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In our latest White Paper GridBeyond’s Asset Development Director Chris Smith explores the results of the latest T-1 and T-4 Capacity Market auctions, the winners and losers by technology type and our view of the five main challenges asset owners should consider when setting their strategy for future Capacity Market auctions.
Published on 15 February the provisional results for the latest T-1 auction showed 4,996MW of de-rated capacity was procured across 226 Capacity Market Units (CMUs) at a price of £75/kW/yr. The T-4 Capacity Market auction held on 22 February also cleared at a record high of £30.59 /kW/year.
But we conclude:
- The high clearing prices seen in the latest Capacity Market auction will provide a major boost for those units that were able to secure contracts. But the prices seen in this auction are likely to be a blip (driven by nuclear opting out, coal plants closing and changing market pressures and costs of operation for thermal generation) and markets will likely return to being oversupplied over coming years resulting in falling revenues under the mechanism.
- Auctions are generally still delivering higher prices for year ahead delivery and not giving long term signals to build new generation. There is also potential that provisional awarded existing capacity under the T-4 auction could withdraw and instead wait for next year’s T-1 auction, to benefit from the higher prices seen for shorter dated contracts.
- While battery storage was a clear winner in both the T-1 and T-4 auctions, much of the capacity awarded an agreement under the T-4 is for a 15-year duration, so degradation must be built in at the beginning or cells must be replaced over the lifetime, which will bring challenges for battery operators and developers.
- There are further concerns that supply chain bottlenecks for battery storage technologies could result in projects being delayed or cancelled.
- A significant proportion of new build capacity receiving agreements in both the T-1 and T-4 auctions was gas fired. Given the ongoing high market prices for gas, which are likely to be compounded by recent geopolitical issues, there is a risk that some of this capacity may not be built.
GridBeyond Asset Development Director Chris Smith said:
“The Capacity Market auctions has in Feb’s T1 and T4 auction provided the price levels which have long been required to support new build projects. Fantastic to see 3.3 GW of Battery capacity win allocation which when will be built will enable National Grid to support managing the grid at a lower cost, reducing dependency on gas-fuelled assets and reducing energy bills for UK consumers.”