Once again, we are in the prequalification window for the UK capacity Market run by the EMR Delivery Body on behalf of the National Grid ESO. The capacity market is of great interest to anyone with a power project capable of exporting to the grid or reducing grid demand. It can be a great lever in the ability to finance projects. These projects can get annual payments of up to £75/kW capacity just for having this capability, resulting in annual payments that can be many hundreds of thousands of pounds per year.
The Capacity Market is a government initiative designed to ensure enough supply capacity in the UK electric power market so that electricity is available to all those who need it when they need it. Essentially, it is a payment for projects in a range of technologies that can affect the supply/demand on the grid by either exporting to the grid or reducing demand from the grid, along with an obligation to do this on demand from NGESO. Anyone who wants to enter the latest round of auctions must prequalify; the window for this is currently open and will run until 1st October (slightly delayed this year due to the general election timing).
Prequalifying happens through the EMRDB portal and consists of outlining details of the project (known as a Capacity Market Unit or CMU), such as capacity that they can export or reduce, technology, setup, and location, along with some declarations that ensure that only eligible CMUs are allowed into the auction.
The auction will happen in March next year. It is an online descending clock called a “Dutch” auction. This means that everyone starts in the auction, and each sets the lowest price at which they will exit. Round by round, the value of the auction drops, and anyone with an exit price above the auction price is kicked out until the remaining capacity matches the required capacity set by the NGESO. At this point, everyone still receives a contract for the auction price, no matter what they put as their exit bid.
There are two auctions—one for contracts that start on 1st October 2025 (the T-1) and one for contracts that start in October 2028 (the T-4). CMUs can be entered in both, but they can’t have two contracts for the same year, so in practice, the T-1 is for CMUs that are ready but don’t already have a contract, and the T-4 is for longer-term contracts and CMUs that are not yet ready but will be within four years.
While the theoretical maximum is currently £75/kW, in practice, it falls below this. Depending on the market, this has dropped as low as £6.44/kW when there was an abundance of projects coming through, but in the auctions held in 2024, contracts were £65/kW for the T-4 auction and £35.79/kW for the T-1 auction.
Of course, this isn’t just free money; there is a requirement to demonstrate that the CMU can react if there is a shortfall on the grid. These generally consist of 3 runs throughout the year, showing that the capacity can be exported to the grid or demand reduced from the grid is possible. There are also some additional extended-duration tests for storage projects. Also, at any point during the year, if there is a predicted shortfall, the NGESO sends a warning for a specific time, and any CMU that doesn’t perform as required will be penalised. In practice, however, previous warnings have never materialised as the regular power market has always filled the gap, and the requirement has been rescinded.
Remember that attention to detail is key for anyone entering prequalification, as small slips can require you to go through the appeals process to get corrected or even stop you from prequalifying and getting rejected from this year's auction. Also, if you get in early, the EMRDB has a checking service that will alert you to errors that its system picks up, giving you a little extra confidence that all will be okay.
There are no obligations to fulfil requirements until a contract has been won in the auction, but once one has, there can be severe financial penalties for not following through, which rise as various milestones are reached and expectations grow.
The rules for the capacity market are regularly updated to account for new circumstances and requirements, and a few new aspects must be considered this year.
There is a new portal through which CMU entries are made. While this is a new format, most of the actual administration requirements remain much the same, with the same need for attention to detail. This also comes with a new set of guidance documents that explain all aspects of the process. These guidance documents are comprehensive and very extensive, but that means they can be rather hard to navigate without some prior experience or a lot of patience.
A non-admin change concerns the need for Independent Emissions Verification for any fossil fuel elements in a CMU. There are limits on CO2 emissions for any CMU, and demonstrating this was previously a self-calculated exercise, but it now needs to be independently verified by a short list of verifiers accredited by UKAS under ISO 14065.
Another change is to allow mothballed projects to demonstrate their capability using data older than the previous 24-month cutoff.
The other significant changes are clarification around permitted battery augmentation to account for degradation as batteries age and changes to extended performance tests to allow storage CMUs to trade obligations to account for degradation and maintenance uncertainty.
This overview is intended to give a general understanding of the capacity market process. For more information, check the guides here: https://emrdeliverybody.nationalgrideso.com/IG/s/ or get in touch with us here at Encora Energy.
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