Since the Summer of 2022, the number of non-Balancing Mechanism - or ‘non-BM’ - registered battery energy storage units has been increasing. This has ended a long trend of operational batteries switching to the Balancing Mechanism.
There are several reasons for this, but a big one could be the rise of ‘NIV chasing’ as a revenue strategy for battery storage.
Non-Balancing Mechanism battery capacity is back on the rise
The total capacity of battery systems not registered in the Balancing Mechanism started to fall in July 2021. This is because some unregistered operational batteries registered for the Balancing Mechanism. In total, 11 batteries (314 MW) have made the jump.
This decrease stopped in August 2022 and then reversed. Since then, many new-build systems have chosen not to register for the Balancing Mechanism. As a result, the capacity of non-BM registered batteries is now at its highest-ever level: 689 MW.
Some batteries have even left the Balancing Mechanism
It hasn’t just been new-build systems that have joined the non-BM fleet. Four systems have made the switch away from participating in the Balancing Mechanism. The largest was Wickham Market in October 2022 - a 50MW, 1.5-hour system.
The most recent is Mannington which made the switch in May 2023, having previously switched from non-BM registered to BM registered in October 2022.
The Balancing Mechanism may not be best for every battery
While the trend has generally been for new systems to be registered in the Balancing Mechanism, there can be good reasons to decide against this:
- Registration in the Balancing Mechanism comes with more administrative burden and higher costs.
- It introduces new communications and metering requirements.
- There have historically been less stringent requirements for non-BM systems providing frequency response.
- And finally, the assets do not have the same requirements to submit and follow Final Physical Notifications, as defined within the Grid Code.
Note: as of 31st March 2023, non-BM participants in the Dynamic Containment, Dynamic Moderation, and Dynamic Regulative services must submit Physical Notification baselines via the Ancillary Services Dispatch Platform (ASDP) an hour in advance during contracted periods. Where they deviate from this baseline, they can face penalties under performance monitoring rules.
So, what’s NIV chasing got to do with it?
If a battery doesn’t need to submit Final Physical Notifications, it has the freedom to adjust its position in real-time. This opens up the possibility of ‘NIV chasing’ as a strategy to make money.
Earning revenues from the system price
NIV chasing is a way of earning revenue by effectively betting on the system price.
If you’re not familiar with NIV chasing, check out the video below. You can also find out more in our explainer article here.
NIV chasing can provide additional value over other traded markets
In 2022, optimizing a 1-hour battery against system prices could theoretically have unlocked almost double the potential revenues by NIV chasing when compared to day-ahead trading values.
But it’s important to note that this is the maximum achievable value - what can realistically be achieved is a different story (more on this later).
Imbalance prices provide bigger spreads for storage
Imbalance prices have larger within-day price spreads than the day-ahead or intraday markets. The imbalance price is the most “real-time” price signal available and so sees the sharpest price spikes and drops.
Spreads in the Balancing Mechanism can rival those in system prices, but there is no guarantee National Grid ESO will dispatch your battery, especially at the highest prices.
These increased spreads occur almost daily, but some days have exceptionally high imbalance prices compared to other markets. System prices hit £4,000/MWh on three different days across 2021 and 2022, and reached close to this level several other times.
In 2021, capturing price spikes within the imbalance market on just four days would have delivered 20% of the entire theoretical value for the year.
Extra cycles = extra money
System prices don’t just see larger spreads - they are also more volatile within-day than other traded markets. Imbalance direction and volume are the biggest determinants of system price in any settlement period. This means they often follow a very different price shape compared to the traded markets.
Because of this volatile price shape, NIV chasing assets will likely perform more charge-discharge cycles in a day. So batteries can capture greater value beyond the typical two-cycle shape of wholesale markets.
So increasing cycles when NIV chasing unlocks extra value for battery storage. Adding a third cycle for a one-hour battery in day-ahead trading increases value by just 2%, but an additional 25% if NIV chasing.
But how much of this value can be captured?
Forecasting the imbalance price is often difficult. Changes in imbalance volumes can easily swing the market from short to long and completely change the imbalance price during that half-hour. This means that there’s a risk of exiting the market at a loss if things go wrong.
Also, the energy stored in a battery is finite. So pursuing an opportunity may prevent the system from taking up better opportunities later in the day.
Capture rates of around 40-50% should be achievable - and some traders may be able to exceed this. So far, in 2023, a capture rate of 58% would result in a NIV-chasing 1-hour battery exceeding the Modo Benchmark.
But batteries don’t have to pursue an exclusively NIV-chasing strategy. They may decide to trade some volumes on the day-ahead or intraday markets, which allows them to lock in some trading value to lower the risk involved in NIV chasing.
Who is pursuing a NIV chasing strategy?
Based on frequency response contract data, we get a good indication of the main strategy a non-BM unit is pursuing.
Habitat and EDF are the main optimizers who appear to be pursuing a trading-heavy non-BM strategy for their non-BM assets (both also have BM-registered batteries in their portfolios). From publicly available data, we can’t confirm whether they are NIV chasing - but this is likely the case.
But imbalance volumes are shrinking - and this might make NIV chasing harder
System prices depend upon the direction and size of the imbalance within each settlement period. But, these imbalance volumes are small - they average under 300 MWh. And they have been shrinking, especially when the market is short - which is where batteries achieve value for discharging.
This could be caused by increasing levels of NIV chasing in the market (by batteries and other generation assets). Increased NIV chasing itself can influence the final imbalance volumes within a settlement period - if all batteries move in one way at a certain time, it can flip the market. Ultimately, this makes system prices harder to predict.
There are also signs that this opportunity may not last forever
National Grid ESO and the government are increasingly aware of the difficulties arising from increasing volumes of non-BM registered storage and generation. For example, non-BM systems must now provide operational baselines when providing frequency response services, giving the control room visibility over what the asset is doing.
And in the 2021 consultation on Capacity Market reforms, it was even proposed that all Capacity Market units would be required to register for the Balancing Mechanism. This proposal was dropped but signals that large amounts of non-BM registered units are a problem for National Grid ESO. It would not be a surprise to see similar proposals resurface.
One way new systems can be encouraged to register within the Balancing Mechanism is for the utilization of battery storage to increase. National Grid ESO is working on improving skip rates by upgrading the control room’s capabilities. But ultimately, these are unlikely to be enough to slow the growth of non-BM registered batteries any time soon.