The Capacity Market is a mechanism to ensure that the electricity supply in Ireland and Northern Ireland continues to meet demand.
The Capacity Market is designed to help ensure that the generation capacity in Ireland and Northern Ireland (including Storage, Demand Side Units and Interconnector capacity) is sufficient to meet demand and that the regulatory approved generation adequacy standard is satisfied. It is a competitive auction-based design where the most efficient and lowest cost capacity is most likely to be successful. This design helps to promote the short-term and long term interests of consumers of electricity across Ireland and Northern Ireland with respect to price, quality, reliability and security of supply of electricity.
Only those units who are successful in the capacity auctions will receive capacity payments. Capacity providers that are successful in the capacity auction will be paid regular payments during the year for each MW of capacity they successfully sold to the market in the Auction. In return, capacity providers that have been successful in the Auction are required to deliver on their Capacity Market obligations. These include making available the awarded capacity and providing sufficient energy to satisfy their awarded capacity through participation in the day-ahead, intraday and balancing market and paying difference charges where the energy price exceeds the strike price. It should be noted that generators and other units operating in the Single Electricity Market (SEM) can also earn revenue from the energy market and system services.
How It Works
Information – Timetables and Auction Packs
In advance of each auction a Capacity Auction Timetable (developed by the System Operators and approved by the Regulatory Authorities) is published which sets out the key dates for the auction process.
The parameters required for each auction are set out in the Initial Auction Information Pack published in advance of Qualification and the Final Auction Information Pack published in advance of the Capacity Auction itself. Analysis by the TSOs using detailed approved methodologies forms the main basis for some of these parameters and all final parameters in the auction are set and approved by the Regulatory Authorities.
Qualification – Who can participate in the Capacity Market?
Capacity providers that wish to participate in a Capacity Auction must seek qualification for each Capacity Market Unit (CMU) they wish to participate. The qualification process helps to provide confidence that units successful in an auction will deliver on their obligations and contribute to security of supply in Ireland and Northern Ireland.
Participation is currently limited to capacity providers on the island of Ireland. All existing Interconnectors and Dispatchable Units must apply to be qualified to participate in each Capacity Auction. Variable Generator Units are not required to register or qualify in the Capacity Market; however, the option to participate is open to these unit types also (subject to some exceptions associated with EU State-Aid requirements). Participation is also voluntary for generators below the De Minimis Threshold (10 MW), new capacity units not yet commissioned, and units that plan to close before the end of the Capacity Year. Each Interconnector and, typically, each generator unit will be represented as one Capacity Market Unit. However, generator units below the De Minimis Threshold and variable generator units can be aggregated into a single Capacity Market Unit.
Qualification – What is required to qualify?
During the qualification process, prospective units must demonstrate that they meet a set of minimum requirements set out in the market rules. Full requirements are comprehensively detailed in the Capacity Market Code (CMC) and Agreed Procedures.
In respect of Connection Agreements / Connection Offers specifically, the System Operators require one of the following criteria to be satisfied as part of being able to deem an application as qualified:
- The Participant in respect of a Candidate Unit holds a valid, executed Connection Agreement facilitating connection of the capacity which the Participant is seeking to qualify, or
- The Participant in respect of a Candidate Unit holds a valid Connection Offer facilitating connection of the capacity which the Participant is seeking to qualify, or
- The Participant in respect of a Candidate Unit will be issued with a Connection Offer where:
- An application for connection for the Candidate Unit has been submitted, has been validated and deemed complete by the System Operator, and the associated full application fee has been paid and the System Operators are not aware, at the time they deem the application effective, of any reason why the Connection Offer would not be issued in respect of the Candidate Unit, or
- The Candidate Unit is confirmed as due to receive a Connection Offer under Ireland’s Enduring Connection Process arrangements.
In respect of planning consents, for the purposes of the Capacity Market Code, for new Capacity, evidence of planning consents are not required at the Qualification stage. Planning consents are required for Substantial Financial Completion. Please refer to the Capacity Market Code for more details on this. Where a project is applying for a connection, the party should consider the relevant requirements for planning consents as part of that process. If you have any questions on the requirements of the connection process, please contact the relevant connections processing team.
