GB capacity market 2021: forecast of auction prices, and implications of decarbonisation on security of supply

We are pleased to present our new strategic insight report: GB capacity market 2021: forecast of auction prices, and implications of decarbonisation on security of supply. The report presents our forecast for the upcoming 2024/25 T-4 Capacity Market auction which will be held on 9th March 2021 as well as our views on the implications of decarbonisation on security of supply and the Capacity Market.

The report was first presented during a Group Meeting in February 2021 and was subsequently updated to reflect market developments.

Key takeaways from this report include:

  • The 2024/25 T-4 CM auction saw 52 GW of capacities prequalify against a procurement target of 40.1 GW, with a strong potential for new-builds as existing capacities are only 0.1 GW in excess of the procurement target. Appetite in flexible assets remain strong, although recent policy and regulatory changes have resulted in a shift towards larger-sized gas recips and longer duration batteries.
  • New-build assets are expected to bid in the range of £15 – 25/kW, with ongoing network charge reforms and considerations for Net Zero being the key concerns. For example, Net Zero compliance for a CCGT – through either ceasing operations in 2035 or retrofitting with CCS – could increase the expected bid of a new asset by at least £10/kW.
  • Aurora forecasts a clearing price of £14.1/kW for the 2024/25 T-4 CM auction with a range of £8.5/kW and £19.3/kW for our Bear and Bull scenarios. Gas recips and batteries will dominate new-build capacities in the Central and Bear scenarios, although OCGTs/CCGTs could feature in the Bull case. A Net-Zero scenario would see clearing prices of £21 – 33/kW due to deteriorating thermal economics.
  • Recent events have highlighted the potential vulnerability of security of supply as renewables penetration increase – by 2050, residual demand could deviate by up to 7 GW annually due to weather outturns. System inertia is also likely to reduce by over 95% with the retirement of baseload CCGT, with the reliance on interconnectors pose further risks due to the growth in well-correlated wind assets across Europe.
  • A number of leading options present themselves to sharpen the CM design as we strive towards Net Zero – (i) procuring more capacities in line with adverse weather outturns; (ii) holding auctions closer to delivery year; (iii) imposing stringent emission limits; (iv) promoting a smart system; (v) promoting hybrid technologies; and (vi) moving towards decentralised CM auctions.

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