Merchant markets have been playing a larger role in the revenue streams for battery energy storage systems (BESS) in recent months. Record-high spreads have gained a lot of attention (and rightly so). However, in the background, Balancing Mechanism (BM) opportunities have been picking up. This is highlighted in Figure 1 (below), which shows the annualised BM revenues for BESS assets in Great Britain (GB) during 2021.
With fears of saturation in ancillary markets, it's natural to wonder if the BM can support a growing BESS fleet. To answer that question, in this article we’ll take a look at how a similar asset class, pumped-storage hydro, has performed in the BM - specifically looking at the Dinorwig Power Station storage facility in North Wales.
You can watch Imrith discussing this piece with Neil in the video below.
Dinorwig is a pumped-storage hydroelectric scheme made up of six turbines with a storage capacity of ~9.1 GWh. The installed power of the storage facility is 1,800 MW, which is 29.3% larger than the current total installed BESS capacity (MW) in GB (as of January 2021). As the largest storage asset participating in the BM, we’ll analyse Dinorwig’s activity in the market to get a glimpse of how this could apply to BESS in the future and some of the underlying challenges that BESS may face along the way.
How much is Dinorwig used for balancing?
Firstly, let's address whether there is enough volume in the BM to accommodate the GB BESS fleet. A useful indication of this is the volume Dinorwig dispatches in the BM compared with how much balancing volume BESS could provide right now.
Volume dispatched
Figure 2 (below), shows the estimated traded volume (GWh) in merchant markets for Dinorwig during 2021.
- On average, Dinorwig exports an estimated 1,013 GWh a month in wholesale markets. To put this into perspective, this is equivalent to every BESS asset in GB (1,515 MWh) cycling twenty-two times every day (which is impossible).
- The BM made up 1.78% of Dinorwig’s traded volume (across bids and offers combined).
- On average, Dinorwig dispatched 23.93 GWh per month through accepted bids. If the entire GB BESS fleet was to cycle once per day for a month (at their full capacity), it would be ~2x that volume (45.45 GWh).
The volume Dinorwig trades in the BM indicates an opportunity for BESS, if it is able to provide some of this balancing demand. However, there are practical constraints that need to be considered - such as being accepted in the BM, pricing bids/offers to be competitive, and being dispatched for similar durations to Dinorwig.
Why is Dinorwig being dispatched?
A ‘System Operator (SO) flag’ indicates that an acceptance was flagged as an action to resolve local imbalance on the transmission system. Of Dinorwig’s 38,107 Bid-Offer-Acceptances (BOAs), 0.32% were tagged with SO-flags.
Figure 3 (below), shows a summary of the total volume dispatched by Dinorwig in the BM during 2021.
- SO-flagged BOAs represented 1.06% of Dinorwig’s traded volume (across bids and offers combined).
- As such, in theory, these volumes are accessible to any asset across the GB system.
Duration of balancing actions
Given Dinorwig has a storage capacity of 9.1 GWh, there is a clear difference in duration between the storage facility and the GB BESS fleet. Dinorwig is a ~5h duration storage facility, whereas the average duration of a GB BESS asset is ~1.1h.
Continuous Acceptance Duration Limit (CADL) is used to flag short duration (< 15-minute) BOAs. CADL-tagged BOAs are a potential indicator of the sort of share of Dinorwig’s dispatched volume (in the BM) that BESS could initially compete for. These actions constitute 19% of the total volume dispatched by Dinorwig in the BM, as highlighted in Figure 4 (below).
- CADL-flagged balancing actions (70.69 GWh) represent a fraction of the total volume (431.8 GWh) provided by Dinorwig in the BM during 2021.
- On average, Dinorwig dispatches 101.1 MWh of CADL-flagged actions per day through accepted offers.
- Theoretically, this could be fulfilled by the entire GB BESS fleet in just over four minutes if they were to provide this balancing demand at their full rated power.
When is Dinorwig being dispatched?
Figure 5a (below), shows Dinorwig’s traded volume across each settlement period in both wholesale markets and the BM during 2021. Highlighting the traditional arbitrage strategy of storage, Dinorwig utilises daily fluctuations in power prices to charge and discharge for profit. Basically, they buy low and sell high.
Figure 5b (below) shows the volume traded by Dinorwig in each settlement period in only the BM during 2021. The trend of volume dispatched across settlement periods is more distributed compared to Figure 5a (above). When considering the BM as part of a wider stream of revenues for BESS, this may indicate opportunities arising at times when there may not be any in other markets.
Revenue opportunity
Figure 6 (below) shows Dinorwig’s monthly merchant markets and cumulative BM revenues during 2021.
Despite the BM making up just 1.78% of Dinorwig’s traded volumes in merchant markets, it accounts for 38% of estimated revenues, totalling £30,572/MW/a.
Competing on pricing
The value Dinorwig is able to leverage from the BM is promising for owners and operators looking to translate this into future BESS revenues. However, to achieve similar revenues, BESS assets will need to match the pricing levels of Dinorwig in order to compete for their share.
The average bid and offer prices for Dinorwig in 2021 were £15.78/MWh and £182.25/MWh, respectively. Figure 7 (below) shows the average accepted daily bid and offer prices (volume-weighted) for Dinorwig vs. the GB BESS fleet during 2021 in the BM.
- When BESS is dispatched in the BM, it is often accepted at similar prices to Dinorwig.
- In Q4 of 2021, turn-down volume in the BM for Dinorwig tended to cost more than it did for BESS.
What does this all mean for BESS?
Dinorwig provides a case study of the sort of BM value potentially available to BESS. In 2021, Dinorwig’s BM revenues (£30,572/MW/a) represented 24.8% of the average GB BESS fleet revenue stack, as shown in Figure 8 (below). This highlights the potential of BM activity playing a larger role in future BESS revenue stacks.
Of Dinorwig’s dispatched actions in the BM, 99.19% of volumes were not SO-flagged. This indicates ample opportunity for any asset, regardless of locational constraints, that can fill the same balancing demand. At present, BESS seems to be able to compete with Dinorwig’s pricing levels. However, BESS trades much less volume in the BM. This is highlighted in Figure 9 (below), which shows the daily volume dispatched (GWh) in the BM for BESS assets and Dinorwig (2021).
As competition in frequency response services increases, with EFR contracts soon coming to an end and the phase-out of Firm Frequency Response, the BESS revenue stack is likely to become more dependent on arbitrage strategies. In 2021, the BM only made up a small proportion (0.71%) of revenues for BESS in GB. However, its value and importance may increase in the not-too-distant future.