total investment. In that sense, this consultation changes very little. The combination of the proposed de-ratings and recent low clearing prices is unlikely to be material to a decision as to whether to proceed. For example, a subsidy-free wind farm would expect to earn £0.19/MWh at a 38% load factor with an £8/kW clearing price at the 8.2% de-rating factor. Even if you doubled that value it is not a game-changer in making subsidy free widely investable.

For projects falling out of the RO and considering repowering, there is a further substantial looming challenge for government. The CM value will be unlikely, in combination with wholesale power values, to support repowering investment cases where development costs are far higher than many anticipate.

From National Grid’s perspective, the proposed de-ratings in the consultation need to be finalised. But it is good to get clarity on the approach as it allows the market to adjust expectations and plans accordingly. It is probable that they be kept under continual consideration. This might include exploring whether a methodology would be needed to be adjusted for repowering or legacy schemes as material capacity volumes role out of subsidy and need to make investment decisions during the next decade.

In any event, the deeper challenge remains one for BEIS. National Grid’s role with the CM is not to stimulate the required volume of low carbon investment to meet government decarbonisation objectives. It is to achieve system security.

The lack of stimulus for investment in subsidy-free or repowering undermines achieving decarbonisation objectives. It is not a challenge for achieving security of supply per se. So, the question for government must be what new policy measures will provide that stimulus? This question needs to be answered by BEIS in the coming months in order to guard against progress against carbon budgets being unwound.

Responses to the consultation are required to be sent to by 5pm on 31 January, and National Grid will publish its response by the end of February.

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