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Capacity Market and Security of Supply: Are We Prepared for Winter?

By Admin UserApril 15, 20225 min read
Capacity Market and Security of Supply: Are We Prepared for Winter?

Introduction

As the GB electricity system decarbonises and becomes more reliant on variable renewables, ensuring security of supply—especially during winter peaks—remains a top priority for policymakers, the ESO, and market participants. The Capacity Market (CM) is the government’s flagship mechanism for guaranteeing that enough reliable capacity is available to meet demand, even in the most challenging conditions. In this article, I’ll explain how the Capacity Market works, assess its effectiveness, and explore the challenges and opportunities it faces as the energy transition accelerates.

Why Security of Supply Still Matters

Despite rapid growth in renewables, the system must always be able to meet peak demand—even during periods of low wind, cold snaps, or unexpected plant outages. The consequences of shortfalls are severe: blackouts, economic disruption, and loss of public confidence.

The Winter Challenge

Winter is the ultimate test. Demand is highest, weather is most unpredictable, and the margin for error is slim. The ESO’s Winter Outlook Report provides a detailed assessment of risks and system readiness each year.

The Capacity Market: How It Works

Policy Background

Launched in 2014 as part of the Electricity Market Reform (EMR) package, the Capacity Market is designed to ensure sufficient reliable capacity is available to meet future demand. It operates alongside the energy market, providing payments to capacity providers in return for a commitment to deliver when needed.

Auction Process

  • T-4 Auction: Held four years ahead of delivery, securing the bulk of required capacity.
  • T-1 Auction: Held one year ahead, allowing for adjustments and new entrants.
  • Eligibility: Open to a wide range of resources—gas, coal (until 2024), nuclear, interconnectors, demand-side response (DSR), and storage.

Successful bidders receive capacity agreements and are paid a fixed price per kW per year. In return, they must deliver when called upon during system stress events or face penalties (National Grid ESO: Capacity Market).

Oversight and Codes

The CM is governed by the Capacity Market Rules and administered by the Electricity Settlements Company (ESC) and National Grid ESO.

The Role of Different Technologies

Gas and Flexible Generation

Gas-fired power stations remain the backbone of capacity provision, valued for their flexibility and reliability. However, as the system decarbonises, their role is under scrutiny.

Interconnectors

GB’s growing network of interconnectors with Europe provides access to additional capacity and supports system balancing. However, reliance on imports during pan-European stress events is a risk (Ofgem: Interconnectors).

Demand-Side Response and Storage

DSR and battery storage are increasingly successful in CM auctions, providing fast, flexible capacity. The 2022 T-4 auction saw record participation from these technologies (National Grid ESO: Capacity Market Auction Results).

Case Study: The 2021–22 Winter

The 2021–22 winter was marked by high gas prices, tight margins, and low wind output at times. The ESO issued several Electricity Margin Notices (EMNs), signalling that available capacity was close to the required margin. However, the system remained secure, with the CM playing a key role in ensuring resources were available when needed (National Grid ESO: Winter Review).

Effectiveness and Criticisms

Strengths

  • Reliability: The CM has successfully secured sufficient capacity every year since its launch.
  • Technology Neutrality: Open to all resources, encouraging innovation and competition.
  • Investment Signal: Provides revenue certainty for new and existing assets.

Criticisms

  • Carbon Lock-In: Critics argue the CM has supported the continued operation of fossil fuel plants, potentially delaying decarbonisation.
  • Value for Money: Some question whether the costs (ultimately borne by consumers) are justified, especially as renewables and flexibility grow.
  • Complexity: The rules and qualification process can be a barrier for smaller or innovative providers.

For a balanced assessment, see BEIS: Capacity Market Five-Year Review.

The Future: Reform and Evolution

Decarbonisation and Flexibility

The CM is evolving to better support low-carbon and flexible resources. Recent reforms have:

  • Lowered barriers for DSR and storage.
  • Tightened carbon emissions limits for new capacity.
  • Enhanced testing and performance requirements.

Whole-System Security

As electrification of heat and transport accelerates, and as more distributed and variable resources connect, the definition of “security of supply” is broadening. The ESO and Ofgem are exploring new approaches to system adequacy, including probabilistic risk assessment and whole-system planning (Ofgem: Future Security of Supply).

Lessons from Recent Winters

  • Diversity is Strength: A mix of generation, storage, DSR, and interconnectors enhances resilience.
  • Flexibility is Key: The ability to respond rapidly to changing conditions is increasingly valuable.
  • Market Design Must Evolve: The CM must continue to adapt to a decarbonising, decentralising system.

Conclusion

The Capacity Market remains a cornerstone of GB’s security of supply strategy, especially during winter peaks. While not without its critics, it has delivered reliable capacity and is evolving to support the energy transition. As the system becomes more complex and decarbonised, the challenge will be to ensure that security, affordability, and sustainability are delivered in tandem.

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