The amount of electricity consumed by everyone varies greatly depending on the time, day and season. For example, the use reaches its peak in winter with its cold and dark days. The capacity market ensures that the UK always has capacity that is reliable enough to meet demand and the lowest cost to consumers. These functions generate the required capacity at minimal cost: the staging of the auction in two phases contributes to this. If existing power plants can submit bids, it also becomes clear how much existing capacity is available. The capacity market should ensure that sufficiently reliable capacity is available by providing payments to encourage investment in new capacity or to keep existing capacity open. EMRS manages the payment mechanism. The capacity market has also been developed to support the development of more active demand management in the electricity market. For each delivery year, two auctions are held to obtain capacity. The first auction takes place four years before the delivery year in order to have enough time to build new required capacity. One year before delivery, a «complementary auction» is then carried out. In this way, adjustments can be made, as it is impossible to accurately predict peak demand four years in advance.
Therefore, in order to keep costs for consumers low, it is important that the capacity market does not build more new capacity than necessary. A second auction takes place one year before delivery. This way, adjustments can be made at the last minute. It also acknowledges that some of the new capacity providers that registered for the first auction may not be able to deliver and will need to be replaced at this stage. Letter from Amber Rudd on electricity market reform Capacity Market Auction 2015. The capacity market ensures security of electricity supply by remunerating reliable sources of capacity. More capacity is auctioned than necessary. This maintains competition at auction and lowers the price of electricity paid by consumers. The duration of the contracts varies according to the financing needs. There are three types of agreements – one year for existing projects, three years for generators to be renovated and 15 years for the construction of new generation plants. The UK government will hold a supplementary T-1 auction in the summer of 2019, which will be delivered in the winter of 2019/20, so that all agreements will be subject to the outcome of the Commission`s formal investigation procedure.
The UK government will soon discuss the regulatory changes needed to allow for the possibility of a T-1 auction. The June 2014 impact assessment explains why the government is intervening in the market, as well as the costs and benefits of the intervention. As part of the government`s electricity market reform, the capacity market will ensure security of electricity supply by providing payment to reliable capacity sources in addition to their electricity revenues to ensure that they provide energy when needed. This will encourage the investments we need to replace old power plants and provide backup solutions for more intermittent and inflexible low-carbon generation sources. To generate CM revenue for our clients, we take their assets in capacity auctions where the price is set. Suppliers who pass the auction(s) will receive a capacity contract confirming their commitment and payments in the capacity market. The Government has published its response to the consultation on the proposed technical changes to the capacity market and has made the necessary arrangements in Parliament. Meanwhile, at the request of the UK Government, National Grid and the Electricity Settlements Company are continuing the capacity market system without making payments to ensure that capacity providers are entitled to deferred payments after the expiry of the standstill period (subject to State aid approval). Additional steps will be taken to review the continuity of fee agreements for suppliers. The duration of the contracts varies according to the financing needs. Since some of the larger power plants can take a few years to build, the main auction always takes place four years before delivery.
Up to 95% of the planned capacity will be purchased at that time. To ensure that the bid does not raise too much, the Network Manager shall provide estimates of peak demand and the amount of additional capacity required. The implementation of the electricity market reform provides stakeholders with a comprehensive overview of EMR policies. The document contains chapters on the two main mechanisms the government is putting in place to reform the electricity market: contracts for difference (CFDs) and the capacity market, as well as details on measures to promote greater energy efficiency through the Electricity Demand Reduction Programme (BDU). Monthly payments for capacity provision are made to capacity providers in accordance with their capacity agreements. Monthly payments are received from suppliers based on projected demand between 16:00 and 19:00 – november to February, which are used to determine their market share. As soon as actual data are available, payments are compared to this revised data. The following diagram illustrates the monthly payments: Target capacity update for capacity market auction This gives suppliers (as indicated by the recent announcement of Ofgem`s price cap) the certainty that by charging supplier fees to customers during the standstill period, they can and must make arrangements and CM contract holders who defer payments after the expiry of the standstill period will be quickly and completely can be financed….