T-4 capacity auction clears at new high of £30.59/kW

The four-year-ahead (T-4) Capacity Market for delivery starting in 2025/26 has cleared at a new high of £30.59 per kilowatt per year (/kW/yr).

One analyst described the auction as a “watershed moment” for the energy industry, with the record-high price reflecting the need to attract investment in new-build capacity to fill the gap left by the closure of coal and nuclear power stations.

Of the almost 48.6GW that entered the auction, agreements were awarded to nearly 42.4GW of de-rated capacity spread across 574 units. The procurement target was 42.1GW.

Existing generation accounted for 32.3GW of successful capacity. Out of the nearly 11.2GW of new-build generation that entered, just over 1.9GW secured agreements.

Contracts were also awarded to around 4.2GW of existing interconnectors, 2.8GW of new-build interconnectors, 170MW of refurbished generation, 194MW of proven demand-side response (DSR) and 810MW of unproven DSR.

Gas accounted for most generation capacity at 27.6GW. There was also 990MW from two units at Sizewell B – the only nuclear power station to enter the auction – as well as around 2.5GW of pumped hydro storage, 1.1GW of battery storage, 842MW of hydro, 634MW of energy-from-waste, 360MW of diesel engines and 10MW of onshore wind.

Capacity Market procurement to date

EnAppSys said the success of 1.1GW of battery storage, split between 107 units, represents a significant increase when compared to the tally from last year’s T-4 auction of around 250MW across 32 units. It said the “vast majority” is new-build generation, with around three-quarters securing 15-year agreements.

With battery storage subject to lower de-rating factors that other types of capacity, the market intelligence noted that this 1.1GW equates to around 3GW of nameplate capacity.

EnAppSys director Paul Verrill said: “Battery project winners are the biggest news in this auction, with many new-build battery projects having chosen the year with the highest ever clearing price for a T-4 auction to come online. This is a major boost in particular for those units that were able to secure long-term contracts.

“Due to de-rating of storage capacity in the auction, and in particular batteries in the market, they will see only around 30% of the Capacity Market payment price.

“The standout headline for batteries is the Intergen Gateway project at 320MW winning a contract. Zenobe, Sembcorp and Statera also brought forward 100MW capacity projects.

“Again, the auction has seen large new-build combined-cycle gas turbine projects fail to make traction arguably due to interconnectors taking contracts that are already coming on line or are operational. They now account for 16% of the capacity.

“A total of 95% of the capacity is from existing assets, and gas fired generation and interconnectors account for more than 80%.”

Other notable new-build winners include the VPI Immingham B open-cycle gas turbine project, with a de-rated capacity of 285MW.

Chris Matson, a partner at the consultancy LCP, said: “The decommissioning of old assets matched with higher capacity needs has meant that the total cost of contracts awarded in yesterday’s (22 February) capacity auction for 2025/26 came to £1.3 billion, up from only £470 million for this winter. While a few years away, these higher costs will ultimately be added to consumer bills.”

He continued: “Yesterday’s T-4 capacity auction was a watershed moment as the clearing price smashed the previous record of £22.50/kW/yr, achieving a price of £30.59/kW/yr for the 42.36GW of capacity contracts awarded.

“While not tied to the high gas prices we have seen in the last six months, yesterday’s prices reflected the transition in the energy grid that we are seeing and where we get our power from. Out of the UK’s six remaining nuclear plants, only one took part in the auction, with the remaining number likely to be decommissioned by 2025.

“By this date, the UK will also have no remaining coal power stations, which were not able to participate in the auction. This gap in capacity supply is being filled by new builds which require higher capacity prices, in particular battery storage which made up the majority of the new capacity awarded 15-year contracts.”

He said another key driver of the increased clearing price was the growth in capacity requirements as the UK begins to electrify transport and heating: “The peak demand for 2025/26 is now expected to be 1.8GW higher than the previous year, partly a result of electrification and the increase in demand from assets such as electric vehicles and heat pumps.”

Dr Simon Cran-McGreehin, head of analysis at the Energy and Climate Intelligence Unit, commented: “By securing this back-up generation, this latest capacity auction is helping to cut the costs of the electricity system by enabling the UK to make the most of cheap renewables.

“Even with the higher clearing price in today’s auction, the costs of providing this security are dwarfed by the costs of the gas crisis that’s directly adding at least £500 to household bills from April and driving almost all of the 54% hike in home energy costs.

“When these capacity contracts kick in, the UK will have an extra 6GW of offshore wind installed, giving homegrown, net zero power that’s free from international interference and that pays back in a gas crisis – in addition to today’s wind farms that are set to pay back at least £660 million during the current gas crisis.”

Last week, the year-ahead (T-1) Capacity Market auction for delivery next winter also cleared at a new record high of £75/kW – the cap for the auction – after the total available capacity of just under 5GW fell short of the target of almost 5.4GW meaning all entrants were successful.