Pricing
15 Feb 2024
Shaniyaa Holness-Mckenzie

Capacity Market: 2024/25 T-1 auction unlikely to repeat last year’s price

The last two T-1 Capacity Market auctions cleared with exceptionally high prices of £75/kW/year and £60/kW/year. The next auction will occur on 20th February, with a record-high target capacity of 7.7 GW. So, will those high prices be seen again this year?

Shaniyaa digs into the possible outcomes from this year’s T-1 auction

9.9 GW of derated capacity has qualified for the T-1 Capacity Market auction for the delivery year 2024/25, of which 9.5 GW has confirmed entry. The auction has a target capacity of 7.7 GW, a record, and up to 8.7 GW could ultimately be procured.

  • The last two years’ T-1 auctions have cleared at prices of £75/kW and £60/kW. However, a repeat this year looks unlikely. Based on historical auction behavior, a price of between £15-25/kW appears most likely.
  • The auction strategies of three gas plants look key to a higher price. Corby (267 MW de-rated) and the two returning CCGTs Sutton Bridge and Severn (779 MW each) look the most likely plants to exit the auction early, which could see a clearing price of up to £55/kW.
  • Alongside lower derating factors, a price of £21/kW would result in a T-1 contract delivering 75% less value than this year's, putting it below the value of T-4 contracts coming online next winter.

9.5 GW of capacity is entering the auction after 360 MW drops out

360 MW of capacity originally prequalified has declined to enter the auction, leaving 9.5 GW of the prequalified capacity remaining.

This means 1.8 GW has to exit the auction to meet the target capacity, resulting in a price of £50/kW. 2.8 GW would have to exit to cause the auction to clear at the cap of £75/kW.

Of this, 4 GW comes from gas and 2.7 GW from nuclear. While most capacity entering the auction comes from existing sites, 76% of DSR capacity is unproven, and 77% of battery capacity is from newly built units.

4 GW of batteries have prequalified

4 GW of battery connection capacity (713 MW derated) will enter the auction on 20th February. 70% of this comes from new-build units. This includes three new 100 MW+ sites, 99 MW Bramley from Penso Power, 144 MW at the former Teesside power station from Semcorp, and the 200 MW Blackhillock from Zenobe.

Historical trends are the best predictor of T-1 auction behavior

Most units in the Capacity Market T-1 auctions (even new-build) are operational or near completion by the start of the auction. This means much of this capacity is unlikely to change operational plans based on auction out-turn and can take a very low price. This has been seen historically, with a price as low as £0.77/kW in 2019.

Units are most likely to exit the auction in round 1 or after the price-taker threshold

Previous years’ T-1 auctions provide a good indication of the bidding behavior we are likely to see this year. Generally, until prices drop below £10/kW, most units either exit the auction in the first round or at £25 /kW. This is the ‘Price-Taker Threshold’ - above which most existing units cannot exit the auction.

The exception to this is plants nearing retirement, which seek a high-price contract to continue generating. This has led to increased capacity exiting in higher-priced rounds in the past.

Following historical Capacity Market trends, the auction is likely to clear between £15-25/kW

The demand curve of the Capacity Market auction could play a role in ensuring prices do not drop too low this year. The ESO will procure up to 8.7 GW of capacity for £0/kW - requiring just 800 MW of capacity to exit the auction.

Using the average volume exiting from each round in historical auctions, this year would clear between £15 and 25/kW: £21/kW in the scenario below.

Taking the minimum and maximum capacity to exit historical auctions in each rounds provides a view of the potential range out outcomes - anywhere between £4/kW and £45/kW.

While historic auctions have followed similar patterns, the behavior of large retiring units has often played a key role in determining the final clearing price. This was the case in the 2021/22 auction, with the 1.7 GW West Burton A coal plant retiring.

Large units exiting the auction early could lead to a £50/kW clearing price

6.7 GW of prequalified capacity in the auction comes from just twelve units of 200 MW or greater. Each of these has the potential to trigger a higher price by leaving the auction early.

EDF has signaled that each of the four nuclear units will continue operating beyond 2025, and so we expect these units to remain in the auction.