What is the Capacity Market?
The amount of electricity everyone uses varies hugely depending on the time, day, and season. For example, usage peaks during winter with its cold, dark days. The Capacity Market ensures that Britain always has enough reliable capacity to meet demand, and at least cost to consumers.
The Capacity Market is designed to:
- Make sure we have enough reliable capacity to meet our peak electricity demands (typically winter evenings) and at the lowest cost to consumers
- Only procure what is necessary using competitive auctions. These are open to both power generators who can commit to be available when needed, and to large electricity users, who agree to reduce their usage when needed.
LCCC has continued to deliver Capacity Market settlement and related activities on behalf of its sister company, the Electricity Settlements Company (ESC), via a cost-sharing arrangement.
The role of auctions in the Capacity Market
The scheme runs two auctions to procure capacity for each delivery year. The first auction is held four years ahead of the delivery year (T-4 auction), to allow enough time to build any new capacity needed. As much as 95% of the expected capacity is procured at this stage. To make sure the auction doesn’t procure too much, the Electricity System Operator provides estimates of peak demand and the amount of extra capacity needed.
Then, a year before delivery, a ‘top-up’ auction is run (T-1 auction). This allows any last-minute adjustments to be made, as it is impossible to accurately predict peak demand four years in advance. It also recognises that some of the new capacity providers which signed up in the first auction might be unable to deliver and need to be replaced at this stage.
Staging the auction in two phases helps to ensure the Capacity Market doesn’t build more new capacity than needed. Allowing existing and new power stations to bid also makes it clear how much existing capacity is available.
Any technology able to deliver electricity to the system or reduce electricity consumption can take part in the Capacity Market auction. To ensure a level playing field between technologies, de-rating factors are applied according to how reliable they are to produce energy when required. For example, a gas power station can generate energy at almost any time, whereas solar can only do so during the day, therefore solar is de-rated during the auction.
Companies which bid successfully at auction sign a Capacity Market Agreement committing to provide electricity or reduce electricity consumption when required. They regularly submit data to prove they are able to do this. In return they receive a monthly payment, set at the auction price. If they fail to submit satisfactory data, their capacity agreements can be terminated.
There are three types of agreement – one year for existing projects, three years for generators in need of refurbishment, and 15 years for building new generation plants.
The agreements vary in length depending on the financing requirements.
ESC's role is to oversee the settlement of the Capacity Market to ensure that regular payments are made to capacity providers who have agreed to provide capacity at times of system stress, to provide meter assurance for sites not already validated by the Balancing System Code operator and also to enable volume reallocation required for secondary trading, which is permitted between those capacity providers
who have under – or over – delivered their obligation during a stress event.
EMRS's responsibility as Capacity Market (CM) Settlement Services Provider is to manage settlement of payments, on behalf of the Electricity Settlement Company, to and from Capacity Providers and Suppliers.
The role of the EMR Delivery Body, National Grid ESO is to administer key elements of the Capacity Market including:
- Capacity Market Register
- Agreement Management
Ofgem - The Capacity Market is governed by the Electricity Capacity Regulations 2014 (the Regulations) and the Capacity Market Rules. Ofgem manage and make any changes to the Capacity Market Rules through their Capacity Market Rules change process, they also manage the process for dealing with certain disputes between National Grid Electricity System Operator (NGESO) and participants in the Capacity Market (CM).
EMR Settlement Ltd - oversee the settlement of the Capacity Market payments
Non-payment register - The Electricity Settlements Company is required to publish a register of non-payments in relation to the The Electricity Capacity Regulations 2014. This register sets out the names of and details relating to suppliers and capacity providers who have not paid an invoice under these regulations by 5:00 pm on the payment due date
CM Dashboards - The dashboards summarise Capacity Market scheme data and metrics which are relevant for analysts, managers and policy makers with an interest in the scheme.