Here we go again: Capacity Market auctions, what can we expect?

After recently issuing our latest Capacity Market Forecast, we wanted to highlight some of the key trends to look out for regarding the upcoming Capacity Market (CM) auctions being held in February 2022.

This round of CM auctions begins with the T-1 for Delivery Year 2022-23 on 15 February followed by the T-4 for Delivery Year 2025-26 on 22 February.

This blog highlights five of the most interesting and sensitive variables that we observed when developing our forecast of clearing prices.

The final T-4 procurement target could change

The draft parameters for the T-4 auction set out a procurement target of 42.1GW. There is a 2.0GW deficit between this and the amount of existing generation and interconnector (new build and existing) capacity which has prequalified for the auction. While this deficit presents an opportunity for new build capacity to be successful, there is the potential for the procurement target to be lowered to account for capacity that has opted-out of the auction but will remain operational over the Delivery Year.

Prequalification registers show that 2.1GW of existing nuclear capacity (Heysham 2 and Torness) has opted-out of the auction but expects to remain operational over the delivery year. Under Capacity Market regulations, National Grid ESO can recommend the procurement target is amended to reflect this available capacity; however, it is at the Secretary of State’s discretion whether to proceed with any change to the procurement target.

As such, this could result in the procurement target being lowered and removing the 2.0GW deficit, therefore potentially impacting the clearing price.

T-4 clearing prices will be sensitive to certain CCGT plant bidding behaviour

While a lower procurement target would hamper the opportunity for new build generation, we still see a chance for a sizeable amount of new build capacity to win agreements. This is based on the tight nature of the capacity dynamics and the previous behaviour of some existing plant that has competed in previous auctions but failed to win.

We, therefore, expect the auction to be sensitive to the bidding behaviours of several existing, but older, CCGT plant. This includes a number of existing CCGT’s that have prequalified for this upcoming T-4 auction, but which failed to win agreements in the previous two T-4 auctions which saw relatively high clearing prices of £18.00/kW/year and £15.97/kW/year.

T-4 clearing prices will be sensitive to projected wholesale revenue views

The T-4 auction will also be highly sensitive to assumptions of future wholesale revenues. Differing assumptions between competing parties on future wholesale revenues, and other non-CM revenue streams for that matter, in 2025-26 could have a noticeable impact on the outcome of the auction. This can be true for any auction in any Delivery Year, so why have we highlighted this as a particular sensitivity for 2025-26?

The mid-2020s will see the decommissioning of several large-scale nuclear (and coal) plant, while recent wholesale price projections have generally lifted following the latest surge in wholesale gas and power markets. While the removal of several large-scale baseload plant may act to lift clearing prices, as well as support new build plant to come forward, the absence of these plants will shake up the generation mix and alter the expected load factors of different assets and technologies.

Individual assets competing in the upcoming auction will therefore be assessing their projected wholesale revenues closely, which will depend heavily on both their view of wholesale prices and expected running hours in a world with fewer baseload plant.

Our modelling shows that relatively minor adjustments to future wholesale revenue assumptions has a significant effect on the clearing price and the amount of new build capacity procured in the auction.

The T-1 auction is set to be tight

Meanwhile, the auction dynamics for the T-1 auction are notably different to recent T-1 auctions, with a much higher procurement target and a significant deficit between this target and prequalified existing generation. In addition, no interconnector capacity is participating in this auction. These assets usually account for a large portion of successful capacity at very low clearing prices.

The procurement target for the T-1 auction is 4.5GW, with just 3.1GW of existing generation prequalified, resulting in a tight auction and a strong possibility that the auction clearing price will be set by a new build asset.

But not all new builds will act as new builds

Of the 5.6GW of de-rated capacity prequalified for the auction, 1.6GW is new build generation. Interestingly, 1.1GW previously won long-term agreements in a prior T-4 auction for delivery in a later year.

The T-1 auction allows those plant expecting to commission ahead of their T-4 delivery year to secure an additional year of revenue before their long-term agreements commence. Therefore, it is likely that these assets will bid at relatively low prices compared to new build plant without future CM agreements.

Taking these assumptions into consideration, the outcome of the T-1 auction could hinge on the bidding strategies of the remaining new build generation, i.e. those without future CM agreements (the majority of which is from battery storage and gas reciprocating engines), and demand side response capacity.

There are a wide range of factors that could impact these upcoming auctions, creating uncertainty in the potential clearing prices that we might observe. The dynamic of the capacity participating in these auctions, in particular the falling away of older, existing plant such as nuclear and coal, will play a large part in this by freeing up greater spare capacity for new build assets and other technologies to compete for. This also gives a glimpse into the dynamics of future auctions with more existing conventional generation capacity to exit the generation mix in the coming years.

If you are interested in hearing more about our Capacity Market Forecasting service, please contact

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