The Capacity Market and it’s three programmes is one of the most exciting new entrants to the UK energy market in the last 20 years. The mechanism has been designed to purchase the energy needs of the country in the most cost effective way and to maintain a buffer of at least 500 MW between the amount of supply available and the amount of demand needed.
Delivered through three mechanisms, the Capacity Market targets new and existing power stations, electricity storage and capacity provided by voluntary demand reduction.
How does it work?
The Capacity Market auctions are delivered through a process more commonly known as a Dutch Auction.
Each auction starts at a high price (capped by Government at £75/MW to protect consumers from excessively high costs) and the price is then reduced progressively until the amount of capacity required is reached at the lowest price acceptable to bidders.
This cut-off point delivers the cleared price, which is then used as the basis for capacity payments to all those successful in the auction.