Reliability options, such as those implemented in Ireland or Italy, constitute a contract between capacity providers and a buyer (here a TSO). Each time the established reference market price rises above the strike price of the option, the seller pays the difference between the reference price and the strike price to the buyer.
The main purpose of reliability options is for buyers to benefit from enhanced security of supply (adequacy). At the same time, the reliability option serves as a hedge against price spikes. Sellers of reliability options receive a regular payment for keeping capacity available.
Source: The ACER in its Final Assessment of the EU Wholesale Electricity Market Design published in April 2022