Insuring the penalty risk of non-delivery in the United Kingdom’s capacity market

In July 2021, the United Kingdom (UK) Government considered tripling the UK grid’s performance-based incentive scheme’s penalty for capacity non-delivery during a shortage. This paper proposes an insurance that a generator may buy to manage its risk exposure to the scheme’s penalty. It also shows how to use readily available data to calculate the insurance’s per MW premium. These findings suggest that the proposed insurance deserves consideration by generators and insurance sellers. Copyright © 2022 Elsevier Inc. All rights reserved.