UK government to procure energy equivalent to 80% of peak time use through capacity market

Edward Davey said that the auction, intended to take place in December, would ensure that the UK had enough power to meet the demands of businesses and homes in the future, when combined with the country's growing renewable and other generation capacity.

"With [this] announcement we have the final piece of the jigsaw of our detailed energy security plans and can now say with confidence that we have defused the ticking time bomb of electricity supply risks we inherited," he said.

"Britain is a world leader in energy security - leading in the EU and ahead of every other G7 country. This announcement - coupled with our record amounts of investment in renewables and electricity infrastructure, our revival plans for the North Sea and the most healthy pipeline of investment projects in new generating capacity and interconnectors ever - means we will remain a world leader," he said.

The plans will need to obtain state aid approval from the European Commission before they can go ahead.

Regular capacity market auctions form part of the government's electricity market reform (EMR) programme; its plans for attracting the estimated £110 billion investment needed over the next decade to replace the country's aging energy infrastructure and match increasing demand while meeting international climate change commitments. Through the capacity market, energy generators will receive regular payments to ensure that they are able to provide back-up power or demand reduction when the need arises.

The government intends to procure 53.3GW of capacity for the first year of the new arrangements, which will be 2018/19. Of this, 50.8GW will be auctioned in December with the rest to follow one year ahead of delivery. Those successful in the auctions will be required to provide capacity when the system needs it or face financial penalties. Agreements will last 15 years for new capacity, while existing capacity will be able to bid for rolling one-year or three-year agreements depending on whether they need to invest in "significant" refurbishment.

The capacity market is intended to boost energy security in the medium term until the government's energy infrastructure investment strategy begins to take effect. In the short term, system operator National Grid is tendering for new supplementary balancing reserves on both the demand and supply side, to run in the winters of 2015 and 2016. These services would operate for short periods when demand is at its highest.

According to the latest assessment of electricity capacity margins, published by market regulator Ofgem, spare capacity will continue to fall over the next two winters due to the planned closure of power stations. However, Ofgem said that the new measures proposed by the government and National Grid had reduced the "probability of disconnections" since its 2013 capacity report.