Degradation risks battery Capacity Market contracts being terminated. The latest rule changes to Extended Performance Testing and clarification around augmentation aim to minimize this.
In July 2024, DESNZ released its Capacity Market: Government Response. This includes government decisions on changes to the Capacity Market Rules for 2024/25. The response provides feedback on the degradation issue and introduces rule changes that benefit most contracted battery units.
15 GW of battery energy storage systems currently hold 15-year Capacity Market contracts. Degradation reduces a battery's energy capacity over time, potentially impacting its ability to meet Capacity Market obligations. By the end of a 15-year Capacity Market agreement, a battery may only have 60% of its original capacity.
Batteries in the Capacity Market are subjected to Extended Performance Testing (or ‘EPT’). These ensure they can provide their stated duration over the length of their contracts.
What is the Extended Performance Test?
Extended Performance Tests are conducted based on the battery’s ‘Adjusted Connection Capacity’. This is its stated connection capacity multiplied by an availability factor, the ‘TWCAA’.
Adjusted Connection Capacity = Connection capacity x Technology Class Weighted Average Availability (TCWAA) for storage
The TWCAA is a scaling factor that adjusts connection capacity based on the average availability of that generation type. For battery energy storage, it is currently 94.37%.
A battery demonstrates extended performance by delivering power output at a level equal to or greater than its Adjusted Connection Capacity for a duration equivalent to its duration group in the Capacity Market.
For example, a battery with the Generating Technology Type ‘Storage (Duration 2h)’ would have to export at its Adjusted Connection Capacity for two hours (four consecutive settlement periods). This requirement is capped at 9 hours.
When do these tests have to take place?
Extended performance needs to be demonstrated on at least one day in the winter (1 October to 30th April) of the first Delivery Year of a contract. Following this, all units with long-term contracts must demonstrate extended performance on at least one day in winter every three years.
If a battery does not pass its Extended Performance Test by 30 April, new-build systems must perform the test by the date on which they are able to provide 90% or more of their contracted de-rated requirement and have a Metering Test certificate. Meanwhile, existing units can try to pass between 1 May and 31 July.
If they are still unable to pass their Extended Performance Test within this time period, ESO will terminate the contract.
New rule changes provide further options for batteries to manage degradation risk
The requirement to perform Extended Performance Tests throughout the 15-year contract introduces a risk due to degradation. If a battery’s energy capacity degrades and it cannot pass the test, it could have its Capacity Market contract terminated.
To reduce this risk, providers can enter units with a connection capacity lower than the site's nameplate capacity. Meanwhile, other methods can be utilized throughout the project’s lifetime.
Batteries can be ‘augmented’ to restore or increase capacity by replacing and/or adding battery cells. This allows a provider to ensure energy capacity remains high enough to pass Extended Performance Tests. In the latest response, DESNZ clarified the rules on augmentation to make clear that this is allowed.
Projects can also remove some (or all) of their capacity obligation through a ‘secondary trade’. Secondary trading is a process whereby some or all of a unit’s Capacity Market agreement can be traded to a different unit. Changes introduced in the latest Capacity Market Rules mean that, for agreements starting in Delivery Year 2024 or later, this will adjust the capacity they need to meet within their Extended Performance Tests. Previously this was not the case.
Updates to rules on Augmentation
The allowance of batteries to undergo augmentation has been clarified under Rule 4.4.4 of the Capacity Market Rules. Although this was already allowed under the Capacity Market Rules, the updated wording seeks to remove any uncertainty.
Previous rule:
“The configuration of Generating Units that comprise a CMU must not be changed once that CMU has Prequalified.”
New rule:
“The configuration of Generating Units that comprise a CMU must not be changed once that CMU has Prequalified unless the change is a Permitted Battery Augmentation.”
Permitted Battery Augmentation is defined as the replacement or addition of batteries. This would include:
- Refreshing cells within an existing battery system;
- Adding additional batteries to the site; and
- Replacing an existing battery system with a new system.
Therefore, if a unit with a contract is at risk of failing to meet its EPT, it can perform one of the above actions to bring the site's energy capacity to a level that enables it to pass.
Updates to Extended Performance Testing requirements following secondary trading
Under the previous rules, following a secondary trade, the unit was still required to conduct Extended Performance Testing for its original Adjusted Connection Capacity. This was to reduce the risk of “market-gaming.”
In the latest rule update, the Adjusted Connection Capacity requirement for the EPT will proportionally reduce if the contract is secondary traded away. It will also proportionally increase for the provider who has bought the additional capacity. This only applies to contracts starting in Delivery Year 2024 (from October 2024) and later.
Therefore, if a unit with a contract meeting this criteria is at risk of failing to meet its EPT, it can try to trade away some of it’s capacity requirement such that it is able to pass.
If a provider increases their capacity obligation through a secondary trade after they have passed an EPT on their initial capacity, it must perform another EPT within 60 working days of the trade or before the end of the Delivery Year (whichever is earlier).
1 GW of batteries will still be subject to the previous Secondary Trading rules
The amendments to the rules related to secondary trading apply for Capacity Market agreements beginning in Delivery Year 2024 and onwards.
1 GW of batteries hold 15-year T-4 Capacity Market contracts that began before the 2024 delivery year. These batteries will not be subject to the new secondary trading rules. For these batteries, if degradation risks them failing EPTs, providers will need to augment them to maintain their capacity or have their contracts terminated.