De-Rating Factor Methodology for Generation Assets

1. Introduction

De-rating factor methodology is an important part of the UK Capacity Market. It is used to estimate how much of a generating asset's installed capacity can realistically be relied upon when the electricity system is under stress.

A generator may have a physical capacity of 100 MW, but it may not always be capable of producing 100 MW when demand is very high. Therefore, the Capacity Market does not simply count the full installed capacity. Instead, the capacity is multiplied by a de-rating factor.

The basic idea is:

De-rated Capacity = Installed Capacity × De-rating Factor

For example, if a 100 MW solar project has a 6% de-rating factor, its de-rated capacity for the relevant Capacity Market calculation would be 6 MW.

The methodology is therefore closely connected with electricity security and reliability.

2. Legal Foundation

The UK Capacity Market was created under the Electricity Market Reform framework, principally through the Energy Act 2013 and the Electricity Capacity Regulations 2014.

The Capacity Market is designed to ensure that sufficient capacity is available to meet future electricity demand and maintain system reliability. The government continues to use the Capacity Market as one of the main mechanisms for securing reliable electricity supply. (GOV.UK)

The Electricity Capacity Regulations require the Capacity Market process to include de-rating factors for different generating technology classes and demand-side response. (Legislation.gov.uk)

Thus, de-rating is not simply an engineering calculation. It has a statutory and regulatory function.

3. Why De-Rating Is Necessary

Different generation technologies have different levels of reliability.

Dispatchable generation

Gas, biomass or other dispatchable generators may be able to operate when required, subject to their technical availability and fuel constraints.

Intermittent generation

Solar and wind generation depend on weather conditions.

A solar farm may have a capacity of 100 MW, but it cannot normally produce 100 MW during a winter evening peak.

Similarly, wind generation can vary depending on wind conditions.

Therefore, the Capacity Market uses technology-specific factors to estimate the contribution that different technologies can make to system reliability.

Ofgem explains that de-rating factors reduce a Capacity Market Unit's capacity according to the likelihood that the technology will be available during periods of peak demand. (Ofgem)

4. How the Methodology Works

The methodology broadly involves:

Step 1: Identify the technology

The asset is placed into an appropriate Generating Technology Class (GTC).

Examples can include:

gas generation;

nuclear;

biomass;

onshore wind;

offshore wind;

solar;

storage; and

other eligible technologies.

Step 2: Examine reliability

Historical and technical evidence is considered to determine how reliably that technology can provide electricity when the system needs it.

Step 3: Calculate the factor

A percentage is assigned to the technology.

Step 4: Apply the factor

The installed capacity is multiplied by the applicable percentage.

Step 5: Determine Capacity Market contribution

The resulting de-rated capacity is used when determining the capacity that can participate in the Capacity Market auction.

5. Treatment of Renewable Generation

Renewable generation is particularly important.

Ofgem's published Capacity Market data shows how different factors can substantially reduce the capacity counted for intermittent technologies. For the 2023/24 auctions, for example, the reported factors included:

Onshore wind: 8.40% in T-1 and 7.03% in T-4;

Offshore wind: 11.52% in T-1 and 8.69% in T-4;

Solar: 5.08% in T-1 and 6.35% in T-4. (Ofgem)

These percentages are not permanent technological ratings. They can change between auction years as the methodology, evidence and electricity-system conditions develop.

6. Reliability Standard

The de-rating methodology is connected to the UK's Reliability Standard.

The current Capacity Market auction parameters use a standard of 3 hours of Loss of Load Expectation (LOLE). (GOV.UK)

LOLE is a probabilistic measure of the expected amount of time in which electricity demand may exceed available supply.

De-rating therefore helps answer an important question:

How much dependable capacity does each type of asset actually contribute to maintaining system reliability?

This is more sophisticated than simply counting the physical MW of every generator.

7. Legal and Regulatory Institutions

Several institutions are involved.

DESNZ

The Department for Energy Security and Net Zero (DESNZ) determines important Capacity Market parameters and policy decisions.

NESO

The National Energy System Operator (NESO) performs important technical and system-planning functions and is involved in preparing capacity-related analysis.

Ofgem

Ofgem has regulatory and dispute-resolution responsibilities within the Capacity Market framework.

Delivery Body

The Capacity Market Delivery Body manages processes such as prequalification and auction administration.

The legal framework therefore combines government policy, technical analysis and independent regulatory oversight.

8. Importance of Evidence and Methodology

De-rating factors must be based on reliable evidence.

