The Capacity Market auctions are almost here! Read on to find the 10 things you need to know ahead of the upcoming auctions. In case you want to skip ahead, #1-5 cover the T-1 auction, and #6-10 cover the T-4 auction.
Are you new to the Capacity Market, or can’t remember your T-1s and your T-4s? Watch our Energy Academy video for a refresh.
(#1-5) T-1 Capacity Market Auction for 2023/24
1. What contracts are available in the T-1 auction?
Only 1-year contracts are up for grabs, with delivery starting 1st October 2023.
2. When is the T-1 auction?
Tuesday 14th and Wednesday 15th February 2023
3. What’s happened in previous T-1 auctions?
- Last year’s T-1 auction (for delivery in 2022/23) resulted in the highest price ever awarded in the Capacity Market. Prices cleared at the cap of £75 /kW/year due to an undersubscribed auction.
- The price was also high in the 2021 Capacity Market T-1 auction at £45 /kW/year.
- However, for the three years previous (2018-2020), the clearing price was extremely low - between £0.77-£6 /kW/year.
Figure 1 shows prices for all historical T-1 Capacity Market auctions.
It’s worth mentioning - the clearing price in the 2022 T-1 auction was £75/kW/year (so £75,000/MW/year). While de-rating factors apply to Capacity Market prices, the Modo revenue Benchmark fell just below £75,000/MW/year in January 2023. Therefore, securing a Capacity Market contract could be quite valuable to a battery’s revenue stack!
4. What are the final requirements for the 2023 auction?
- Target Capacity: 5.8 GW (but the auction will procure up to 6.87 GW)
- Price cap: £75 /kW/year
5. How much capacity is prequalified?
Figure 2 shows the pre-qualified capacity (actual and de-rated) by fuel type in the T-1 auction.
- De-rated capacity prequalified for the auction: 6.8 GW
- 3.2 GW of battery storage pre-qualified into the auction (resulting in 815 MW of derated capacity). This is over twice the 1.5 GW pre-qualified last year.
- Of the battery storage units, 94% of the capacity comes from new builds.
- 69% (4.7 GW) of the de-rated capacity is from existing generating Capacity Market Units - mostly gas (2.5 GW), nuclear (1.4 GW), and coal (0.4 GW).
🔮 BONUS T-1 knowledge: What to look out for...
- Good news! The auction is going to clear at a price (i.e., greater than £0) as the prequalified de-rated capacity (6.8 GW) is less than the maximum auction threshold (6.87 GW).
- A big chunk of the pre-qualified capacity comes from existing nuclear and coal plants. Some of these plants are scheduled to retire soon and may be looking for a high price to make it worth carrying on. At 1.8 GW of de-rated capacity, these plants are likely to determine the price of the auction.
- Nuclear power stations Hartlepool and Heysham make up the total prequalified nuclear capacity (1.8 GW actual capacity). As their decommissioning dates are planned for Q1 2024, if these power stations do not get contracts, it is likely they will retire early, removing up to 1.8 GW from the grid.
- This year, new-build offshore wind is also taking part in the T-1 auction. Presumably, these wind assets would also have Contract for Differences agreements available to them, so it’s interesting that they are looking to the Capacity Market as a source of revenue.
- A record amount of battery storage is entered into the auction, but will they all look to secure contracts given the delays we saw in new capacity coming online in 2022?
(#6-10) T-4 Capacity Market Auction for 2026/27
6. What contracts are available in the T-4 auction?
Up to 15-year contracts are available for new-build capacity, while existing capacity can only secure 1-year contracts. Delivery starts on 1st October 2026.
7. When is the T-4 auction?
Tuesday 21st and Wednesday 22nd February 2023.
8. What’s happened in previous T-4 auctions?
Last year’s T-4 auction was for delivery from 2025/26. The key values from that auction were:
- Last year’s T-4 auction resulted in the highest price ever awarded in the T-4 Capacity Market auction. Prices cleared at £30.59 /kW/year.
- Prices were at their lowest in the 2019 auction (2022/23 delivery) at £6.44 /kW/year, but have increased every year since then.
Figure 3 shows prices for all historical T-4 Capacity Market auctions.
Note - 2022/23 Clearing Price is based on the T-3 auction in 2019.
9. What are the final requirements for the 2023 auction?
- Target capacity: 43.9 GW (but the auction will clear between 42.4 GW and 45.4 GW)
- Price cap: £75 /kW/year
10. How much capacity is prequalified?
Figure 4 shows the pre-qualified capacity (actual and de-rated) by fuel type in the T-4 auction.
- De-rated capacity prequalified for the auction: 47.9 GW
- This means that a minimum of 2.4 GW needs to exit the auction for there to be a price greater than £0 /kW/year.
- It also means that 4 GW needs to exit the auction for the target capacity of 43.9 GW to be met.
- 7.4 GW of battery energy storage pre-qualified for the auction (resulting in 1.9 GW of de-rated capacity). This is a sharp increase on the 4.6 GW that pre-qualified last year.
- Of the battery storage units, 98% of the capacity comes from new builds.
- 68% of the total de-rated capacity is from existing generating Capacity Market Units (mainly gas, 27.7 GW).
🔮 BONUS T-4 knowledge: What to look out for...
- Two new CCGTs (Eggborough - 1.7 GW and Damhead Creek 2 - 1.8 GW) have been prequalified for the auction. With a combined de-rated capacity of 3.2 GW, these units could lead to a minimum clearing price of £25 /kW/year.
- Looming retirement of some of the existing CCGT fleet could again impact the price, as they make up the vast majority of the 28 GW of the prequalified de-rated gas capacity.
- In the T-4 auction, Sizewell is the only remaining nuclear power plant. EDF has stated the plant could be operational until 2035, but this is likely to be contingent on securing Capacity Market contracts.
- The prequalified battery energy storage units with 1 and 2-hour durations are likely to secure contracts. The impact of de-rating factors means that Capacity Market revenues are unlikely to substantially change their business case, so they will happily take a contract even at low prices.
- However, of the battery capacity, 1.5 GW is from 4-hour+ duration battery storage units that may be looking for a higher price to make the increased upfront costs worth it.
And finally
Don’t forget to check back after the auctions! We’ll be wrapping up all the biggest news from these very soon.