The Capacity Market is a mechanism that ensures electricity supply always meets demand, particularly during times of peak stress on the grid. The system incentivises investment in more sustainable, low-carbon energy alternatives for the network and compensates providers for maintaining generation installations. The Capacity Market mitigates the risk of power outages and potentially unpredictable renewable energy sources, such as wind and solar generation, by providing capacity when there’s insufficient output to balance the grid.
The Capacity Market is fundamental to the UK's latest Electricity Market Reform (EMR) policies. It was designed alongside various other decarbonisation schemes, including Contracts for Difference (CfDs), the Carbon Price Floor (CPF), the Energy Company Obligation (ECO), Electricity Demand Reduction (EDR), Demand Side Response (DSR) initiatives, and the nationwide rollout of smart meters.
The Capacity Market operates alongside the Energy Market and the ancillary Balancing Services Market. As intermittent renewable generation technologies improve, the CM will allow even more back-up generators and demand-side responders to participate, thereby further stabilising energy prices and network reliability.
The DECC estimates that the Capacity Market could help reduce energy consumption by nearly 6.5 TWh in 2030 and save homes and businesses up to £4bn. Electricity system cost savings in energy-intensive sectors of this magnitude may reduce emissions by 4.5 MtCO2e (metric tonnes of carbon dioxide equivalent).
How does the Capacity Market work?
CM services are sold in descending clock auctions to the lowest bidder to ensure value for both the System Operator (SO) and end user. These auctions take place as T1 and T4, representing one year and four years ahead respectively. This system ensures capacity is met for the coming year by paying participants to allow existing capacity to remain available whilst incentivising longer term investment in new forms of capacity to provide ongoing security of electrical supply.
How are payments made?
The National Grid buys capacity from responders (£/kW/yr) ahead of delivery to improve grid reliability and meet energy efficiency standards. These opportunities allow suppliers to generate income to cover investment costs not recoverable through the primary Energy Market.
For example, a 10MW capacity provider with a contract for £1/kW/year could earn £1 x 10,000kW = £10,000 per year for making that capacity available to the grid during times of peak stress.
The National Grid pays generators regardless of whether or not the power they provide is consumed as long as its immediately made available in accordance with their contract. In the event of over-delivery, the National Grid will only provide compensation if other units fail to respond.
How are providers notified?
During times of peak stress, the National Grid issues a Capacity Market Warning through the CM portal. These warnings include information regarding the start time (usually four hours ahead of required delivery time), the circumstances that triggered the warning, the settlement period for which it is applicable, and the percentage of the provider’s total obligation. Delivery expectations are based on system demand and Aggregate Capacity (AC).
What are the key differences between the Energy Market, the Capacity Market, and the Balancing Services Market?
What are some examples of Capacity Market and Balancing Market initiatives?
Responders can participate in both markets by providing a variety of balancing measures, including:
Through FIT, businesses of all sizes that generate their own energy (e.g. solar, wind, hydro, and biomass) can both reduce the costs of their utility bills and receive payments for feeding excess energy back to the grid. In contrast, SFFR, DFFR, and Triad management schemes pay generators to either reduce or increase capacity load on the grid to balance supply and flatten energy price volatility.
How other participants can contribute: