At the beginning of August, the ESO launched the 2024/25 edition of the Capacity Market. This confirms timelines for prequalification ahead of auctions next March. It also confirms derating factors and target capacities for both the T-1 and T-4 auctions, with some good news for battery energy storage.
The T-1 auction will contract capacity for the delivery year 2025/26 (starting October 2025). The T-4 auction will contract capacity starting in 2028/29 (starting October 2028).
Storage de-rating factors increase following methodology change
In July, we looked at potential changes in derating methodology for battery energy storage. These changes have now been confirmed, with a move to the ‘scaled EFC’ methodology. This means battery derating factors for both the T-1 and T-4 auctions have increased from the most recent auctions.
This increases the contracted MW that batteries can receive through the auctions, making the contracts more valuable for a given price. The changes also remove the step at higher durations that had led to batteries entering with 9+ hour durations in the last T-4 auction.
One and two-hour batteries will have a derating factor of 13.64% and 27.15% in the T-1, respectively. This is a 20% relative increase over the derating factors in the last Capacity Market.
In the T-4, batteries' derating factors increase by 35% relative to the previous auction. One-hour batteries will have a derating factor of 10.47%, and two-hour batteries will have a derating factor of 20.94%.
This increase in de-rating factors reverses a previous downward trend in the Capacity Market. However, even with the increase, derating factors are below their level two years ago. We expect derating factors to decline in future years based on the current methodology.
T-1 target capacity declines while T-4 remains at 44 GW
The target capacity for next year’s T-1 auction has been set at 6.5 GW. This is 0.3 GW below the recommendation of the ESO due to concerns that it is overly conservative. The target capacity is 1.2 GW below the 7.7 GW at the last auction.
The target capacity for the T-4 auction is 44 GW, the same as the final target capacity for the previous auction. The recommended target was 45 GW, but 1 GW of this is being set aside for the T-1 auction for the same delivery year.
What will this mean for next year’s prices?
In the T-1, this will all be about how much capacity enters the auction. In the most recent auction, 9.9 GW, a record, competed for contracts. This, therefore, resulted in a lower price (£36/kW) than in previous years, despite the record target capacity. We expect that a similar capacity, or higher with increased battery derating factors, will enter the next auction, so a lower price is likely.
In the T-4, 43.3 GW of total capacity entered the auction, resulting in a record-high price of £65/kW. Of this, 37 GW was existing capacity. We expect most of this to enter next year’s auction, and the gap to the 44 GW target means new-build generation should set the price again. This means a third high price in a row is likely. Something that could change this is if last year’s high price results in an increase in new-build projects entering the auction.
Capacity Market prequalification closes on 1st October and auctions will take place in March
Here are the key dates for the 2025 Capacity Market:
- Prequalification closes on the 1st October.
- The T-1 auction will take place on the 4th-5th March.
- The T-4 auction will take place on the 11th-12th March.