Pricing
20 Jul 2022
Neil Weaver

Frequency response: how saturated are these markets?

There’s currently 1567 MW of installed battery energy storage in GB, and frequency response markets - excluding MFR and EFR - can accommodate less than 1400 MW (and as little as 712 MW, in January 2022).

Quentin and Neil discuss frequency response saturation.

Figure 1 (below) shows the size of frequency response markets compared to the installed capacity of battery energy storage systems (BESS) in GB.

Frequency response market volume vs. installed GB battery energy storage capacity
Figure 1 - Frequency response saturation: market volume vs. installed BESS capacity.

It’s therefore reasonable to assume that frequency response markets are saturated as a default. However, this isn’t the case.

Estimated active capacity

At any given time, approximately 200 MW of the total installed BESS capacity in GB is not able or available to provide frequency response. This is due to assets undergoing testing, carrying out behind-the-meter activities, or being upgraded upon completing legacy contracts, amongst other things. To figure this out, we tracked activity over time on an asset-by-asset basis.

Therefore, despite there being 1567 MW of installed BESS capacity, there’s around 1300 - 1400 MW of capacity currently able to provide frequency response. We’ll call this active capacity. Figure 2 (below) shows total market volume compared to our estimated active capacity of BESS in GB.

Frequency response market volume vs. active GB battery energy storage capacity
Figure 2 - Frequency response saturation: market volume vs. active BESS capacity.

Although this is an inexact estimation of active capacity, it suggests that these markets may currently be undersaturated.

De-rating assets

However, to paint a more accurate picture of active capacity, we need to apply a de-rating factor. This accounts for state of energy rules for providing services symmetrically.

Symmetric delivery means providing both the high- and low-frequency services at the same time. In order to do this, assets must follow National Grid ESO rules regarding state of charge management. These rules stipulate that an asset must maintain a certain percentage of its nameplate capacity (MW) in charge, to uphold its contractual obligations in the case of a frequency event.

In table 1 (below), you can see our de-rating factors. These align with the ESO’s rules around state of charge management.

Frequency response de-rating factors
Table 1 - De-rating factors for Dynamic Containment, Dynamic Moderation, and Dynamic Regulation.

Saturation?

So we’ve taken a 200 MW haircut, and applied our de-rating factors. How much active capacity is actually available to participate in frequency response markets?

In figure 3 (below), you can see where our estimated, de-rated, active capacity curve sits compared to market volume. The curve decreases as the higher-throughput services (Dynamic Moderation, and particularly Dynamic Regulation) start making up a larger proportion of the frequency response stack.

Note: we are only using existing installed capacity figures here - hence no growth. In reality, we do expect the curve to increase as new capacity comes online and becomes operational in the markets. (See figure 4.)

Frequency response market volume vs. active, de-rated GB battery energy storage capacity
Figure 3 - Frequency response saturation: market volume vs. de-rated, active BESS capacity.

The total size of frequency response markets actually outweighs active capacity from May to October. Currently, frequency response markets are undersaturated. This undersaturation helps explain the record-high revenues we saw in June. However, as the ESO begins to phase out its FFR service, we expect these markets to become saturated once again.

What does this mean for the future?

The above graph provides a healthy outlook for battery energy storage asset owners and operators - in the immediate to mid-term future, anyway. It shows that frequency response will remain undersaturated through to October or November, at which point we’ll likely start to see wholesale prices surge to very high levels with the onset of winter. It’s entirely plausible that the large BESS revenues we’ve seen in recent months are here to stay for the rest of the year (at least).

But what happens when we take expected BESS buildout into account? In figure 4 (below), we’ve adapted our capacity curves to include estimated battery energy storage installation between now and April 2023.

Note: these numbers do not strictly align with those in our Future of BESS Buildout report. Instead, we have adapted those numbers based on past behaviour. (We looked at the proportion of past projects which have been successfully installed in their planned timeframe.) They also take into account current barriers to buildout - such as supply chain issues and lack of available grid connections, amongst other things.

Battery energy storage - market saturation forward view
Figure 4 - Frequency response saturation outlook.

If BESS buildout follows this curve, we’ll see these markets becoming more saturated, more quickly. As ever, though, there are plenty of unknown unknowns at play. Even taking into account saturated frequency response markets, we expect there to be lucrative revenue opportunities for battery owners and operators elsewhere.


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