Capacity Market

Earn revenue using existing assets by making capacity available to the grid during times of peak stress on the system.

What is the capacity market?

The Capacity Market is a mechanism designed to ensure security of electricity supply by providing a payment to participants who can offer a reliable source of capacity to the network, in addition to their electricity generation revenues.
The initiative was introduced by the government as part of their Electricity Market Reform package and acts as an insurance policy against the possibility of future power outages, to ensure that electricity demand is met during times of high load on the network.

Why was it introduced?

It incentivises investment in more sustainable, low-carbon capacity for the network at minimal cost to the consumer and provides payments for existing generation assets to remain operational. It also mitigates against the unpredictability of renewable energy sources such as wind and solar generation, by providing capacity when there is insufficient output from these sources to balance the grid network, such as on days with low wind or higher demand.

Who can participate?

Participants are required to make capacity available using either onsite generation, combined heat and power plants, demand side response or battery storage facilities to deliver power, or reduce demand when called upon by the National Grid at any point during their contracted period.

How does it work?

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 or not, which makes for a reliable and guaranteed source of income.

Capacity market suspension

The future of the Capacity Market may be in doubt since legal action taken by Tempus Energy in 2015 led to its suspension following a European Court of Justice ruling. Tempus argued the CM was anticompetitive as it favours large generation over technology like Demand Side Response. This is because DSR participants can only secure contracts one year ahead, compared with 15 years for larger generators, giving them an unfair advantage.
As there is currently no guarantee of payments for participants in winter 2018, this could mean they choose not to respond to stress events. The National Grid has confirmed the system will be able to cope with demand this winter, due to high electricity wholesale prices incentivising power stations to stay open. However, by winter 2019/20 there could problems without sufficient intervention. Current plans to resolve the issues include offering equal contract terms to both DSR providers and large generators to ensure an even playing field and the reinstatement of payments to capacity providers.

How we can help?

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.

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