De-Rating Factor Governance for Generators

1. Introduction

A de-rating factor is a percentage used to determine how much of a generator's installed capacity can be counted as reliable capacity for electricity-system planning or a Capacity Market.

For example, a generator may have an installed capacity of 100 MW, but its de-rating factor may be 80%. Its de-rated capacity would then be 80 MW.

This concept is important because installed capacity is not always the same as dependable capacity. A solar plant cannot normally produce its full capacity during every period of system stress, while a gas plant may have a higher availability but can still experience outages.

Therefore, de-rating factor governance concerns the legal and regulatory process for deciding, reviewing and applying these factors to different generation technologies.

2. Purpose of De-Rating Factors

The main purpose is to ensure that the Capacity Market does not count more capacity than generators can realistically provide.

For example:

A 100 MW gas plant may receive a relatively high de-rating factor.

A 100 MW wind project may receive a lower factor because output depends on weather.

A battery's contribution depends on its duration and ability to discharge during the relevant period.

The factor therefore attempts to reflect reliability rather than simply physical size.

3. De-Rating in the UK Capacity Market

The UK Capacity Market is designed to ensure that sufficient electricity capacity is available to meet future system needs.

The Electricity Capacity Regulations 2014 provide the legal framework for the Capacity Market. The government and relevant institutions use technical evidence to determine the contribution different technologies can make to security of supply.

The de-rating methodology is particularly important because it affects:

how much capacity a generator can offer;

how much capacity it can contract for;

the amount of capacity payments it may receive; and

the overall amount of capacity procured.

Thus, de-rating has both technical and financial consequences.

4. Governance Process

De-rating factors should not simply be selected by generators themselves.

A proper governance framework normally requires:

1. Technical evidence

The regulator or system authority considers historical performance, availability and reliability.

2. Methodology

A consistent mathematical methodology is established.

3. Consultation

Generators, suppliers, consumer groups and other stakeholders may be given an opportunity to comment.

4. Publication

The methodology and resulting factors should be transparent.

5. Review

Factors should be updated when technology, market conditions or evidence changes.

This is important because electricity technologies develop rapidly.

5. Role of NESO and Government

In Great Britain, NESO has an important role in electricity-system planning and security.

The government establishes the wider Capacity Market policy framework, while technical analysis and market administration involve relevant electricity-system institutions.

The governance structure must therefore separate:

energy policy decisions;

technical analysis;

market administration; and

economic regulation.

This helps reduce arbitrary treatment of different technologies.

6. Technology-Specific De-Rating

Different technologies have different reliability characteristics.

Gas generation

Gas generators can normally operate when required but may experience mechanical or fuel-related outages.

Wind generation

Wind generation depends on weather conditions, so its contribution during peak system stress must be estimated statistically.

Solar generation

Solar generation can contribute to annual electricity supply but has limited availability during winter evening peaks.

Battery storage

A battery can respond very quickly, but its contribution depends on:

battery duration;

state of charge;

charging arrangements; and

duration of the system-stress event.

Therefore, applying the same de-rating factor to all technologies would not accurately represent their different characteristics.

7. Battery De-Rating

Battery storage creates a particularly difficult governance problem.

A 100 MW battery with a one-hour duration has a different capacity contribution from a 100 MW battery capable of discharging for four hours.

Therefore, de-rating methodology increasingly needs to consider duration as well as capacity.

This is important because a generator that can provide electricity for only a short period may not provide the same security contribution as a generator capable of continuous operation during a prolonged system shortage.

8. Intermittent Renewable Generation

Wind and solar require statistical treatment because their output varies.

A regulator should not simply say:

“100 MW installed capacity = 100 MW reliable capacity.”

Instead, historical production data and system conditions can be analysed to estimate the amount of capacity likely to be available during periods of system stress.

This makes de-rating a form of probabilistic electricity regulation.

9. Case Law: Tempus Energy Ltd v BEIS

One of the most important European cases is Tempus Energy Ltd v Commission, Case T-793/14.

