Gas and carbon prices are the two main factors affecting power prices in Great Britain. Gas prices have more than halved from the levels reached in 2022, and carbon prices have fallen considerably, too.
But how much has this contributed to lower battery energy storage revenues?
Gas and carbon prices play a big role in setting power prices - because of CCGTs
Renewables are quickly growing in their share of the electricity generation mix in Great Britain. However, one-third of power is still provided by gas-fuelled plants, mostly Combined Cycle Gas Turbines (CCGTs).
Even on the windiest of days, some power from CCGTs is still needed - either through the wholesale market or the Balancing Mechanism. Because the marginal-priced plant sets power prices, CCGTs are responsible for setting prices much of the time - even when low-cost renewables are generating lots of power.
Therefore, power prices in Great Britain are strongly linked to the underlying fuel costs for CCGTs - gas prices and carbon prices. Both had risen significantly across 2021 and 2022 but have fallen this year.
Gas prices dominate changes in power price in Great Britain
The primary driver of CCGT costs is the price of gas. Because CCGTs are often responsible for setting power prices, a strong relationship exists between power prices and gas prices in Great Britain. This link sent power prices skyrocketing in 2022 and caused governments to scramble to provide support for electricity bills.
Carbon prices play a part too
Because CCGTs are responsible for setting prices a lot of the time, power prices are also linked to carbon prices, which gas and other carbon-emitting power plants pay.
The UK has two ‘carbon prices’. The first is set by an actively traded commodity within the Emissions Trading System (ETS), currently trading for £40/tonne CO2. The UK also has the Carbon Price Support (CPS), set at £18/t CO2. There are exemptions for smaller plants, but large carbon producing stations will pay for both of these.
The amount generators pay will depend upon the carbon intensity of their fuel - around 0.2t CO2/MWh for gas. Because of this intensity factor, carbon prices tend to have a weaker link to power prices than gas. Carbon prices currently account for around 30% of the cost of burning fuel for a CCGT.
Batteries depend on trading spreads - and these are linked to gas and carbon prices
The link between gas and carbon prices and average power prices is clear. However, the baseload power price does not matter for battery energy storage. Batteries earn money by trading the daily spread in these prices, or within the Balancing Mechanism, or by contracting to deliver frequency response services.
But spreads in day-ahead prices do have a link to gas and carbon prices. Although CCGTs are responsible for setting prices most of the time, the efficiency of these varies across the fleet. Different efficiencies mean operators need to sell power at slightly different prices to make a profit, which creates spreads even when CCGTs set the wholesale price for the entire day.
Essentially, the combination of gas and carbon prices forms a ‘floor’ for spreads in the day-ahead power market in proportion to these two commodity prices.
More extreme system conditions, whether high demand or an over-supply of renewable power, tend to increase spreads from this point.
Historically, a doubling in gas prices has led to around a doubling in day-ahead price spreads. The link to carbon prices is weaker - a change in carbon price leads to a change in spreads of around one-fifth.
So, if trading spreads for batteries are linked to gas and carbon prices, has this resulted in changes to revenues for battery energy storage?
Frequency response has negated the link between battery revenues and commodity prices
Historically, there has not been that much of a connection between battery energy storage revenues and the underlying commodity prices. This is expected - because revenues have been dominated by frequency response. Prices for Dynamic Containment and other services have historically been set by supply and demand dynamics, not by links to wholesale prices.
This link is changing with a shift away from frequency response
However, fleet revenues are transitioning away from being dependent upon frequency response. More battery revenues than ever now come from ‘energy arbitrage’ actions - either trading in the wholesale market or being dispatched in the Balancing Mechanism.
Trading revenues are very highly connected to spreads in the day-ahead market. Likewise, there is a link within the Balancing Mechanism (BM). CCGTs provide the majority of balancing volume, at prices linked to gas and carbon prices. As batteries compete for dispatches, this creates a link there, too.
This means revenues for battery storage now have a much stronger connection to these traded commodities than ever before.
Falls in gas and carbon prices have contributed to lower revenues in 2023
The saturation of frequency response markets has caused a collapse in prices from the highs of 2022. Therefore, many battery operators would have been hoping for volatility in the wholesale market to negate this. However, that hasn’t been the case - day-ahead spreads in 2023 have fallen 58% from 2022, averaging £66/MWh.
Falling gas and carbon prices have been a contributor to this fall. Lower prices for both have accounted for a reduction in spreads in 2023 of at least 25%.
The remaining 33% can be attributed to generally lower volatility in the electricity system. This year, the premium to day-ahead spreads based on volatility has been the lowest since before 2018.
This illustrates just how poor year 2023 has been for wholesale price volatility. Day-ahead prices, and therefore price spreads, have consistently traded within the minimum range expected based on gas and carbon prices. Only a few days have broken away from this, mostly down to high renewable generation on the grid.
There is still time for things to change in 2023
As we head into autumn, gas prices appear to have reached a floor based on global prices of Liquified Natural Gas (LNG). The fall in UK carbon prices has also slowed down too. This makes it unlikely that we will see further falls in trading spreads due to these two commodities this year.
As the heating season starts in Europe, imports of LNG will be needed to maintain storage levels, and gas prices are expected to increase. Recent gas forward curves indicate an increase in gas prices of around 30% through winter. If it turns out to be colder than expected, gas demand and therefore prices could increase significantly - with trading spreads for battery storage increasing too.
It's not just conditions in Europe that matter - there is competition for LNG from buyers in Asia and elsewhere. Because of the link between gas prices and trading spreads, battery storage revenues are now more exposed to the global gas markets than ever.
Finally, whilst day-ahead price volatility has been particularly low in 2023, the past two years show how quickly this can change as we head into winter. Any price spikes such as that seen in December 2022 can quickly turn the fortunes of the battery fleet.