Pursuant to analysis performed on the occasion of the UK energy market reform, capacity instruments will most likely not be a financial instrument for the purposes of the Markets in Financial Instruments Directive (2004/39/EC)("MiFID"). Such instruments would not be within scope of European Market Infrastructure Regulation (EMIR) as well.
Interesting feature of the intended UK capacity market is the possibility for secondary trading in capacity obligations. The reform's assumptions include a system where capacity obligations may be physically traded at any time from a year ahead of the delivery year provided sufficient notice is given to the system operator. The system operator's consent to these trades must be obtained and this will require an assessment by the system operator of the receiving party's eligibility and pre-qualification.
Secondary trading in capacity obligations under the UK rules will be a relatively restricted market As parties eligible to take on additional obligations will include only:
• Plant that was unsuccessful in the capacity market auction; and
• New plant that had commissioned early,
• Capacity that had not participated in the auction or opted out but that has subsequently been verified by the system operator as providing eligible physical capacity (for instance new demand side services (DSR) or a de-mothballed plant).
As the UK government also explains, plant that has taken on obligations, opted out or that had declared they would be retiring will not be eligible to take on additional capacity obligations. Plant that has opted out will be able to opt back into subsequent auctions - in which case the system operator will increase demand in that auction accordingly.
Where parties have traded obligations, the capacity payment goes directly to the plant taking on the obligation and the liability in an event is calculated according to the performance of the party taking on the obligation.
The penalties that apply to a new plant that fails to commission (i.e. the loss of the admin fee and the reduction in payment/contract length) will apply to new build even if they physically trade out of their position in the secondary market.
Providers that have acquired capacity obligation pursuant to the auction will not be permitted to take on further physical obligations (even outside of times of peak demand) though they will be able to hedge their position financially in private markets.
The system operator will develop an IT System which will serve as a registry for all capacity obligations and can be capable of becoming a platform for financial trading.
Preferring back to the MiFID/EMIR issues the UK government believes moreover that the intended capacity instruments will not fall under the proposed MiFID II new definitions of the multilateral trading facility and the organised trading facility.
Is is to be seen whether the new market will attract greater participation, be it domestically or overseas.