Qualification – De-rating, Capacity Requirement and Locational Capacity Constraints
The Capacity Market qualification process and auction uses the concept of “de-rated MWs”. The de-rating process accounts for the fact that generators and other capacity providers do not have perfect reliability. The TSOs implement a detailed approved methodology to calculate the “de-ratings factors” that apply to each unit in qualification. The methodology that takes account of a range of factors including historical availability statistics for each generator in the SEM, size and energy limits. Technology classes that are less reliable from a generation adequacy perspective get lower de-rating factors.
The all-island capacity requirement is also expressed in terms of de-rated MWs. The requirement is calculated using the same approved methodology and takes account of a wide range of future demand scenarios, generator reliability and renewable energy output. Use of this methodology helps to ensure that whatever mix of capacity is successful in the Capacity Auction will satisfy the generation adequacy standard. The final values used in the auction are in the form of a Demand Curve set by the Regulatory Authorities, which has been adjusted accordingly for reserves, non-participating capacity and capacity to be procured in future auctions.
As well as an all-island requirement there were a number of locational capacity constraint areas and associated locational minimum MW requirements set in this auction. The areas for this auction were the same as the previous two auctions (i.e. Northern Ireland, Ireland and the Greater Dublin Region). The reason for the inclusion of these areas is that there are limits on the transmission system that can restrict the flow of power to areas of demand. The minimum MW requirements set in the auction for these areas are based on the TSOs’ analysis using a detailed approved methodology, with the final values used in the auction set by the Regulatory Authorities.
The Capacity Auctions take place on the Capacity Market Platform (CMP) which has been developed specifically for the functionality of the Capacity Market. Participants with units qualified for the auction submit their offers via this platform. Offer submissions are validated against the approved final qualification results for each Capacity Market Unit.
The gate opens for offer submissions one week before the auction and closes two hours before the auction. The auction is a simple sealed-bid format and units can offer their qualified capacity in one block or divide their offers into up to five price-quantity pairs. Units are subject to the approved offer price caps set for them during qualification. For most existing capacity, this is the Existing Capacity Price Cap defined in the Auction Information Packs. New capacity can offer into the auction at up to the Auction Price Cap. Existing or New Demand Side Unit capacity can offer into the auction at up to the Auction Price Cap. Units that have been granted a Unit Specific Price Cap by the Regulators during the qualification process can offer into the auction at up to that Unit Specific Price Cap.
Once all offers have been submitted and the gate has closed, the System Operators run the auction calculation in the Capacity Market Platform. Based on the submitted auction offers, the auction software seeks to find the lowest cost combination of capacity that will satisfy the all-island demand curve and the minimum locational requirements. The auction clearing price is set where the offer curve (based on the submitted offers) meets the demand curve. Capacity that is successful in the auction due to locational requirements does not affect the auction clearing price. Cleared offers receive the higher of their offer price and the auction clearing price.
An Auction Monitor appointed by the Regulators is present throughout the process. After the auction calculation has run the System Operators assess the results to ensure that the calculation has run correctly and is line with the requirements of the market rules.
Delivery and Settlement
Once a participant has been “awarded new capacity” (is successful in the auction) and the results have been approved by the Regulatory Authorities, strict delivery obligations apply. These obligations include the achievement and reporting of key delivery milestones for new capacity.
The Capacity Market is funded by suppliers, through a capacity charge. In return, the suppliers are hedged against high energy prices. Capacity providers that have been successful in the auction are required to pay difference charges to suppliers, where energy market prices exceed the defined Strike Price. The difference charges are calculated against the reference price for the market in which the generator sold the energy (i.e. Day Ahead Market, Intra-Day Market or Balancing Market). If capacity providers with Awarded Capacity do not deliver to the market at times of high energy prices, then they will not earn energy revenue but will be subject to difference charges at the Imbalance Price from the Balancing Market. This feature encourages Awarded Capacity to deliver at times of system scarcity.
The market design includes stop-loss limits, which place an upper limit on how much capacity providers must pay back to the market. Where a generator unit wishes to go on a scheduled outage during a period where they have been successful in a Capacity Auction, they have the opportunity to cover their capacity obligations via a Secondary Trading mechanism which allows them to reduce their obligation during the period of scheduled outage. During this period, they will not receive capacity payments and will not be subject to difference charges.
Capacity Auctions will be held four years (T-4) before the delivery Capacity Year with additional auctions, if required for incremental capacity, held closer to the Capacity Year, e.g. in the year prior to the capacity year start (T-1), or two years prior to the Capacity Year (T-2).