Capacity Market

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

What is the Capacity Market?

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?

  • The Energy Market is where most generators sell electricity (£/MWh) to suppliers for particular periods of time. This mechanism allows for both generators and suppliers to hedge their price risk. The EM determines which providers are dispatched at any one time, and the direction of flow over the interconnectors.
  • Sufficient capacity is guaranteed by Capacity Market agreement holders at periods of system stress. Capacity Market CfDs, for example, incentivise investment in renewables by protecting developers from volatile wholesale prices with high upfront costs, while the CPF taxes fossil fuels used to generate electricity via Carbon Price Support rates set under the Climate Change Levy.
  • The ancillary Balancing Services Market pays participants for the option to buy energy at an agreed price to mitigate the risk of grid imbalances and stabilise energy market volatility. Participants are called upon to provide generation or load-management capacity outside of stress events.

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:

  • Demand Side Response (DSR) services
  • Static and Dynamic Firm Frequency Response (SFFR and DFFR)
  • Short Term Operating Reserve (STOR)
  • Triad (peak load) avoidance and load shifting
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  • Feed-In Tariffs (FIT)

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:

  • Demand side responders reduce their demand when requested to provide extra capacity on the network. Volume is ring-fenced for DSR participation in the year ahead auction.
  • Generators with stored capacity have the capacity to respond instantaneously to requests from the National Grid.
  • Embedded generators can partake by increasing the volume they take from their own plant to produce a net demand reduction on the network when requested.
  • Interconnectors from the Continent can trade and share energy supplies with other countries via underground (deep sea) or overhead cabling.
  • Combined heat and power (CHP) generators can reduce carbon emissions by up to 30% compared to the separate generation of heat through a gas-fired boiler and an electricity power station.