DECC will make forecasts of future peak demand (possibly based on a “reliability standard”) and, if there is a risk of a shortfall in capacity to meet that demand, the System Operator (which will administer the Capacity Market) will run an auction to contract for the total capacity required (at the end of 2010, 61GW) to meet that demand. DECC will not contract specifically for flexible capacity; existing mechanisms for managing system balancing (such as short term operating reserve (STOR) and other balancing services) will continue as at present. The auctions which are expected to be run will be open to existing plants as well as new ones.
Successful bidders at the auctions will enter into capacity agreements, committing them to generate the agreed amount of electricity when needed in return for regular capacity payments (as bid). The agreements will require assurance that physical capacity is in place and operators who fail to generate electricity when required will face penalties.
DECC is minded to exclude participation by plants receiving a CfD, in order to avoid over-compensating them, but they acknowledge that it may be possible in the future when CfD strike prices are set by auction.
Secondary trading of the capacity obligation will be allowed, subject to conditions.