29 Feb 2024
Shaniyaa Holness-Mckenzie

Capacity Market 2024: T-4 auction results in five charts

The T-4 Capacity Market auction for delivery year 2027/28 took place on 27th February 2024. With capacity entering the auction below the target for the first time ever in the T-4, a high price was guaranteed.

  • 43.3 GW of capacity entered the auction, 700 MW below the 44 GW target.
  • This was the first time the T-4 Capacity Market had less capacity entering the auciton than the target.
  • As a result, the auction was guaranteed to clear above £60/kW, and the average capacity exiting historical auctions suggested there would be a price of above £70/kW.
  • New-build units made up 98% of the 1.1 GW of derated battery energy storage capacity entering the auction.

For further details of the conditions going into the auction, read our previous article.

Below are the main headlines from the auction including the impact on battery energy storage systems in Great Britain.

1. The T-4 Capacity Market auction cleared at a record-high price

The auction cleared in bidding round 2 at £65/kW/year. This is a £2/kW/year increase from last year's T-4 auction, making it the highest-ever clearing price in the T-4 auction.

Although there was an increase in price, falling derating factors for battery energy storage systems resulted in a reduction in contract value from last year. Derating factors for 1-hour units fell from 12% in last year’s auction to 8% in this year’s auction. Derating factors for 2-hour units decreased from 24% to 15%.

For 1 and 2-hour batteries, the reduction in derating factors means there is a 33% reduction in contract value based on connection capacity from last year’s auction to this year’s auction.

2. Batteries dominate new-build capacity winning contracts

Overall, 42.8 GW of derated capacity won contracts in the auction, but just 3.6 GW is new-build, representing 8% of awarded capacity. In last year’s auction 5.3 GW (12%) of capacity awarded contracts was from new-build units. Batteries saw the highest levels of new-build capacity, winning contracts by both derated (1 GW) and connection (5.6 GW) capacity.

5.7 GW of battery connection capacity received contracts across new-build and existing units. However, this number is likely to be higher as multiple battery units adopted a strategy of entering a lower connection capacity in order to register with a higher duration of up to 9 hours.

All 15 units with a 9-hour duration that entered the auction won contracts (141 MW derated) totaling 1.4 GWh in energy capacity. However, in general, it is unlikely that any of these assets will actually be 9-hour systems. If these are actually 1-hour units, the total connection capacity from batteries awarded contracts could be 7 GW.

3. Batteries get up to a 35% uplift in value by registering as 9-hour units

This year’s derating factors meant that registering as a 9-hour unit would lead a battery to earn 35-40% more than registering its actual duration. To do this, a unit would need to enter with a lower connection capacity to ensure the energy capacity of the unit remains the same.

A 1-hour unit would get a 35% uplift on its nameplate capacity if it entered the auction as a 9-hour unit, receiving £6.8k/MW/year on its nameplate capacity. Whereas the same unit registered as a 1-hour duration unit would receive £5k/MW/year. In both cases it would be providing the same capacity to the grid.

ESO has confirmed that this is allowed as long as the unit can adhere to extended performance testing requirements. However, whether this will be a profitable strategy next year will depend on the final derating factors for the auction.

4. Alcemi, Zenobe, and Carlton Power see the highest energy capacity winning contracts

With some batteries registering as nine-hour duration units, energy capacity now provides a more accurate representation of the size of portfolios winning contracts. Alcemi (1.8 GWh), Zenobe (1.6 GWh), and Carlton Power (1.6 GWh) won the largest contracts by energy capacity.

5. Battery capacity contracted in the Capacity Market to reach 16 GW by 2027

6 GW of battery connection capacity, representing 12.5 GWh of energy capacity, secured 15-year contracts. Across all auctions so far, batteries will represent 16 GW of connection capacity in the Capacity Market by 2027. The total battery capacity operating in Great Britain currently stands at 3.6 GW.

Additional information

  • Eggborough OGCT makes up the largest proportion of capacity that exited the auction, at 282 MW. This site would have been looking for a high price to support construction and operational costs.
  • Sutton Bridge and Severn CCGTs had been prequalified in this auction as refurbishing units looking for 15-year agreements. However, both of these sites entered the final auction as existing units and secured 1-year contracts. This means they will continue to contract in the capacity market on a rolling annual basis.
  • Two new interconnectors won contracts. The Viking Link (1.4 GW connection capacity, 0.8 GW derated) interconnector with Denmark began operation at the end of December 2023. Meanwhile, the new Irish interconnector Greenlink (500 MW connection capacity, 272 MW derated) is due for commissioning this year.