In order to ensure the demand for electricity is always met, generators receive a payment for being ready to generate electricity. This payment encourages generators to be available and ready to supply electricity to the grid when it is demanded by customers. This payment is known as the Capacity Payment Mechanism (CPM) in the current SEM. In the new I-SEM it will be known as the Capacity Remuneration Mechanism.
In the SEM, a pot of money is available to generators to cover the CPM based on the relatively low fixed costs of the generating plant. This money is then distributed to all generators annually based on a set calculation with payments published by the SEMC.
In the high level design of the I-SEM, the SEMC concluded that a form of capacity payment should continue, to minimise the risk of a shortfall in generation in the market. However, the SEMC decided that a more competitive process should be put in place than the current system allows. The SEMC has also decided that upfront capacity payments will be made through a competitive process, such as an auction. This approach should promote competition between market participants in order to receive capacity payments.