The GB Capacity Market rewards flexible demand, secure generation and energy storage. It's highly complex, and sits apart from all other GB flexibility markets. This blog will explain what the Capacity Market is, and how you can participate.

Axle is the UK leader in entering domestic energy assets into the Capacity Market. We have participated with Half-Hourly Settled assets through all major energy suppliers, and qualified custom metering hardware for Bespoke assets.

What is the Capacity Market?

Energy prices are volatile, so investors can be nervous about committing to long-term projects. The Capacity Market provides a long-term revenue source for reliable electricity generation and flexible electricity demand. As more of our electricity generation becomes intermittent, the Capacity Market encourages investment in a resilient electricity grid.

The Capacity Market exists separately to all other GB electricity markets. The rules are written into UK law, and auction parameters are set every year by the UK’s Secretary of State for Energy Security and Net Zero.

How do Capacity Providers help?

The Capacity Market is only called upon during extreme shortages of electricity supply, called “stress events”. The Capacity Market has never been activated since it began delivery in 2018.

Four hours before a possible stress event, Capacity Providers will be notified that they may be called upon to deliver their obligation, via a Capacity Market Notice. If the notice is not cancelled and demand control is instigated by the NESO, then there is a stress event. Capacity Providers must deliver the volume in their contract.

The Capacity Market only pays based on availability, rather than utilisation. This means that Capacity Providers are paid every month for being on standby, even if they’re not used. If they are called upon, they are not paid for the energy that they deliver.

How to take part in the Capacity Market

At the start of every year, an auction awards Capacity Market contracts to Capacity Providers.

At the auction, you can buy contracts either one year in advance, or four years in advance.

• T-1 contracts start delivery in October, the same year as the auction.
• T-4 contracts start delivery in the October four years after the auction.

Most volume is awarded as T-4, and most contracts last just one year. But if you’re building new electricity generation, you can win long-term contracts up to 15 years (in the T-4 auction only). That means that in next year’s T-4 auction, you could win a contract starting in 2028 and lasting until 2042!

You can buy a Capacity Market contract by:

1. Participating in the auction. This requires you to “pre-qualify” the year before (or four years before).
2. Secondary Trading. It may also be possible to buy contracts from other Capacity Providers who previously won contracts in the auction. Secondary trading can happen at any time of year, including within the delivery year.

How much is it worth?

Since capacity is paid based on availability, prices are in £thousands per MW annually.

Prices vary significantly every year. They are affected by the volume of existing capacity in the market, as well as the priorities of DESNZ and the secretary of state in the year of the auction.

Auction

The Capacity Market auction is a descending clock auction - sometimes called a Dutch auction.

Prices start high, with everyone participating in the auction. Every round, the price decreases. Participants can submit an Exit Bid when the price is too low for them.

Once the capacity left in the auction is lower than the target capacity, the auction clears. Everyone left in the auction receives the same price (pay-as-clear).

As the price of the round decreases, the "target capacity" of the government increases. If the auction cleared at £30k/MW, the government would be willing to buy more capacity than if it cleared at £70k/MW.

Ahead of the auction each year, the Secretary of State chooses the shape of the Capacity Market demand curve: how much capacity the government is willing to procure at different price points. This reflects how risk averse or price sensitive the government wishes to be when securing capacity.

Types of Capacity Provider

You can participate in the Capacity Market if you are:

• An electricity generator
• Electricity storage / batteries
• Demand Side Response (DSR)
• An interconnector

Each of these technology types incurs a different de-rating factor, which reflects the anticipated ability of the technology to respond during a stress event.

For example:

• Demand Side Response has a de-rating factor of 79%
• A 5-hour battery has a de-rating factor of 65%
• A 1-hour battery has a de-rating factor of 14%
• Solar PV has a de-rating factor of 5%

These de-rating factors are multiplied by the power of the asset you're participating with to determine how much you can bid into the Capacity Market. For instance, an EV charger is classified as Demand Side Response, so a 7.4kW charger can contribute 7.4 * .79 = 5.8kW of capacity. The de-rating factors are updated every year in the Electricity Capacity Report, where NESO revises its estimates of how ‘reliable’ each technology type is - down to the level of interconnectors by individual country.

Demand Side Response (DSR)

To enter the Capacity Market as a Demand Side Response provider, you must perform a test to prove that your assets can deliver the stated reduction in demand.

You can apply to the Capacity Market as Proven or Unproven DSR. Applying as Unproven DSR means that you’re on the hook to test (”prove”) your capacity before the delivery year starts. To apply as Proven DSR, you must have already carried out a test.

Most parties apply to the Capacity Market as Unproven DSR. This means that it’s possible to participate in the auction without having to pre-emptively test. Once you’ve acquired capacity in the auction, you then run a test to prove that you can deliver your capacity.

The DSR test consists of demonstrating your turn-down capacity for a single settlement period (30 minutes). The baseline is determined by the average of that settlement period during 16 baseline days, made up of:

• Six days: the same day of the week for the past six weeks
• Ten days: the past ten days of the same ‘working kind’. These will be the past ten working days if baselining a weekday, and the past ten non-working days if baselining a weekend.

If successful in acquiring a Capacity Market contract, a Capacity Market Unit (CMU) must demonstrate its capacity three times during the delivery year. These assessments are called Satisfactory Performance Days (SPDs), and whilst they apply to all technology types, they are most relevant for DSR (generators fulfil their SPDs just by generating normally).

In addition to Satisfactory Performance Days, batteries and storage participating in the Capacity Market must demonstrate Extended Performance. During the delivery year, they must demonstrate a continuous discharge for a length proportional to the qualified storage capacity of the CMU.

Metering

Capacity Providers must provide half-hourly metering data throughout the delivery year.

Metering can be provided in three main ways:

Supplier Settlement metering is the primary route used by Capacity Market participants. It requires that a meter be Half-Hourly Settled by its associated energy supplier. The supplier must then forward the meter’s data flow to EMRS - the body responsible for Capacity Market settlement.

In Bespoke metering, capacity providers submit data directly from their on-site metering equipment. This requires that the metering hardware undergoes a full technical assessment and commissioning test. This is a detailed assessment that goes down to the level of specifying measured burdens on individual current transformers.

Balancing Services metering can be used where the metered component(s) already participate in other grid services.

Summary

The Capacity Market is a unique revenue source that can reward flexible demand and secure generation for being on standby to help the grid.

Axle is the UK leader in qualifying domestic assets for the Capacity Market. We have participated with Half-Hourly Settled assets through all major suppliers, and qualified custom metering hardware for bespoke assets. We’d love to chat about how we can help you participate.

We’re also hiring. If you like moving fast, and you want to work on the biggest bottleneck to decarbonisation, join us!