This is particularly important because a factor can directly affect the amount of capacity that a generator can offer into the Capacity Market.

For example:

100 MW generator × 10% factor = 10 MW de-rated capacity

If the factor changes to 20%:

100 MW × 20% = 20 MW

Therefore, methodology can have significant commercial consequences for investors and generators.

9. Case Law: Tempus Energy Ltd v BEIS

A major case concerning the Capacity Market is Tempus Energy Ltd v Secretary of State for Business, Energy and Industrial Strategy (Case T-793/14).

The General Court of the European Union examined the legality of the UK's Capacity Market State aid scheme. The Court annulled the European Commission's State aid approval because the Commission had failed to conduct the required formal investigation into the scheme's effects on competition.

The case concerned the Capacity Market as a whole rather than one particular de-rating factor.

Relevance

It demonstrates that Capacity Market design must comply with wider legal requirements, including competition and State aid principles.

Following the judgment, the UK took steps to obtain renewed State aid approval and subsequently re-established the Capacity Market framework.

10. Case Law: SSE Generation Ltd v CMA

In SSE Generation Ltd v Competition and Markets Authority [2022] EWCA Civ 1472, the Court of Appeal considered issues involving electricity-market regulation and the operation of industry arrangements.

Although the case was not specifically about de-rating factors, it is useful because it demonstrates the courts' approach to complex electricity-market rules and regulatory decision-making.

Relevance

Capacity Market calculations operate within a broader regulatory structure. Technical methodologies can therefore have legal consequences and may be challenged where a participant argues that the relevant rules or statutory framework have been incorrectly applied.

11. Capacity Market Disputes

Participants have a formal dispute mechanism.

If an applicant disagrees with a Delivery Body decision during prequalification, it can request a Tier 1 review. If it remains dissatisfied, it can proceed to a Tier 2 determination. Ofgem publishes the final determinations. (Ofgem)

This is important because de-rating and related eligibility calculations can affect whether an asset can participate and how much capacity it can offer.

Recent Ofgem determinations have involved technologies including solar farms and battery-storage projects, showing that these disputes remain practically important. (Ofgem)

12. Changes for Modern Electricity Systems

The methodology must develop as the electricity system changes.

The UK increasingly uses:

offshore wind;

solar;

batteries;

interconnectors;

demand-side response;

flexible generation; and

potentially hydrogen-to-power.

Ofgem's ten-year review recognised that the Capacity Market needs to consider whether additional technology classes are required, particularly for demand-side response and newer technologies. (Ofgem)

This demonstrates that de-rating is a dynamic regulatory methodology, rather than a fixed legal percentage.

13. Interconnectors and De-Rating

Interconnectors are also subject to de-rating, but their methodology is different from domestic generating assets.

For the 2030/31 T-4 auction, the government published interconnector de-rating factors based on country-level analysis and technical adjustments. For example, the published factors include 62% for IFA, 66% for BritNed and 75% for NSL for that auction. (GOV.UK)

The government has also commissioned work on improving the technical reliability component of interconnector de-rating methodology. (GOV.UK)

This shows the increasing importance of probabilistic and system-wide analysis.

14. Legal Significance

The de-rating methodology has several legal consequences.

Investment

It affects the revenue potential of generation assets participating in the Capacity Market.

Equality between technologies

Different technologies must be assessed using a rational and evidence-based methodology.

Regulatory certainty

Investors need reasonably predictable rules when deciding whether to build generation or storage assets.

Energy security

The methodology helps ensure that the Capacity Market does not treat unreliable and highly reliable capacity as if they made exactly the same contribution to security of supply.

15. Conclusion

De-rating factor methodology is a central mechanism for translating physical generation capacity into dependable capacity for the UK's Capacity Market.

Its basic purpose is simple:

Installed MW → reliability assessment → de-rating factor → dependable MW → Capacity Market participation.

The methodology is particularly important for renewable and intermittent technologies because their physical capacity does not necessarily equal their availability during periods of system stress. (Ofgem)

Legally, the methodology operates under the Electricity Capacity Regulations 2014, Capacity Market Rules and government auction parameters, with regulatory oversight and dispute mechanisms involving Ofgem. (Legislation.gov.uk)

The Tempus Energy litigation demonstrates that Capacity Market design must also satisfy broader legal requirements, while recent regulatory reviews show that the methodology must continue evolving as the electricity system incorporates more renewables, storage, interconnection and demand-side flexibility.

In this sense, de-rating is not merely a technical calculation. It is a legal-economic tool for deciding how different generation assets contribute to the UK's electricity-security obligation.