Post: Unlocking value from the Capacity Market: the rise of secondary trading

Unlocking value from the Capacity Market: the rise of secondary trading

Secondary trading is a key mechanism for optimising revenue and managing risk in the Capacity Market. In this article we explore what the Capacity Market is and why secondary trading is growing in importance.

What is the Capacity Market?

The Capacity Market is essentially the UK’s insurance policy for electricity security. Run by the National Energy System Operator (NESO) on behalf of government, it ensures there’s enough capacity available to meet peak demand. Participants are paid in exchange for committing to deliver power (or reduce demand) when called upon, with significant penalties for failing to perform during a stress event.

The Capacity Market is a technology-neutral mechanism in which most types of capacity can participate, including:

• new and existing on- or offshore generation plant (all types of generation plant including combined heat and power (CHP))
• battery storage
• demand-side response (DSR)
• interconnector capacity

The Capacity Market auction is a descending clock or reverse auction. This means that prices start high, with everyone participating in the auction. Every round, the price decreases. Participants can submit an Exit Bid when the price is too low for them. Once the capacity left in the auction is lower than the target capacity, the auction clears. Everyone left in the auction receives the same price (pay-as-clear).

Two main types of auctions are held:

• T-4 auctions (four years ahead) form the bulk of capacity commitments, including new builds
• T-1 auctions (one year ahead) top up capacity to cover changes before the delivery year

How does it work?

The Capacity Market pays for availability, not actual generation. This means participants are rewarded for being ready to deliver electricity or reduce demand if required, even if they are not ultimately called upon.

The mechanism is only triggered during stress events. These are extreme situations when electricity supply is tight. During these events

1. the National Energy System Operator (NESO) issues a Capacity Market Notice (CMN) to warn participants up to four hours before a potential shortage
2. If the notice is not cancelled and NESO takes demand-control action, a stress event is confirmed
3. Capacity Providers must deliver the contracted capacity volume or face penalties for underperformance

What is secondary trading?

Secondary trading is the process by which a Capacity Market contract holder transfers all or part of their obligation to another qualified participant. It acts as an “aftermarket” outside of the primary T-4 and T-1 auctions and can occur any time from after the T-1 auction through the end of the delivery year.

Why does it happen?

• operational changes or delays: if a generator falls behind schedule or a planned unit can’t deliver in time
• portfolio strategy adjustments: a company may decide to rebalance commitments based on market signals
• risk mitigation: to avoid the significant penalties associated with failing to fulfil a Capacity Market obligation

This means secondary trading is essentially a strategic lever for:

• risk management: avoiding penalties from non-delivery while retaining revenue
• revenue optimisation: capturing value from contracts that no longer fit strategic or operational goals
• market participation flexibility: enabling businesses that missed auctions to enter the Capacity Market
• supporting decarbonisation goals: by facilitating agility in how capacity obligations are met and traded.

Secondary trading enables capacity obligations to flow to the most capable and efficient providers, maintaining reliability while integrating variable and distributed resources.

Why secondary trading will become more important

A number of trends indicate that secondary trading will become more prominent in the UK Capacity Market:

• tightening capacity margins: high clearing prices in recent auctions reflect rising demand and tighter capacity margins. This increases the likelihood of operational risks and creates a stronger commercial incentive to trade obligations rather than face penalties
• growth in distributed and flexible resources: battery storage, DSR, and small-scale generation are becoming more critical to system stability. Secondary markets help aggregate and transfer obligations among diverse providers, enabling participation from smaller or aggregated assets
• policy and rule changes: recent changes, such as the Secondary Trading Eligibility Directory by the Electricity Settlement Company, aim to reduce friction and help participants identify eligible trade partners, making secondary trading more accessible

Where GridBeyond fits in

GridBeyond is uniquely positioned to support firms navigating secondary trading. Through our Secondary Trading Clearing House, we help Capacity Market participants manage their obligations by:

• matching buyers and sellers to optimise contract portfolios
• clearing contracts for companies that cannot deliver their obligations and wish to avoid penalties
• helping businesses without primary agreements secure capacity positions they otherwise missed
• providing expertise in a market environment where manual processes can be complex and costly

We combine deep understanding of Capacity Market dynamics with proprietary optimisation tools to help clients extract the greatest value from both primary auctions and secondary markets.