With DC procurement targets falling in November, the question of where GB BESS revenues will come from is more important than ever. One possible answer is a return to the monthly FFR auctions. The results of October’s monthly FFR tender (for delivery in November) confirm this - let’s take a closer look at what happened. In this article we’ll explore:
- The results of the latest monthly FFR tender.
- Who the (big) winners in FFR were.
- What this means for BESS and how this relates to Dynamic Containment.
Results from the latest tender
With considerably lower DC requirements expected for November following the ESO’s November market information report, the question of whether to continue participating in a saturated DC market (DC) or to return to FFR has been an important strategic decision for owners and operators of BESS. Let’s take a look at the results of tender round 142 (for delivery in November) and see how things played out.
Volume
Figure 1 (below) shows the procurement volumes and targets for monthly (dynamic) FFR, for tender rounds 141 (October 2021 delivery) and 142 (November 2021 delivery).
- Dynamic volume in FFR has increased dramatically, from an average of 68 MW in October to 488 MW for delivery in November - an increase of over 600%.
- On the whole, the tender for November was undersubscribed, with the ESO failing to hit procurement targets across the day (EFA 3-6). However, there was slight over-procurement in the overnight block (EFA 1-2).
- Only two bids were rejected for November - a 5 MW bid that resulted in (further) overholding across the overnight block, and a 4 MW bid priced at £49/MW/h for EFA 5-6 which was deemed uneconomical.
Price
The big story in monthly FFR has been the rebound in prices. Figure 2 (below) shows the accepted bid prices compared to the market reference price (volume-weighted average accepted bid price), again for tender rounds 141 and 142.
- The daily (volume-weighted) average market reference price increased from £ 10.86 /MW/h to £15/MW/h.
- Some assets accessed particularly lucrative prices, specifically 10 MW Larport farm (Gore St ESF owned and Flexitricity operated), securing £46/MW/h contracts in EFA blocks 5-6 - almost three times the current DC pricing.
Saturation
When we talk about saturation in frequency response markets, what we generally mean is that the total installed capacity of GB BESS exceeds the total volume requirement for all (non-stackable) frequency response markets. However, the most recent monthly FFR tender was undersaturated - the ESO rejected almost no volume across the month and failed to hit procurement targets across EFA blocks 3-6.
With sufficient BESS capacity to satisfy the total demand for frequency response, it seems odd that the ESO missed procurement targets in the monthly tender.
This highlights one interesting impact of holding auctions for services that run across different delivery periods. Although frequency response as a whole is saturated, individual markets (specifically those with longer lead time to contract delivery, such as monthly FFR) won’t necessarily fill up if providers opt to participate in closer to real-time markets (i.e. DC, weekly FFR). What this does mean is that those closer to real-time markets will become even more saturated.
Winners in November FFR
As mentioned above, some FFR providers secured particularly lucrative contracts in the recent tender. Figure 3 (below) shows how each site and operator performed by comparing average bid prices for November delivery.
- Eight of the sites participating in the monthly tender (for November delivery) secured an average price in excess of the current DC price of £17/MW/h.
Let’s take a look at three organisations that fared particularly well in the auctions - Gore Street Energy Storage Fund (owner), Flexitricity (operator) and EDF (operator):
- The top three sites poised to secure the highest revenues in FFR across November are all owned by Gore Street Energy Storage Fund. In particular, the top two - Lower Road (10 MW, operated by Arenko) and Larport Farm (19.5 MW, operated by Flexitricity) - both secured 24/7 contracts in excess of £25/MW/h.
- Of the eight units earning more than the current DC price, three are operated by Flexitricity. All three are expected to earn revenues in excess of £16k/MW across November.
- Two EDF-operated sites - Eelpower’s Rock Farm (20 MW) and Gresham House’s Wickham Market (50 MW) - also secured revenues in excess of the current DC price.
What this means for Dynamic Containment
With a significant amount of BESS capacity opting to participate in FFR across November, how will this impact the supply and demand dynamics of DC? Figure 4 (below) the capacity of sites contracted in monthly FFR as a proportion of total DC-eligible BESS capacity.
- We saw most movement into FFR across the overnight block, with 533 MW of DC capacity opting to secure contracts in the monthly tenders for EFA blocks 1-2.
- Movement into the monthly auctions was lowest across EFA 5. This is likely driven by operators factoring merchant opportunity costs into their bidding strategies - especially in light of the wholesale pricing events that took place in September.
Figure 5 (below) shows the percentage of time across November we’re likely to see saturation by EFA block. This is particularly interesting given the amount the reduced volume available to participate in DC following the monthly FFR tender.
- DC will remain saturated 100% of the time in EFA blocks 4-6.
- For the overnight block (EFA 1-2), the remaining eligible capacity will only exceed DC requirements ~20% of the time, meaning DC will be undersupplied ~80% of the time.
- In these instances, more aggressive pricing strategies can be implemented and we can expect to see pricing at the familiar £17/MW/h (unless there are any changes to the ESO’s price cap).
Which strategy is best?
With a significant amount of GB BESS locked into monthly FFR for November, it will be interesting to see what other strategies might emerge across the month. For November in particular there are a number of factors to consider:
- Competition in DC will drive down prices in November.
- Lower requirements in DC will mean that not all sites will be able to rely on 24/7 DC contracts.
- We don’t yet know how prices will play out when both DC low and high are launched.
- The likelihood of merchant opportunities in the wholesale markets and the BM.
Figure 6 (below) shows how expected revenues for November FFR contracts compare to a range of other potential strategies.
- September was an incredibly lucrative month for BESS, with high pricing in DC and record-breaking day ahead spreads.
- The maximum expected revenues for November are just £3/MW/day lower than September, highlighting how lucrative the tender was for certain players.
- With prices likely to fall in DCL for most EFA blocks across the month, it’s unlikely we’ll see similar levels of revenues from a 24/7 DCL strategy in November.
- However, with DCH being introduced on 1 November, alongside the ability to stack the high and low DC products, we will likely see BESS bidding into DCH and DCL simultaneously, which will offer a boost to falling DCL revenues.
While hindsight is 20-20, it’s surprising that more optimisers didn’t price aggressively into FFR. For those sites choosing to participate in DC (and access any potential merchant opportunities), it feels like a relatively risk-free play. The worst-case scenario for providers is being rejected and subsequently continuing with their original strategy. The best-case scenario is that they could’ve been accepted at £25.22/MW/h.
Going forward, it wouldn’t be surprising to see all BESS adopting this strategy of aggressive FFR pricing, especially given its success in November. Moreover, with more time to understand the true value available in DCH/L, opportunity cost pricing will become easier to implement.