03 Mar What is the Capacity Market
About the Capacity Market
In 2014 the government introduced the Capacity Market as part of the Electricity Market Reform. It was the biggest reform to the UK’s energy policy for over 20 years. The aim is to ensure that supply of power will always be sufficient to meet demand.
As more unpredictable renewable energy plants replace older polluting power stations there needs to be insurance against the possibility of power cuts, high demand or low wind. The objective is to secure a reliable supply of power.
Success means delivery of low-carbon energy without additional cost to consumers. Existing assets are utilised and businesses are rewarded for participating in the delivery of a secure, sustainable supply of electricity.
How does it work?
The Capacity Market works by providing payment to power generating businesses for reducing their consumption during high periods of demand, and generating additional power when needed.
Each year an auction is held for businesses to bid to provide the capacity to be delivered in four years’ time. Businesses can bid based on the amount of revenue they want to receive. This revenue can also be used as an investment into the equipment needed to generate more electricity.
Businesses must be able to commit to providing the specified amount of electricity and if they are unable to fulfil their commitment they will be penalised.
During times of high demand, businesses should reduce their consumption by switching to back-up generators or decreasing their use of power through adjustments to system processes.
The amount of capacity needed is decided based on recommendations from the National Grid. Businesses that can provide this capacity will be financially rewarded.
Coal fired generators are being shut down and replaced with wind and nuclear generators. These new systems can be unpredictable so there needs to be a contingency for ensuring that demand can be met.
Rather than having to build new power plants the government wanted to find a way to utilise existing assets. The Capacity Market allows for old polluting power stations to be replaced with lower carbon ones and smart grid technology.
Businesses that put initiatives in place to provide capacity are rewarded financially which provides an incentive to invest in newer, more efficient and environmentally friendly technologies.
Building new power plants incurs cost which would be passed on to the consumer. By utilising existing assets and having strategies in place to keep up with demand, this cost is minimised. Consumers can continue to benefit from reliable power supplies at an affordable price.
Power plants also take a long time to build but as demand cannot be accurately predicted there is a risk that they may be underutilised. By getting power generating businesses to commit to providing capacity you eliminate the need to build new expensive power plants.
In order to encourage commitment from businesses, payments are made for investing in providing new capacity or keeping open existing generators. Payments are made monthly to capacity providers in line with their capacity agreements and this can provide a substantial stream of additional revenue for your business.
What it means for your business
Put simply, you will be compensated for the power that you will provide in the future. Rather than just providing the electricity you need, you will commit to being able to provide additional power and reduce your consumption in times of high demand.
The Capacity Market not only secures supply of electricity for the UK but it also provides a commercial opportunity for power generating businesses.
If you are already participating in STOR or Triad management systems, then you are probably already equipped to benefit from the Capacity Market. You could increase your revenue and use the payments to invest and expand.
In order to participate, you will need smart metering technology, control equipment and load reducing strategies.
N-ERGY can help you make the most of the Capacity Market
The Capacity Market benefits everyone. It encourages investment, provides a commercial opportunity for businesses and ensures that homes and businesses have a reliable supply of energy.
However, you have to be able to fulfil your commitments and this means that strategies need to be in place to meet your capacity when called upon.
At N-ERGY we offer full project management. We can design and implement the strategies needed for you to benefit from a combination of programmes such as STOR, Triad and the Capacity Market.
Our expert power consultants will look at your existing systems and make recommendations on the best investments and power management solutions. We’ll help you maximise your business systems and take advantage of the commercial opportunities provided by reforms such as the Capacity Market.
If you would like to discuss how we can unlock the potential in your business then contact our expert team today to find out more.