Between July and September, there were a number of interesting developments in Britain’s battery energy storage market. The revenue stack is evolving, the Balancing Mechanism is going through major changes, and there have been delays in battery buildout. So, what happened in the past three months that you need to know?
Revenue Performance
The proportion of merchant revenues continues to trend up
For years, the expectation has been that battery energy storage revenues would start to rely less on frequency response - and more on wholesale market optimization. That shift is now taking place.
- In August and September this year, the proportion of battery revenues from frequency response services dropped below 70%.
- Revenues are becoming more tightly linked to wholesale market prices - with trading revenues now making up a larger proportion of the revenue stack.
Day-ahead price spreads show positive signs for battery energy storage
Wholesale trading opportunities for battery energy storage systems are evident in the spreads between minimum and maximum prices in the day-ahead market.
- Despite a drop-off from 2022, wholesale spreads are up on where they were pre-2021 - and we haven’t entered winter yet. We expect 2023 spreads to more accurately represent the “new normal” going forward.
- Fundamental changes in the power markets are generating more market opportunities for battery energy storage systems. The primary drivers of this are greater renewable generation and higher gas and carbon pricing.
The Balancing Mechanism is now a strategy for all
Until this year’s drop-off in frequency response prices, the Balancing Mechanism was primarily a revenue stream that rewarded two-hour systems. However, in Q3, more one-hour assets than ever before made a significant proportion of their revenues in the Balancing Mechanism.
- With National Grid ESO's Open Balancing Platform launching in December, we expect battery energy storage systems to be deployed even more in the Balancing Mechanism.
- Some one-hour systems have started focusing more on Dynamic Regulation contracts in search of higher market earnings - another revenue stream that was almost exclusively adopted by two-hour assets in the past.
- Firm Frequency Response has been phased out. This service was mainly provided by shorter-duration systems in recent times. We expect these assets to now switch their attention to trying to win Dynamic Containment contracts.
- The Enduring Auction Capability, the new way to bid into Dynamic Frequency Response services, goes live at the beginning of November.
Only 290 MW of the expected 500 MW capacity came online in Q3
At the current rate of buildout, we expect battery energy storage capacity in Great Britain to hit 3.6 GW by the end of the year. This is significantly lower than the 4.7 GW anticipated in the ESO’s Winter Outlook - and this might mean higher prices than some expected.
So, why is buildout slower than expected?
- Developers have had to find replacements for work intended to be carried out by now-bankrupt EPC contractors.
- Supply chain delays have meant essential equipment is missing.
- There are ongoing issues with connecting at the network operator level.
- And there are also equipment commissioning issues.
If the issues causing delays in Q3 continue into Q4, the fleet may only reach 3.3 GW by the end of the year.
Capacity Market de-rating factors continue to decline
De-rating factors in both the T-1 and T-4 auctions are down by roughly a third from last year. This reduces the ‘real terms’ Capacity Market revenues available to battery energy storage assets (each MW is worth a third less than it was last year).
- A big reason for this reduction is the number of storage assets that already have Capacity Market contracts.
- More shorter-duration storage (which can only provide capacity for a limited amount of time) means that stress events become longer. This further reduces the benefit of having additional shorter-duration storage.
- However, the methodology for deciding storage de-rating factors is currently under review - though any changes made will be too late for this year’s Capacity Market.
The Balancing Mechanism is deep
Battery energy storage is currently able to access around 10.5 GWh of daily energy volume through the Balancing Mechanism. This would require over 5 GW of one-hour batteries to cycle twice daily - to fully provide this one portion of Balancing Mechanism actions. The battery fleet has a long way to go before it can fill this volume within the Balancing Mechanism.
- Currently, batteries are only competing for around 15% of the total Balancing Mechanism volume - due to limitations on dispatches longer than 15 minutes, and their unsuitability to provide many system-flagged actions.
- If battery energy storage systems can demonstrate that they are able to provide the dispatch volume that is (currently) longer than 15 minutes in duration, this would open up the remaining 76% of energy capacity required for non-system flagged actions. This averages 33 GWh of energy per day, equivalent to 1.4 GW of total continuous power output across Bids and Offers.
But, even when in merit, batteries are not being used
Most of the time, batteries are pricing themselves at the right level to be dispatched. This means they are “in merit” - and, in theory, this capacity should be accepted. However, this isn’t always the case. When capacity is in merit but not used, we say it has been “skipped”.
- The average percentage of periods when batteries are in merit, available, not being looked over in favor of system-flagged actions, but still aren’t used is 91% - this is essentially the actual “skip rate” of battery energy storage systems.
More battery dispatch should occur with the Open Balancing Platform based on bid/offer price trends
The Open Balancing Platform’s bulk dispatch function should mean that multiple batteries can be dispatched at the same time - to perform a balancing action that would have previously been performed by a single, larger asset.
- Batteries consistently beat pumped storage on price, and should be able to win that 18% share of Balancing Mechanism dispatches.
- Displacing the 72% share held by CCGTs may still require more competitive pricing.
Modo’s Quarterly Calls
Modo’s Quarterly Calls give you the opportunity to catch up on all the latest trends - all in one place. They also feature bespoke Q&A sessions so that you can dive deeper into the topics that matter most to your team.
If your organization is keen to schedule a quarterly call, please contact the team. We’ll be rounding up Q4 with customers in the new year.