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.