The services are sold in descending clock auctions to the lowest bidder, which ensures the best value for the system operator and ultimately to the end user, as these costs are passed on to energy consumers.
The auctions take place as T1 and T4, representing one year and four years ahead respectively. This ensures that capacity is met for the coming year by providing payments to participants to allow existing capacity to remain open, whilst also incentivising longer term investment in new forms of capacity to provide ongoing security of electrical supply.
Payments are made on a £/kW/year basis for the capacity they make available to the grid. As an example, a contract secured for £1/kW/year, with a 10MW capacity provider could earn £1 x 10,000kW = £10,000 per year for making that capacity available to the grid during times of peak stress. Crucially these payments are made whether or not providers are required to deliver capacity, which makes for a reliable and guaranteed source of income.
Whether you are currently participating in the Capacity Market, a similar scheme, or are unsure of how these changes may affect your business, contact our team of experts for advice and guidance on the best course of action.