The most common reason why "Generic OAuth 2" is unavailable is that the agent is connected to Microsoft channels such as Microsoft Teams or Microsoft 365 Copilot. In that case Copilot Studio restricts the available authentication methods and only allows Microsoft authentication.
Could you please check:
1. Whether the agent is connected to Teams, Microsoft 365 Copilot, SharePoint, or Power Apps channels.
2. Whether a DLP policy in Power Platform Admin Center is enforcing Microsoft authentication.
3. Whether the agent is deployed as a managed solution.
As a test, try temporarily removing the Teams/M365 Copilot channels and then return to Settings > Security > Authentication. In many cases the "Generic OAuth 2" option becomes available again.
Also, since you're following the Entra External ID guidance, verify whether "Authenticate with Microsoft" would satisfy your scenario instead of Generic OAuth 2, as External ID is natively based on Microsoft Entra authentication.
Thanks.
Hope this helps!
Paolo
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