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The Capacity Market

The CM dictates the generation stack

Great Britain has a Capacity Market (CM). These are annual auctions to award contracts that secure supply for the next winter (T-1) or for four years' time (T-4). The T-1 auction indicates the cost of prolonging retirement for thermal assets; the T-4 auction indicates the cost of new build generation assets.

It should be noted that the Capacity Market dictates the generation stack

The Capacity Market does not impact the daily storage operation (or any other generator). Assets that have a Capacity Market contract also participate in wholesale markets. Though the Electricity System Operator issues Capacity Market notices at times of system stress, this usually prompts the market to release more volume - and the market solves the shortfall. To date (February 2024), there has never been a Capacity Market event.

The Capacity Market acts as a subsidy mechanism.

Batteries have dominated recent CM auction rounds

For this reason, we model prices - the Capacity Market offers another revenue stream and should be taken into account when forecasting revenues.

Modo forecast for the T-4 CM price

We look at what new capacity comes online, and we look at what the entrance cost of this technology is (with a learning rate applied, assuming technologies get cheaper over time). We take technology cost numbers from the latest auction or other Modo research and assume a cost of capital.

Hydrogen, CCS, or long-duration storage usually set the price. We assume these plants are only eligible for a CM contract if they are not benefiting from any other state aid.

Storage is of limited duration; it faces de-rating factors. These percentages are applied to the overall capacity market revenue (given in £/kW) and are technology-specific. They reflect that an asset couldn't go on providing power endlessly - or that it will always be available. In recent years, de-rating factors have been particularly tough on storage as they are very low for 1-hour and 2-hour systems.

In Winter 2023/2024, a 1-hour storage system will get 18% of Capacity Market revenues vs a non-energy limited generator.

We also forecast de-rating factors for a 1, 1.5, 2 and 4 hour-duration system.