What are capacity payments?
In the current Irish electricity market, generators are paid for the energy they produce and they also receive a payment (a capacity payment) for being available to produce. Capacity payments are set at a level to ensure that sufficient generation capacity is available to meet the demand for electricity at all times. As a proportion of their total income, wind generators receive least through capacity payments – and peaking plant, that are needed only occasionally, receive the most.
Capacity payments are one of the means by which All-Island Single Electricity Market (SEM) Committee ensures that the Irish electricity market incentivises new investment in electricity generation. In 2014 the aggregated (total) payments made to generators for the electricity sold into the Irish market came to €2.2 billion 1. In addition to this generators received capacity payments of €565 million (increasing by 1.6% in 2015) 2. The annual capacity payment sum for 2016 is set at €515 million, and relates to a capacity requirement of 7070MW 3. The capacity payment sum is down 10% on the 2015 total.
For generators, the capacity payments are uniform for each half-hour trading period, i.e., the same price is paid to all. The capacity price varies by trading period however and at times of lower margin the price will be higher and therefore the overall price achieved by a generator will depend on the timing of its availability. If it generally tends to be available at times of high margins it will be paid less overall. Generators with priority access such as renewable energy and ‘price takers’ with price guarantees receive the lowest proportion of their revenue in capacity payments. Capacity payments accounted for between 7% (for wind) and 30% (for peaking plants) of generators’ revenue in 2013.