De-Rating Factors for Capacity Market Design

1. Introduction

A de-rating factor is a percentage used to convert the installed capacity of a generator or other electricity resource into the amount of capacity that can realistically be counted for capacity-market purposes.

For example, a generator may have 100 MW of installed capacity. If its de-rating factor is 75%, its capacity-market contribution may be treated as 75 MW.

The reason is simple: installed capacity does not always mean dependable capacity. A gas plant can experience an outage, a wind farm depends on weather, solar generation depends on sunlight, and a battery may have limited duration.

Therefore, de-rating factors are an important part of capacity-market design because they help determine how much reliable capacity the market actually procures.

2. Purpose of De-Rating Factors

The main purpose is to measure the reliability contribution of different resources.

Without de-rating, a 500 MW wind farm, 500 MW gas plant and 500 MW battery could potentially be treated as providing exactly the same capacity.

That would ignore their different operating characteristics.

De-rating therefore attempts to answer:

How much capacity can this resource realistically be expected to provide when the electricity system is under stress?

This helps the Capacity Market avoid both under-procurement and over-procurement.

3. Capacity Market and Security of Supply

The Capacity Market is designed to provide incentives for sufficient capacity to be available when electricity demand is high and supply is limited.

The UK's Capacity Market framework is established principally under the Energy Act 2013 and the Electricity Capacity Regulations 2014.

A generator's de-rated capacity can affect:

eligibility;

auction participation;

capacity obligations;

contract volumes; and

potential capacity payments.

Consequently, de-rating is both a technical issue and a regulatory-economic issue.

4. Main Factors Used in De-Rating

A proper methodology may consider several factors.

A. Forced Outage Rate

A generator can unexpectedly become unavailable because of equipment failure.

A generator with a high historical forced-outage rate should generally receive a lower reliability contribution than a highly reliable generator.

B. Availability

Historical availability shows how often the resource is capable of operating.

C. Technology Characteristics

Different technologies have different operational characteristics.

D. Weather Dependence

Wind and solar generation depend on weather conditions.

E. Storage Duration

Battery capacity depends not only on MW but also on how long the battery can discharge.

F. System-Stress Conditions

The important question is whether the resource can contribute during periods of system stress, rather than simply how much electricity it generates annually.

5. Conventional Generators

Traditional generators such as gas, coal and nuclear plants can normally provide electricity when required, but they are not perfectly reliable.

They can experience:

mechanical failures;

maintenance outages;

fuel-supply problems;

cooling-system failures; and

transmission restrictions.

Therefore, their de-rating factors should reflect actual reliability.

A 1,000 MW generator should not automatically be treated as 1,000 MW of dependable capacity.

6. Wind and Solar Generation

Renewable generators present a different challenge.

Wind

Wind output changes depending on wind conditions.

Solar

Solar output depends on sunlight and is therefore limited at night.

Consequently, annual generation alone cannot determine their capacity contribution.

The methodology should examine the amount of generation available during the relevant periods of system stress.

This makes de-rating particularly important as renewable generation becomes a larger part of the electricity mix.

7. Battery Storage

Battery storage requires special treatment.

Consider two batteries:

Battery A: 100 MW, 1-hour duration

Battery B: 100 MW, 4-hour duration

Both have 100 MW power capacity, but Battery B can provide electricity for a much longer period.

Therefore, capacity-market de-rating may need to consider:

power capacity;

energy capacity;

duration;

state of charge;

charging capability; and

expected length of system stress.

This prevents short-duration storage from being treated as automatically equivalent to long-duration generation.

8. Demand-Side Response

A capacity market should not necessarily be limited to generators.

Consumers can also provide capacity by reducing or shifting electricity consumption.

Examples include:

industrial demand reduction;

EV charging management;

smart heating;

battery management; and

flexible commercial loads.

The importance of including demand-side response was highlighted in Tempus Energy Ltd v European Commission, Case T-793/14.

The General Court annulled the Commission's State-aid approval of the UK Capacity Market because the Commission had failed to conduct a sufficiently detailed examination, including consideration of demand-side response. (curia.europa.eu)

Importance

The case shows that capacity-market design should consider different technologies and forms of capacity, rather than assuming that traditional generation is the only source of security.

9. Aggregated Resources

Small resources may participate through aggregation.

