The encyclopedia · Strategy & Leadership · Strategic decision · 2014
The UK paid generators to be available, in an auction, to prevent blackouts
Britain auctioned capacity in 2014 so reliable plants were paid to be ready at peak, cutting blackout risk without picking winners
National Grid · Ofgem
the move
As ageing coal and nuclear plants closed, Britain's spare power margin fell, raising blackout risk under the existing energy-only market. The obvious response was to subsidise particular plants or order new build.
The UK instead created a capacity market. National Grid runs a reverse auction where any provider — a power station, storage or a demand-side response scheme — bids to guarantee availability at peak. Winners receive a steady payment and pay a penalty if they cannot deliver.
The first auction in December 2014 secured 53.3 GW, well over 80% of peak demand. The market priced reliability across technologies, so the state bought insurance without the government choosing which plants to back.
why it works
- A reverse auction reveals the true cost of capacity rather than letting the state guess
- Paying for availability, not output, rewards firm backup and not just cheap generation
- Technology-neutral rules let any provider compete, so the market picked the cheapest reliability
- Penalties for non-delivery made the capacity promise enforceable
what transfers
To procure a public good like capacity, auction it: let providers reveal the cost of reliability and pay for availability, not output, so the state buys insurance at a market price
what came after
The first capacity auction in December 2014 bought 53.3 GW and the mechanism became central to Britain's electricity market. Ofgem later investigated a handful of generators for allegedly mis-stating planning consents, and the EU courts twice questioned its state-aid status before reinstating it. Critics argue it pays existing plants as much as new ones and can over-reward capacity that would have been built anyway, but the auction design became a reference for capacity markets elsewhere.
references
- Ofgem opens investigations into five generators' compliance with Capacity Market Rules
- UK guarantees energy price to cut blackout risk
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