The 'Automatically optimize storage' is designed to automatically remove the oldest recovery points in order to remain within the disk space threshold set on the backup destination folder. This option is currently not working which means the threshold is not being adhered to.
Figure 1 below is an example of this problem. In this example, the threshold has been set to 10GB but the space being used is 10.9GB.
The 'Automatically optimize storage' option will only work when the 'Limit the number of recovery point sets saved for this backup' option is set to at least 2.
This is because the auto-optimize feature is designed to cleanup the entire recovery point set rather than individual recovery points within a set.