Electricity Capacity (Amendment) Regulations 2025

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Electricity Capacity (Amendment) Regulations 2025.

My Lords, this instrument, laid before the House on 16 December 2024, seeks to make technical improvements and changes to the capacity market scheme—the Government’s main tool for ensuring security of electricity supply in Great Britain.

The capacity market was introduced in 2014 and is designed to ensure that sufficient electrical capacity is available to meet future predicted demand, to maintain the security of electricity supply. It provides all forms of existing and new-build capacity with the right incentives to be on the system to deliver when needed. It covers generation, storage, consumer-led flexibility—formerly known as demand-side response—and interconnection capacity.

Through capacity market auctions, held annually, one year and four years ahead of delivery, we secure the capacity needed to meet future peak demand under a range of scenarios, based on advice from the capacity market delivery body—the National Energy System Operator, or NESO.

Since its introduction in 2014, the capacity market has contributed to investment in just under 19 gigawatts of new, flexible capacity needed to replace older, less efficient plant as we transition to a net-zero economy. To date, the capacity market has been successful in ensuring that Great Britain has adequate electricity capacity to meet demand, and continues to be required to maintain security of supply and provide investor confidence. To ensure that the capacity market continues to function effectively, we regularly make adjustments to the implementing legislation, based on our day-to-day experiences of operating the scheme.

The draft instrument makes changes to eight regulations, to deliver technical improvements and changes that support the functioning of the capacity market, which have been identified and explored through consultation. This will improve security of supply. It will also accelerate investment in low-carbon technologies, increasing the role that they play in the capacity market, supporting the Government’s 2030 clean power mission.

Stakeholder feedback has identified a need to review the wider timescales associated with the settlement body’s calculation activities. This ensures that timelines for settlement remain appropriate. The “settlement body” refers to the Electricity Settlements Company, a private company owned by the Secretary of State, established to oversee the settlement of payments to and from suppliers and capacity providers. The draft instrument amends the timelines for the settlement body’s determination so that they are in line with those concerning penalty charges.

As part of the requirements under the Capacity Market Rules, some capacity market units must complete an extended performance test. This provides assurance that a capacity market unit from a storage-generating technology class can deliver capacity for the relevant duration. In effect, extended performance tests are a sub-function of the satisfactory performance days requirement, which requires a capacity provider to demonstrate availability during a delivery year. The policy intent is that failure to meet extended performance tests should have the same consequence as failure to meet satisfactory performance days. The draft instrument ensures that the regime is consistent and that the two demonstrations of performance are treated in similar fashion when failed.

My Lords, these regulations propose amendments to the Electricity Capacity Regulations 2014. While presented as essential to streamline the capacity market, we must be careful around one or two of the implications that arise.

As has been outlined by the Minister, the proposed changes stem from two public consultations held in 2023, which received broad support—especially for increasing the role of low-carbon technologies. However, there are some concerns: how will these regulations ensure long-term energy security, and will they genuinely accelerate the shift to a low-carbon system?

First, the Government seek to remove the 10-year reapproval requirement for the capacity market, allowing it to operate indefinitely without regular reviews. While this may offer stability, we ask whether this move risks stagnating the market’s ability to adapt to fast-evolving technologies and changing energy needs. Do we not need to maintain regular scrutiny of such a critical, dynamic sector, especially in the next 10 years when technology is moving rapidly?

Secondly, the regulations aim to establish the capacity market as a permanent fixture and remove any reference to it as temporary. This again raises the question of whether this shift represents a real commitment to security of supply or whether we are entrenching an outdated system that may fail to evolve with the energy sector and the technological advancements to which we have referred.

Thirdly, while the regulations repeal provisions from the EU electricity regulation that are deemed unnecessary, we must ask whether we are simplifying the system too much and whether this could leave gaps that harm flexibility and responsiveness during crises.

Fourthly and finally, the Government are focusing on low-carbon technologies. However, can renewables, such as wind and solar, provide the same reliability as traditional generation during peak demand or system stress? Will prioritising low-carbon technologies risk energy security? How will the Government ensure that the capacity market remains competitive and attracts investment in both low-carbon and reliable generation technologies?

My Lords, I am grateful to the noble Lord, Lord Offord, for his general support for what is proposed in these regulations and for his specific questions in relation to the implications for long-term energy security and whether there is a risk of stagnating the market. He also asked whether we are going to keep this under regular review.

I should start by saying that the capacity market has been operating since 2014 and has worked pretty well. I acknowledge that. We see no reason why we cannot continue with it. In a sense, the permanent nature of the system that the noble Lord referred to is a perfectly reasonable response to the fact that the system is tried and tested. I should also say that it has supported investment in just under 19 gigawatts of new-build flexible capacity, including low-carbon technologies, since its introduction. That is solid evidence to suggest that the system can deliver the capacity needed to meet future peak demand and respond to the kind of challenge that he raised about introducing low-carbon technology into the frame as older capacity starts to be replaced.

I take the noble Lord’s point about keeping this under review. We absolutely are going to keep this under regular review. We have to do so. That is so important. We are committed to ensuring that the right policy tools are in place for delivering the secure and affordable energy system we need. I can confirm to the noble Lord that we regularly assess the performance of the capacity market and explore improvements to the scheme. We do not hesitate to bring to your Lordships’ House and the other place further changes in relation to further statutory instruments.

This is all intended to improve security of supply. We believe that accelerating investment in low-carbon technologies can increase the role they play in the capacity market. Our evidence since 2014 suggests that the mechanism that we have put in place is going to work. I am quite confident that we are right to say that this should be a permanent feature. Having said that, I thank the noble Lord for his constructive response to this SI.

Motion agreed.