The Capacity Market: a primer for UK manufacturers

Posted on 28 Apr 2016 by The Manufacturer

The UK’s newest policy for balancing the energy grid, the Capacity Market, can be good news for British industry. Mike Hall, UK managing director for Kiwi Power, explains.

You’ve read the headlines: the capacity crunch is looming, the lights are going out and British manufacturers are going to be told to stop production. It’s all very doom and gloom.

Mike Hall, UK managing director, Kiwi Power.
Mike Hall, UK managing director, Kiwi Power.

But you also may have heard about the Capacity Market (CM), which is in fact the latest and greatest (in scale at least) tool that the UK has to stop this scenario happening.

But the CM is far more than just a protective measure. What the headlines haven’t said is that it’s also a significant commercial opportunity: UK businesses can be paid handsomely to be part of the scheme, using energy assets on site – often at little or no cost.

Manufacturers in particular are ideally placed to take advantage of the Capacity Market.

Most industrial sites will have some sort of backup generation, either to cover the full-site load and continue production, or to cover partial load to protect assets in case of emergency.

For example, industries such as glass and metal production rely on equipment that would be damaged if not kept cool – backup generators ensure that the cooling pumps will keep working in an emergency.

Isolated, these generators are a sunk cost which manufacturers need to invest time and money in testing regularly. The CM allows companies to create a revenue stream from that investment, as well as a number of extra benefits.

What is the Capacity Market and why should I care?

The CM is the biggest reform in the UK’s energy policy in more than 20 years. With increasing reliance on intermittent wind and inflexible nuclear, and 25% of coal generation capacity going offline by 2020, the challenge of balancing energy supply and demand is growing.

thumbnail_Metals Image
The challenge of balancing energy supply and demand is growing.

The CM is designed to replace this lost capacity with newer, cleaner power generation and smart demand response to ensure security of supply.

To energy-intensive industries, this may not sound like good news. New generation means new costs and energy prices are already high – the steel industry’s recent turmoil serves as a stark warning to the dangers of high energy bills to manufacturers.

That is why it’s so important that manufacturers understand and take advantage of the significant new revenue streams and added benefits that the CM offers them through demand response.

So how does it work?

The goal is for new, more efficient, less polluting power stations and demand response providers to be rewarded for ensuring a predetermined amount of capacity is available at times of stress.

Participants are then paid in two ways:

  • An annual amount for keeping the capacity available, priced per kilowatt
  • The prevailing market rate for any power sold back to the grid, or savings at the retail rate for energy produced and used on site, rather than bought

The annual allotment is decided once per year through three different auctions. The main auction for new power plants is the T-4 auction, contracting for four years ahead, starting in 2018.

Then there is the one year ahead T-1 auction which tops-up the main auction with demand response. Finally, the Transitional Arrangement (TA) was designed to encourage more demand response onto the grid two years before the T-4 auction in winter, 2016.

How much are we talking?

Businesses can select which auction is right for them by the amount of revenue they want to receive for participating and when they want to receive it.

2016/17 2017/18 2018/19 2019/20
T-4 N/A N/A £19.4 per KW £18 per KW
T-1 N/A c.£20-25per KW (expected) c.£27.5 per KW (expected)


c.£27.5 per KW



TA £27.5 per KW c.£27.5 per KW



It’s expected that the auctions will align in a single process in 2020, but for now the best prices have come out of the TA auctions, presenting manufacturers with backup generation a chance to start earning from winter 2016.

For example, a glass manufacturer with a 3MW backup generator (to cover 20% of a 15MW site), could earn £82,500 gross per year in availability payments, plus the prevailing market rate for any power produced.

How can businesses get involved?

Businesses must be able to reduce consumption from the grid during a time of system stress – when demand is at its peak, or during a significant event such as power station failure.

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The CM is designed to replace this lost capacity with newer, cleaner power generation, which may not sound like good news to energy-intensive industries.

These events are expected to occur infrequently, perhaps a few times per year, and limited to a few hours in duration.

For manufacturers who need to test their generation equipment each year, these periods can often be substituted, turning a costly exercise into a profitable one. Testing under-load is also typically more accurate than ‘dry run’ tests.

To participate, businesses need suitable smart metering technology, together with control equipment and strategies to reduce or transfer load, all installed by September 1, 2016.

Demand response providers will often conduct a suitability audit and provide the equipment to businesses for free, as well as managing capacity events and payments from National Grid, taking a small margin from the resulting payments.

Other demand response schemes and added benefits

For businesses already participating in existing demand response programmes such as STOR or Triad management, it’s likely all the required equipment and processes are in place to benefit from CM immediately, and it’s possible to participate in a combination of programmes.

Natwest and RBS launches Energy Efficiency Audit programme
The CM can be an entry point which paves the way for inclusion in others such as Triad avoidance.

For those new to all these schemes, however, the CM can be an entry point which paves the way for inclusion in others such as Triad avoidance – reducing or halting energy use at the three most expensive points of the year.

As well as creating a new revenue stream to help offset costs, the equipment upgrades involved will often mean a number of other added benefits. By upgrading equipment and linking generators to the grid, businesses will have more efficiency measures available to them.

The metering equipment also gives access to energy consumption data, can help drive efficiency programmes and aid with reporting requirements. It enables a more intelligent company-wide approach to energy overall.

Against a backdrop of volatile, high energy prices and an uncertain future, the CM can be a vital lifeline for UK industries.