CM auction results are in: Analysis by Michael Lawson

Capacity Market T-1 and T-4 capacity auctions were held this month. Today these results were made final, as follows:

• T-1 Auction secured 7.2GW at a clearing price of £5/kW/yr.
• T-4 Auction secured 40.1GW at a clearing price of £27.10/kW/yr

What is the Capacity Market?

These auctions allow the grid operators to secure the required amount of generation to help maintain a reliable and secure network as well as some form of underlying revenue stream for generating participants. These two auctions secure power generation in advance of need: T-1 for October 2026 – October 2027 and T-4 for October 2029 – October 2030. T-4 typically provides investment decisions for new build or investment in refurbishing generation, as the lead time can be longer to develop this. T-1 provides shorter term revenue signals and is also available to those new-build generators that get T-4 contracts but get deployed earlier than contracted for.

For T-1 the result was £5/kW/yr. This is in comparison to £20/kw/yr and £40/kw/yr in the previous two years. T-1 revenues were last this low in DY 2020/2021. There are three primary reasons for the fall in price. One is that refurbished nuclear and gas assets have supplied a lot of extra generation. The second is that new-build battery assets have come online earlier than their T-4 contracts required. The third is increasing Demand Side Response (DSR) volumes. Joulen contributes some of the DSR, enabling asset owners to help provide security to the grid in times of stress while retaining access to other revenue streams and reducing their energy bills.

The T-4 result was £27.10/kW/yr. Again, in comparison to the last number of years clearing over £60/kw/yr this is a significant fall. Similar to T-1 results, it has been driven by an increasing amount of capacity coming from refurbishing gas generators as well as an increase in grid-scale battery assets that are (relatively) quick to market. An improvement in derating factors from 10%-40% for those battery assets over four hours has seen more of these assets winning contracts, and the continual improvement in BESS performance has seen this become a big factor in the GB energy market. A record amount of DSR volume cleared, securing 6% of total volume. That’s a 50% year-on-year increase.

These lower results than previous years are a story of two halves. The positives are they represent a win for the UK bill payer as the market becomes more resilient, with an increasing range of diverse assets providing the security of supply we all need. They will challenge flexibility revenues, but Joulen doesn’t rely solely on Capacity Market revenues. We optimise residential and commercial energy usage firstly and then leverage P415 wholesale trading and other flexibility revenue sources.