Summary and Background Part 2: Electricity Market Reform Chapter 3: Capacity Market
16.The Capacity Market is being introduced to mitigate future risks to the security of electricity supplies.
17.Since 2011, 8% of generating capacity has closed under the Large Combustion Plant Directive. A further 10-12% of current power generating capacity is due to close over the coming decade, and more intermittent (wind) and inflexible (nuclear) generation is being built to replace it. These changes to our market create an investment challenge, in particular for plant which will be needed during periods of peak demand or still days, but which would operate less often than now and therefore have less certain revenues. This uncertainty could lead to underinvestment and, as a consequence, uncomfortably low levels of reliable capacity.
18.This legislation therefore provides for the introduction of the Capacity Market to provide an insurance policy against the possibility of future blackouts – for example during cold, windless periods – with the aim of helping to ensure that consumers continue to receive reliable electricity supplies at an affordable cost.
19.Under the Capacity Market, a forecast will be made of future peak electricity demand. This will then be used to determine the level of reliable capacity that is needed to ensure security of supply in a future period. Providers of capacity (either electricity generation or other non-generation technologies such as demand side response) will compete against each other in capacity auctions held four years and one year ahead of the year capacity is expected to be in place, should it be needed. Those who are successful in the auction will receive a guaranteed revenue stream for providing capacity. This is separate to any revenues that they receive through the electricity market. If the capacity providers are unable to provide the capacity when it is needed they will face penalties (referred to as capacity incentives). The Capacity Market will therefore ensure sufficient reliable capacity is available by providing revenue to incentivise investment in new capacity or existing capacity to remain open.