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What is the UK Capacity Market?

The complete guide to understanding Britain's energy security mechanism

UK Capacity Market at a Glance

49GW Total Secured Capacity
1,500+ Participating Companies
£2.5bn Annual Market Value
2014 Market Launch Year

🔋 What is the Capacity Market?

The UK Capacity Market is a government scheme designed to ensure Britain has enough electricity generation capacity to meet demand, especially during peak periods. Think of it as an insurance policy for the power grid.

The market works by paying power generators, energy storage providers, and demand-side response providers to be available when needed, even if they're not actually generating electricity at the time.

Simple Explanation: The Capacity Market pays power stations to be "on standby" - ready to generate electricity when demand is high or when renewables aren't producing enough power.

Why Does It Exist?

  • Energy Security: Guarantees power supply during peak demand
  • Grid Stability: Maintains reliable electricity supply as renewables increase
  • Economic Efficiency: Provides revenue certainty for power generators
  • Consumer Protection: Prevents blackouts and price spikes

See our complete database of capacity market participants and technologies.

⚡ How Does the Capacity Market Work?

The Capacity Market operates through a competitive auction system where electricity generators and other capacity providers bid to provide capacity in future years.

The Process:

  1. Capacity Assessment: National Energy System Operator (NESO) calculates how much capacity Britain needs
  2. Auction: Companies bid to provide capacity at specific prices
  3. Selection: Lowest-cost bids win capacity agreements
  4. Delivery: Providers must be available during "stress events"
  5. Payment: Annual payments for being available, plus penalties for non-delivery

Types of Capacity Agreements:

  • New Build (15 years): For new power stations requiring long-term revenue certainty
  • Refurbishing (3 years): For existing plants being upgraded
  • Existing Plant (1 year): For operational facilities

Browse participating companies to see who's involved in capacity provision.

🏆 How Do Capacity Auctions Work?

Capacity auctions are annual competitive bidding processes where the government secures electricity capacity for future delivery years.

Auction Types:

  • Main Auction (T-4): Held 4 years before delivery, secures most capacity
  • Transitional Auction (T-1): Held 1 year before delivery, fills remaining gaps
  • Supplementary Auctions: Additional capacity if needed

Bidding Process:

  1. Pre-qualification: Providers must prove they can deliver capacity
  2. Bid Submission: Companies submit price and quantity bids
  3. Price Discovery: Auction clears at the marginal price
  4. Capacity Agreements: Successful bidders sign 15-year, 3-year, or 1-year contracts
Recent Results: The 2024 T-4 auction cleared at £63/kW/year, securing 46.4GW of capacity for delivery in 2028-29.
Secondary Trading: Capacity obligations can be bought or sold after the auction. Trading opens once agreements are issued and runs up to one working day before a potential stress event. This lets providers manage outages or new entrants acquire capacity. All trades are logged on the EMR portal and adjust monthly payments & penalty caps for both parties. Learn more about secondary trading →

Explore auction results by technology type or auction year.

🏭 Who Participates in the Capacity Market?

The Capacity Market includes a diverse range of participants, from large power stations to innovative storage and demand response providers.

Technology Types:

Generation Technologies:

Major Participants:

View all participating companies and their capacity portfolios.

💰 How Are Capacity Payments Calculated?

Capacity payments are made to providers for being available to generate electricity when called upon by the system operator.

Payment Structure:

  • Annual Availability Payment: Fixed payment per kW of capacity per year
  • Stress Event Performance: Must deliver when called upon
  • Penalties: Charges for non-delivery during stress events
  • Termination Fees: Penalties for early withdrawal
Example: A 100MW gas plant winning at £63/kW/year would receive £6.3 million annually for being available, regardless of how much electricity it actually generates.

Payment Timeline:

  • Monthly Payments: 1/12th of annual capacity payment
  • Stress Event Payments: Additional payments when delivering during system stress
  • Annual Reconciliation: Adjustment for actual performance

The total cost is ultimately passed to consumers through electricity bills, representing about £25-30 per household per year.

📅 Key Capacity Market Timeline

2013

Electricity Market Reform introduces Capacity Market concept

2014

First capacity auction held, securing 49.3GW for 2018-19

2018

European Court ruling temporarily suspends the scheme

2019

Capacity Market relaunched with EU state aid approval

2021

Demand Side Response and storage become major participants

2024

Latest auction secures 46.4GW for 2028-29 delivery

2025+

Ongoing market evolution with increasing battery storage participation

✅ Benefits and Criticisms

Benefits:

  • Energy Security: Guarantees adequate capacity to meet peak demand
  • Investment Certainty: Provides revenue certainty for new plant investment
  • Technology Neutral: All technologies can compete on equal terms
  • Consumer Value: Competitive auctions drive down costs
  • Grid Flexibility: Incentivizes flexible technologies like storage and DSR

Criticisms:

  • Consumer Cost: Adds £25-30 per household to electricity bills
  • Market Distortion: Some argue it subsidizes fossil fuel plants
  • Complexity: Complex rules and requirements
  • Environmental Concerns: May delay coal plant closures
Overall Assessment: Most experts agree the Capacity Market is essential for energy security, especially as more intermittent renewables join the grid.
Reality Check – "Technology-neutral" with caveats: The auction rules themselves do not prefer any fuel, but separate carbon-intensity (≤ 550 g CO₂/kWh) and NOx limits under MCPD/IED effectively exclude new unabated diesel and other high-emission plant.
Proven vs Unproven DSR: Most DSR bids as Unproven – it secures a contract first and must pass a 30-minute turn-down test at least one month before the Delivery Year. Passing converts it to Proven; failure reduces or cancels the obligation and triggers penalties.

🔮 Future of the Capacity Market

The Capacity Market continues to evolve as Britain's electricity system transitions to net zero.

Key Trends:

  • Growing Battery Storage: Rapid increase in battery participation
  • Coal Phase-out: Final coal plants closing by 2025
  • Gas Transition: Gas plants increasingly providing flexibility rather than baseload
  • Demand Response Growth: More industrial and commercial demand participation
  • Hydrogen Future: Potential role for hydrogen technologies post-2030

Upcoming Changes:

  • Enhanced Frequency Response: New services for grid stability
  • Locational Capacity: Possible future regional capacity requirements
  • Net Zero Alignment: Ensuring the market supports decarbonization goals

Stay updated with the latest capacity market developments by exploring our comprehensive database of participants and technologies.