UK proposes lower emissions limit for new oil and gas plants from 2034
The UK government has opened a consultation into its ‘capacity market’, with the aim of improving energy security and spurring investment to reach net zero.
The UK Department for Business, Energy and Industrial Strategy suggested on Monday lowering emissions limits for new oil and gas plants participating in its so-called capacity market from October 1 2034, which would incentivise the use of carbon capture technology and hydrogen and the reduction of running hours. It also proposed reforms to the frequency with which emissions are disclosed.
The capacity market scheme offers providers stable revenues in return for delivering energy during times of volatility. Companies face penalties for failing to meet their obligations under the scheme.
The government also intends to encourage the participation of low carbon, flexible technologies with low capital expenditure – like ‘demand side response’ technologies and smaller scale electricity storage – in carbon market auctions by offering three-year agreements.
The government has asked respondents to identify which low carbon technologies might benefit from three-year agreements without capital expenditure thresholds. The consultation will run until March 3 2023, with proposals due to be implemented in July.
“It’s vital that we decarbonise our electricity system completely by 2035, so this consultation represents an important step forward in that process,” said Dan McGrail, chief executive of trade body RenewableUK. “We need to incentivise more investment in new low carbon flexibility in our modern energy system, based on renewable technologies including wind, solar, tidal stream and green hydrogen.”
Flexibility around multi-year agreements
Under current rules, newly build CMUs (the units of electricity generation capacity that can be put forward in a capacity market auction) must meet an emissions intensity limit of 550g of CO₂ per kilowatt hour (kWh) in order to qualify for multi-year agreements. This is above the level of carbon emissions deriving from coal but below that of most gas plants.
From 2024, existing capacity must either meet this limit or a yearly limit of 350kgCO₂/kWh. Under the new proposal, from October 1 2034 the intensity limit would be reduced to 100gCO₂/kWh, a requirement that the government believes cannot be met by unabated gas.
So-called fossil fuel emissions declarations, which are currently submitted either at the start of an agreement or, in some cases, 14 months after the beginning of the agreement, will need to be updated and submitted annually by new build plants when the new intensity limit is introduced.
“As always, some of the capacity market reform proposals may be more welcome by industry than others,” said Ashurst partner Antony Skinner. “One proposed reform that is likely to receive industry support is in relation to providing more flexibility around multi-year capacity agreements, and in particular the suggestion that a nine-year term may be available to projects that do not quite meet the [capital expenditure] threshold required for a 15-year term.”
Multi-year agreements for projects involving low capital expenditure are being proposed in response to a perceived bias towards technologies involving high capital expenditure.
The government acknowledged that “for low carbon capacity with lower capex costs, the requirement to satisfy capex thresholds in order to secure multi-year agreements [disincentivises] participation”. These CMUs can currently only access one-year agreements, which provide less revenue visibility.
It is proposing three-year agreements with no capital expenditure thresholds to low-carbon CMUs that meet its new emissions standards. “This would address participation barriers for low carbon capacity, whilst limiting consumer exposure to price, competition and volume risks,” it said.
The government will retain the current three-year and 15-year thresholds for capital expenditure as part of capacity market agreements. However, in recognition that some low carbon refurbishments in particular may not meet the upper threshold and therefore limit agreements to three years in duration, it is also proposing a nine-year threshold for capital expenditure.
Photo credit: Bloomberg