Pricing
22 Feb 2024
Shaniyaa Holness-Mckenzie

Capacity Market T-4: A high price is guaranteed in the 2027/28 delivery year auction

The clearing price in the T-4 Capacity Market auction has been increasing each year since the 2022/23 delivery year. The volume entering this year’s T-4 Capacity Market auction will be 0.7 GW below the target. So, with a high price guaranteed, how will this impact battery revenues?

Shaniyaa looks at what capacity is entering this year’s T-4 Capacity Market auction and the possible price outcomes.

If you are new to the Capacity Market, you can watch our Energy Academy video here.

The headlines:

  • The 2027/28 T-4 Capacity Market auction is due to take place on Tuesday 27th February.
  • With 940 MW of prequalified capacity not entering the auction, the 43.3 GW of capacity that will enter is below the 44 GW target.
  • This means the auction is guaranteed to clear above £60/kW, but the average capacity exiting historical auctions suggests we’ll see a price of above £70/kW.
  • New-build units make up 98% of the 1.1 GW of derated battery energy storage capacity entering the auction.

Capacity entering the T-4 Capacity Market auction is 0.7 GW below the target

44.2 GW of derated capacity was prequalified for entry, but 900 MW of this will not enter the auction. This means 43.3 GW will be competing for contracts versus the target capacity for the auction is 44 GW.

Although this is 700 MW below the target, it is not enough to clear the auction at £75/kW because that target there is 42.5 GW. Overall, units from all technology types have the chance to win contracts.

Gas units dominate the capacity entering the auction

Of the 43.3 GW of capacity entering the auction, 37 GW comes from existing units. In particular, existing gas units dominate the auction. At 26.7 GW this represents 62% of all capacity competing for contracts.

The new 0.3 GW Eggborough OCGT and 167 MW (derated) Thurrock 2 gas plant will be entering the auction. At the same time, 1.6 GW of gas units will also be refurbished. This is primarily made up of the Sutton Bridge and the Severn CCGTs at 0.8 GW each.

1.1 GW of battery capacity will enter the auction, 98% of this comes from new build units.

6.2 GW of battery connection capacity could win contracts in the T-4 Capacity Market auction

The 1.1 GW of derated battery capacity entering the auction corresponds to 6.2 GW of connection capacity. Of this, only 145 MW is from 1-hour batteries, while only 132 MW of that are units that are currently operational.

The shift from 1-hour to 2-hour systems is being solidified as 2-hour units represent 62% of all battery connection capacity entering the auction. The average duration of batteries entering the auction is 2.9 hours.

With the likelihood of a high price, this could also be the first time a 9-hour unit wins a contract. 15 units are entering the auction with this duration but it is unclear how many of these will actually be longer duration systems.

So just how high could the auction clear?

The auction is guaranteed to clear at or above £60/kW

Last year’s T-4 auction had a record-high price of £63/kW. This corresponded with an excess of 3 GW of capacity entering the auction over the target capacity. This year’s auction is the first time the capacity entering a T-4 Capacity Market auction will be below the target.

With 43.3 GW entering the auction, it would clear in the £65-£60/kW bidding round. The remaining capacity curve would intersect the demand curve at around £61/kW.

However, based on trends in capacity exiting each bidding round in historic auctions, the auction could clear as high as £72/kW.

While the price might be high, derating factors in the T-4 auction have decreased, which will have an impact on contract value for batteries.

Batteries will see a minimum contract value of £4.6k/MW/year on their connection capacity

For units with a duration of 1 hour, if the auction clears at £60/kW/year contracts will be worth £4.6k/MW/year on their connection capacity.