Energy Bill gains Royal Assent
19 Dec 2013
The government’s Energy Bill containing its long-running electricity market reforms yesterday became law after receiving Royal Assent and being passed as an Act of Parliament.
The Energy Act, as it is now known, contains a number of key proposals aimed at boosting investment in energy infrastructure, especially low carbon technologies such as new nuclear and renewables.
Among these is the plan to develop a capacity payment regime, aimed at encouraging investment in reserve electricity capacity capable of balancing the grid as more and more intermittent renewables such as wind farms come online.
This capacity mechanism could be a key driver in establishing a thriving demand side response market in the UK
It is proposed that a series of auctions for reserve capacity will be held where bidders – either owners of idle generating plant or major consumers – will vie to be paid for freeing up capacity on the grid at critical times.
This capacity mechanism could be a key driver in establishing a thriving demand side response market in the UK, where major energy users such as process firms reduce their demand on the grid at peak times in return for payment.
Capacity payments to industrial users already occur in the US, and last year 28GW – 6% of peak demand - was made available through so-called demand side response (DSR) providers.
UK capacity auctions are set to run on four-yearly cycles, with the first auction set to take place at the end of next year to provide capacity in 2018. However, these auctions are restricted to generating capacity, with the DSR portion being held back to be auctioned just a year in advance of delivery – a concession made by the government to recognise the fact that it would be extremely difficult for industrial users to calculate their energy needs four years in advance.
As a result, ahead of the main capacity mechanism scheme beginning at the end of 2018, there will be two one-year DSR delivery periods starting at the end of 2016 and end of 2017, with the auctions for these periods taking place at the end of 2015 and end of 2016 respectively.
However, although the timetable was published in June, it is understood the Department of Energy and Climate Change was waiting for the Energy Act to be passed before fleshing out the details of exactly how the scheme would work, both in terms of the technology that will be used and the type of payments that will be made (i.e. on an availability or pay-as-you-go basis).
In between now and the first DSR period at the end of 2016, National Grid has proposed to run its own capacity payment scheme, called Demand Side Balancing Reserve (DSBR). This scheme, if approved by energy regulator Ofgem, will run between 4pm and 8pm every night during two winter periods: November 2014 to February 2015, and November 2015 to February 2016.
This scheme will be open to any plants with half-hourly meters, and the only technology required will be a mobile phone to receive text message notifications of when National Grid want operators to turn down their electricity consumption from the grid. Payments on this scheme will be made on a pay-as-you-go basis, National Grid proposing capacity payment fees ranging between £1,000 per MWh and £15,000 per MWh.