Tempus challenged the European Commission's State-aid approval of the UK's Capacity Market.

The General Court annulled the Commission's decision because the Commission had failed to conduct a sufficiently detailed examination of the Capacity Market's compatibility with EU State-aid rules.

The Court particularly emphasised the importance of considering demand-side response when assessing the Capacity Market. (curia.europa.eu)

Relevance to de-rating governance

The case demonstrates that Capacity Market design cannot simply focus on traditional generators.

The authorities must consider whether alternative resources can provide capacity and whether the market design properly reflects their contribution.

This is directly relevant to the development of de-rating factors for:

batteries;

demand response;

renewable resources; and

aggregated resources.

10. Case: R (SSE Generation Ltd) v CMA

In R (SSE Generation Ltd) v Competition and Markets Authority [2022] EWCA Civ 1472, the Court of Appeal considered issues concerning the electricity balancing arrangements and the Balancing and Settlement Code.

Although the case was not directly about de-rating factors, it demonstrates the importance of transparent and legally governed electricity-market rules.

The judgment is relevant because capacity and balancing arrangements operate within a broader system of regulated electricity-market rules. (bailii.org)

11. Judicial Review and Regulatory Accountability

De-rating decisions can have significant financial consequences.

A generator may argue that:

the methodology is irrational;

the data is unreliable;

different technologies have been treated inconsistently;

the regulator failed to consult properly; or

the decision was based on an incorrect interpretation of the regulations.

Courts generally do not substitute their own technical judgment for that of the specialist regulator. However, the decision-making process must still comply with legality, procedural fairness and rationality.

This is why transparent methodology is essential.

12. Data and Evidence

Good de-rating governance requires reliable data.

Relevant information may include:

historical availability;

forced outage rates;

weather conditions;

generation output;

duration capability;

maintenance records;

fuel availability; and

system-stress periods.

The authority should explain how the evidence is converted into the final de-rating factor.

If stakeholders cannot understand the methodology, it becomes difficult to challenge or verify the decision.

13. Periodic Review

De-rating factors should not remain permanently fixed.

Technology changes.

For example:

battery technology improves;

offshore wind becomes more geographically diverse;

forecasting improves;

interconnection changes;

demand response expands.

Therefore, periodic review is necessary.

A factor that was reasonable five years ago may not accurately represent current system conditions.

14. Impact on Generators

A de-rating factor directly affects a generator's participation in the Capacity Market.

For example:

Installed capacity = 200 MW

De-rating factor = 75%

De-rated capacity = 150 MW

If the factor falls to 60%, the same generator would have only 120 MW of de-rated capacity.

Therefore, the factor can influence:

capacity-market bids;

contract volumes;

potential capacity payments;

investment decisions; and

technology choices.

This makes the governance of the factor commercially significant.

15. Consumer Interest

De-rating factors also protect consumers.

If factors are set too high, the market may believe that sufficient reliable capacity exists when it does not.

This could create a security-of-supply problem.

If factors are set too low, the system may procure unnecessarily large amounts of capacity, increasing costs for consumers.

Therefore, the regulator must seek a methodology that reasonably reflects the actual contribution of each technology to security of supply.

16. Conclusion

De-rating factor governance for generators is an important part of electricity-market regulation because it determines how installed capacity is converted into dependable capacity.

The main governance principles are:

use reliable technical evidence;

apply a transparent methodology;

recognise differences between technologies;

consider duration for storage;

consider demand-side resources;

consult affected stakeholders;

regularly review the methodology;

provide reasons for important decisions; and

maintain judicial and regulatory accountability.

The Tempus Energy v Commission judgment is particularly important because it demonstrated that Capacity Market design must properly consider alternative resources such as demand-side response. (curia.europa.eu)

In simple terms, a de-rating factor answers the question: “How much of this generator's installed capacity can reasonably be counted as dependable capacity when the electricity system needs it?” Good governance ensures that the answer is based on transparent evidence rather than arbitrary assumptions, while balancing system security, fair competition, investment incentives and consumer costs.