What is the Capacity Market?
The Capacity Market is part of the UK Government’s Electricity Market Reform package and was introduced to manage security of electricity supply and safeguard against potential future blackouts, for example, during periods of low wind and high demand.
It is estimated that over the next 10 years, the UK will need around £100 billion of capital investment in its electricity infrastructure to accommodate projected future increases in electricity demand and to replace ageing power stations.
Electricity Market Reform (EMR) is a government policy to incentivise investment in secure, low-carbon electricity, improve the security of the UK’s electricity supply.
Capacity providers are paid a per MW rate for the capacity they provide to the market. They are then expected to respond if/when called upon by National Grid at time of stress or excess demand on the network.
Providers have to apply in the Capacity Market Auction to be included. If they are successful, they are awarded a Capacity Agreement, which confirms their Obligation and their payments.
T-1 and T-4 Auction
There are 2 Auctions each year:
- T-4 = This is the main auction. It buys most of the capacity needed for delivery in 4 years time.
- T-1 = These are top up auctions just ahead of each delivery every year.
The auctions follow a descending clock format, starting with offers of £X/kW and gradually reducing until the minimum price is reached at which the supply of capacity offered by bidders is equal to the volume required.
Most businesses will want to move into T-4 as soon as they can to take advantage of the known, higher prices.