The Capacity Market is a mechanism used to ensure that electricity generation continues to meet with demand. Started in 2018, it is designed to provide a generation buffer that protects against supply disruption as the UK’s generation mix becomes more varied and unpredictable as additional renewable generation is added to the grid.
The Capacity Market is intended to encourage investment in reliable capacity to secure future energy supply. This includes both generation and demand, such as storage. Potential participants take part in the Capacity Market Auction, held four years ahead of the delivery date. Supplementary auctions are held a year ahead of delivery to top up available capacity. This is primarily aimed at adding additional demand side response to the mix.
Auctions use a ‘descending clock’ format, starting at £75/kW and reducing until a minimum price is reached, meaning the supply of capacity offered by bidders matches the amount required. Existing generators and demand side response providers are offered one-year contracts, although new build generation can secure contracts of up to 15 years in length to encourage investment in new generation. Refurbished generation can secure three-year deals.
Suppliers then receive monthly payments in return for standing by, ready to respond when called on by National Grid to balance supply and demand. Suppliers are called on by a Capacity Market Warning, typically four hours ahead of required delivery, that includes the circumstances that have triggered the warning and the percentage of their total obligation they are being requested to deliver.
The Capacity Market in the past has been criticised as the lowest bidders are often fossil fuel generators, such as goal or gas. Effectively, the capacity market is subsidising these generators to remain on standby in the event that they are required. In some years extremely low prices, which in the 2019 top-up auction reached just £0.77/kW, were also criticised as making it nearly impossible for some technologies, such as battery storage, to compete.