The Capacity Market is a mechanism to ensure that electricity supply in the island of Ireland continues to meet demand.
How it works
Capacity market auctions run for a specified capacity year. The System Operators develop timelines for each auction. These timelines are then approved by the Regulatory Authorities.
Funding for the market
The Capacity Market is funded by suppliers through a capacity charge. In return, the suppliers are hedged against high energy prices. When energy prices exceed the strike price, the market pays suppliers the difference.
To fund this arrangement, generators must pay difference charges for capacity not delivered. This is based on the difference between the strike price and a reference price. The reference price reflects the price at which the capacity provider traded in the DAM, IDM and BM. If the reference price exceeds the strike price, the capacity provider pays a difference charge for the relevant volume.
Generators are most exposed to the strike price if they fail to supply energy during peak demand. This incentivises being on when the reference price goes above the strike price. They must pay capacity difference charges whether they are scheduled on or not. Interconnectors are treated in the same way. However, their only obligation is to maintain availability of interconnector capacity.
The market design includes stop loss limits. These place an upper limit on how much capacity providers must pay back to the market.
At times of low demand, there is more capacity available than is required. The hedging needs of suppliers are reduced, along with the capacity requirement. This also reduces the capacity needed for suppliers to avoid difference charges.
Capacity providers may procure spare capacity from other generators to cover their obligations. This is referred to as Secondary Trading. Capacity providers can use financial trades outside the market to manage exposure.
Capacity market auctions are run for a specified capacity year. The timelines account for processes to set capacity requirements, local constraints, and unit qualification. It also considers running the auction and post-auction processes. Participants are notified when the timing for each auction has been set by the TSOs. Participants are notified when the timing for each auction has been set by the TSOs.
The capacity year commences at the start of the trading day on 30 September. It ends at the end of the trading day on 30 September in the following year. The length of the first capacity “year” may be longer to accommodate the market start date.
Transitional one-year-ahead primary capacity auctions (T-1) will run for the first three years of the markets. Secondary capacity auctions will run at regular intervals up to the start of each capacity year.
Primary capacity auctions will run four years ahead (T-4) of each capacity year. T-1 auctions will be held before the start of the capacity year. The first T-4 auction will run in 2018 for the capacity year ending 30 September 2022. Additional auctions may take place if required.View the timetable
The installed capacity or maximum output of a unit is not always available. This might be due to outages, temperature-dependent derating and energy limits. Consequently, capacity offered into the auction is the de-rated capacity. This reflects the statistical contribution of the unit to meeting capacity requirements. The qualification process ensures spare capacity to address outages and lack of availability.
Qualification examines physical units proposed as Capacity Market Units or candidate units. These may be existing or proposed. Typically there is a one-to-one relationship between a candidate unit and a CMU. Variable and small candidate units are often aggregated into one CMU.
Who can participate
Participation is limited to capacity providers in the island of Ireland. All existing interconnectors and dispatchable units must apply to participate. Variable generator units are not required to register in the Capacity Market. However, the option to register and qualify is open to these unit types.
New capacity must hold a connection offer before participating in the qualification process. Participation by the following is voluntary:
- Generators below the de minimis threshold
- Variable units above the de minimis threshold
- Uncommissioned new units
- Units that plan to close before the end of the capacity year
Participation happens via a capacity market unit (CMU). A CMU can represent one interconnector or, typically, one generator unit. Generators below the de minimis threshold and variable units can be aggregated into a single CMU. The CMU must be registered to the same participant as the generator unit or interconnector.Join the market