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Security interests in the UK Capacity Market: new rules

Lenders and capacity providers in the UK’s Capacity Market will want to take note of new procedures introduced by National Grid in its role as the Capacity Market’s Delivery Body.

The Capacity Market aims to incentivise investment in new electricity generating capacity and ensure reliable electricity supplies for end users. Where a Capacity Provider has third party debt financing, the lender will want to take security over the capacity payments it is entitled to receive by registering a Security Interest in respect of the relevant Capacity Agreement on the Capacity Market Register.

Recently National Grid, as Delivery Body, has changed the way such Security Interests are to be registered.

Previously lawyers acting for lenders (the beneficiaries of the Security Interests) have undertaken registration on behalf of their clients, in line with the other common security registrations at Companies House and where applicable, the Land Registry. All that was required was to submit by email a notice of the Security Interest in a form agreed by the Delivery Body (the Security Interest Notice).  The Delivery Body now requires that Security Interest Notices are registered by the relevant Capacity Provider itself, via the online portal registration system known as the EMR Delivery Body Portal (the Portal).

This means that beneficiaries of the Security Interests, or lawyers acting on their behalf, are no longer able to manage this process, so the Security Interest Notice will need to be submitted to the Capacity Market Register via the Portal by the Capacity Provider or their lawyers (if they are appointed as an agent to act on behalf of the relevant Capacity Provider).

Once a Security Interest Notice has been uploaded to the Portal the Delivery Body will receive notification and following this the Delivery Body will be required to approve (or return) an application to register that Security Interest and update the Capacity Market Register accordingly.

Going forward, it is likely that this process will be reflected in any relevant loan or security document to ensure that, where applicable, borrowers and developers are required to submit a Security Interest Notice to the Delivery Body (or provide evidence of this to the beneficiaries of the Security Interest) as a condition to the terms of the financing.

If you are a Capacity Provider and you have not already signed up to the Portal, information on how to register via the company registration form can be found here. The Delivery Body has also published guidance on how to upload a Security Interest which you can access by clicking here.

If you are experiencing any issues with the Portal, the Delivery Body can be contacted via email at EMR@nationalgrid.com or via telephone on 01926 655300.

Defined terms used in this blog post are taken from the consolidated version of The Capacity Market Rules 2014 published on 14 July 2016, or as introduced by the author.


Security interests in the UK Capacity Market: new rules

UK “early” Capacity Market auction produces cheapest prices yet

The provisional results of the “early” Capacity Market auction held last week have now been published.

This was an auction exclusively of 1-year capacity agreements, primarily to cover Winter 2017/18, after the UK Government decided that it did not want National Grid to carry on ensuring security of supply during Winter periods by means of a Contingency Balancing Reserve (CBR).  The CBR involved auctions open to generators who would not otherwise be operating in a given Winter period and to demand side response providers.  A Government consultation in March 2016 noted that the prices National Grid were paying under the CBR were increasing and that it introduced distortions into the market.

From Winter 2018/19, of course, the Capacity Market itself will ensure security of supply.  Those with capacity agreements beginning in 2018 will be the capacity providers who bid successfully in a four year ahead auction held in 2014, supplemented by those who win capacity agreements in any subsequent one year ahead auction for delivery in 2018.  Last week’s “early” auction was a one-off bridge between the CBR (now operating for the last time to cover Winter 2016/17) and the fully-fledged Capacity Market regime.  The key difference between the CBR and the Capacity Market is that the CBR (or at least the major part of it) focuses on securing capacity that would otherwise not be in the market, to fill the potential gap between existing generation and projected peak demand, whereas the Capacity Market provides a reliability incentive to all eligible generators and demand side response providers on the market.

Commentary on previous Capacity Market auctions (such as this post from December 2016) has tended to focus on the failure of the four year ahead auctions to result in the award of 15 year agreements to meaningful amounts of large-scale new gas-fired generation projects.  With new projects competing against almost all existing thermal generation, and new reciprocating engine projects able to bear much lower Capacity Market clearing prices than a CCGT project, the auctions have produced low clearing prices, but no obvious successors to the existing big coal-fired plants that the Government wants to close by 2025.

How to evaluate the results of the “early” auction, then?  The provisional results indicate capacity agreements going to 54.43 GW of capacity, at £6.95 kW / year, suggesting total costs to bill payers of around £378 million.  This might look like spectacularly good value compared with the results of the last four year ahead auction (for delivery starting in 2020), where the clearing price was £22.50 kW / year for 52.43 GW of capacity.  But that isn’t really a fair comparison, since about a quarter of the capacity that was awarded agreements for 2020 was new build, whereas less than 4 percent of the capacity awarded agreements in the “early” auction falls into this category.  All the rest will be paid £6.95 for just continuing to operate – which presumably most of them would have done anyway. 

An alternative point of comparison might be with the costs of the CBR.  The most recent Winter for which these are available is 2015/16, when National Grid spent just over £31 million on procuring, testing and utilising less than 3 GW of CBR capacity.  Obviously a much inferior system. 


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UK “early” Capacity Market auction produces cheapest prices yet