For example:

200 home batteries + 300 EVs + 500 flexible consumers

may be combined by an aggregator and offered as a larger capacity resource.

The de-rating methodology must therefore determine how the reliability of an aggregated portfolio should be calculated.

This raises questions about:

simultaneous availability;

customer participation;

measurement;

response time;

delivery obligations; and

non-performance.

10. Reliability-Based Methodology

A modern methodology should ideally be based on probability and reliability analysis.

It can examine:

historical outages;

historical generation;

weather conditions;

demand patterns;

interconnection;

storage duration; and

system-stress events.

The objective is not to predict exactly what every generator will produce.

Instead, the objective is to estimate the probability that sufficient capacity will be available when the system needs it.

This is why de-rating is fundamentally a risk-management tool.

11. Case Law: Tempus Energy v Commission

The Tempus Energy litigation is particularly important for capacity-market design.

The General Court found that the Commission had not adequately examined the Capacity Market's impact and the role of demand-side response before approving the scheme under State-aid law.

The case established an important regulatory lesson:

Capacity-market decisions must be based on proper examination of the characteristics and contribution of different capacity resources.

This is relevant to de-rating because assigning a factor to a technology can influence its competitive position and the overall cost of capacity procurement.

12. Case Law: Tempus Energy Technology v Commission

The subsequent litigation concerning the redesigned Capacity Market further demonstrates that the legal design of capacity mechanisms must be based on a properly reasoned assessment of electricity-system needs and different market participants.

The broader lesson is that capacity-market rules must be supported by evidence and proper regulatory reasoning.

This is especially relevant where different technologies receive significantly different de-rating treatment.

13. Case Law: 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 aspects of Britain's electricity balancing arrangements.

Although the case was not directly about de-rating factors, it demonstrates the importance of carefully interpreting technical electricity-market rules within their statutory and regulatory framework. (bailii.org)

Relevance

Capacity markets do not operate separately from the wider electricity market. De-rating assumptions therefore need to be compatible with broader balancing and system-operation arrangements.

14. Transparency and Consultation

Because de-rating factors directly affect generator revenues, their determination should be transparent.

A sound governance process should include:

publication of the methodology;

explanation of assumptions;

publication of relevant evidence;

stakeholder consultation;

opportunity to challenge technical assumptions;

publication of final factors; and

periodic review.

This promotes regulatory accountability and investor certainty.

15. Consumer Protection

De-rating factors also affect electricity consumers.

If factors are set too high, the market may overestimate reliable capacity and procure too little capacity.

If factors are set too low, the market may procure excessive capacity and increase costs.

Therefore, the methodology must balance:

system reliability + investment incentives + competition + consumer cost

A technically incorrect factor can therefore create both security risks and unnecessary consumer costs.

16. Periodic Review

De-rating factors should be reviewed periodically because electricity technologies are changing rapidly.

For example:

batteries are becoming longer-duration;

offshore wind is expanding;

weather forecasting is improving;

demand response is increasing;

interconnection is changing; and

smart technologies are becoming more widespread.

A factor based on old data may no longer accurately represent the resource's contribution to security of supply.

17. Legal Challenges

Generators may challenge a de-rating methodology where they believe:

the regulator exceeded its statutory powers;

relevant evidence was ignored;

the methodology was irrational;

consultation was inadequate;

similar resources were treated inconsistently; or

the regulator failed to give adequate reasons.

Courts generally recognise that electricity regulators have technical expertise. Judicial review therefore normally examines legality, procedural fairness and rationality, rather than replacing the regulator's technical calculation with the court's own preferred methodology.

18. Conclusion

De-rating factors are a central part of Capacity Market design because they convert installed capacity into a realistic estimate of dependable capacity.

A good methodology should consider:

forced outage rates;

availability;

technology characteristics;

weather dependence;

storage duration;

demand-side response;

aggregation;

system-stress periods;

reliable statistical evidence; and

regular review.

The Tempus Energy v Commission judgment is particularly important because it showed that capacity-market design must properly consider the characteristics and contribution of alternative capacity resources, including demand-side response.

In simple words, de-rating factors prevent the Capacity Market from treating every megawatt of installed capacity as equally reliable. They help regulators determine how much dependable capacity each resource can realistically provide, thereby supporting security of supply, fair competition, investment certainty and reasonable consumer costs.