Balancing Reserve launched on March 13th and has been in operation for ten weeks. During this period, it has seen widespread battery participation, with 39 different battery units winning contracts at some point. However, the ESO has recently signaled that operation within the service has been below expectations, which could prevent a further expansion of the service.
ESO does not yet have enough confidence to expand the Balancing Reserve market
Balancing Reserve contracts reserve directly, outside of the Balancing Mechanism, to correct energy imbalances when generation and demand deviate from forecasts. This reserve also supports in post-fault scenarios, such as replacing generation from a tripped power plant.
Contracting this volume directly allows the ESO to avoid costly ‘strategic’ dispatch options. This is where inflexible large generators are instructed to turn on or stay online to provide headroom. Most of this energy costs more than alternatives available from batteries and other flexible technologies.
By the end of April, strategic actions had not yet shown signs of reduction. This may be due to the limited capacity of the Balancing Reserve procured to date (up to 400 MW). The ESO has indicated that they might need to procure up to 2.5 GW of the service.
The ESO has not yet met its criteria for increasing the volume procured. They may begin procuring shaped volume on an ad hoc basis. Lower-than-expected participation from technologies like CCGTs and performance issues with contracted systems, especially batteries, contribute to this.
Balancing Reserve has not yet met the required criteria to expand volumes
In the Operational Transparency Forum on May 22nd, ESO highlighted two participant behaviors they want to change in Balancing Reserve: increasing offer prices when contracted for Positive Balancing Reserve and long periods of consecutive contracts leading to unavailability. These issues make contracted reserves less reliable.
20% of battery offers when contracted are priced uncompetitively
Since the launch, most participants have priced competitively for Offers while contracted for Balancing Reserve. As of April, 18 out of 20 battery units consistently priced Offers in line with other batteries and alternatives in the Balancing Mechanism.
However, 20% of contracted Positive Balancing Reserve periods saw Offers at £150/MWh or more. Five percent were above £500/MWh (up to £9,999/MWh), mostly from a single unit.
Pricing Offers out of the market means the ESO is paying for reserve without it being available. While this behavior is not explicitly against the Balancing Reserve Service Terms, ESO was expecting units to price competitively.
More batteries entering the market could improve pricing behavior through increasing competition, as dispatches in the Balancing Mechanism should ultimately provide more value for batteries. This has been seen in May with the performance of Little Raith.
Batteries have been in breach of service availability requirements 12% of the time
Balancing Reserve has proven valuable for batteries, with the best-performing systems focusing on the service. However, since the service launched, 12% of contracted battery periods have breached availability requirements, sacrificing 11% of total contracted revenue.
Some units performed poorly in the first two months and exited the market. Of those continuing into May, the worst-performing battery was penalized in 26% of contracted periods. The units that spent more time in the service maintained better availability, with penalty rates of 7% or lower.
The ESO has linked poor availability to contracting across consecutive periods. For a storage unit, a MEL equal to contracted power means the unit could deliver an Offer at full power for the full half-hour. However, if this occurs in consecutive periods, its MEL can drop before it is able to recover energy, therefore failing in its contract.
The Service Terms do not explicitly rule out this bidding behavior, and unavailability is penalized through loss of contracted revenue in affected half-hours.
The ESO has the ability to increase penalties up to the cost of replacement reserve if unavailability is due to commercial decisions (such as trading on top of a contract). No such penalties have been enforced yet, but this could promote better performance. However, stricter penalties may, in turn, lead units to increase the price of their Balancing Mechanism actions to avoid dispatches and their impact on energy.
Ultimately, more battery units entering the market and competing for contracts should promote better energy management in line with contract terms. These contracts have been valuable to batteries, especially with low value elsewhere in May.
The ESO is seeking feedback on the service
The ESO has launched a call for input seeking feedback on these issues, alongside others affecting the market to date. Solving these problems is critical for the ESO to expand Balancing Reserve volumes and launch Quick Reserve later in 2024. The call for input will run for 2 weeks, closing on June 5th.
The form can be found here.