Q4 2023 saw significant movement in Britain’s battery energy storage market. National Grid ESO launched new software, trading strategies evolved to combat falling revenues, and cycles continued to rise.
So, what are the headlines from the past three months that you need to know?
1) Q4 2023 was the largest quarterly increase in operating battery capacity in Great Britain
419 MW of new battery energy storage capacity started commercial operations in Q4. This brings the total commercially operational battery energy storage capacity to 3.5GW.
- This is a new record however it is only 6 MW more than in Q2 2023. The deployment rate been relatively flat for the last five quarters.
- Based on historic buildout rates, we expect battery energy storage capacity in Great Britain to reach between 5.8 GW and 6.2 GW by the end of 2024.
Read more about this in our Q4 update on battery buildout:
2) At least 3 GW of new batteries have connection dates every year from now on
Grid connection queue reforms were approved in November. This changes the system from first-come, first-served to one with completion milestones.
- Over 3 GW of new battery energy storage projects have transmission connection dates annually from 2024. This is over double the 1.5 GW installed in 2023.
- There are challenges to delivering these projects, and National Grid will filter out non-viable projects from the TEC register through their Connections Reform.
- Great Britain is in competition with the EU and the US for resources, such as skilled labour, EPC contractors, and the equipment needed to deliver on these projects.
3) More battery capacity is now uncontracted than ever before
Total operating battery capacity continues to grow, while frequency response procurement volumes have remained stable. This means more capacity than ever is uncontracted and operates in merchant markets.
- New battery additions mean 1.9 GW of capacity was left uncontracted in December 2023, over 50% of the market.
- New battery energy storage deployment is expected to continue to outstrip frequency response volume requirements.
- With the current projected buildout, uncontracted battery capacity could reach 4.5 GW by the end of 2024.
4) The Enduring Auction Capability has reduced prices across all frequency response markets
National Grid ESO launched the Enduring Auction Capability (EAC) on the 2nd of November. This introduced the ability to co-optimize delivery across multiple ancillary services and bid negative prices.
- Improved auction efficiency caused average frequency response prices to drop 40% in November and a further 22% in December.
- After the major frequency deviation event on the 22nd of December, the ESO may review whether they increase procurement volumes of frequency response.
Read more about this in our deep dive into why the EAC caused prices to fall:
5) Merchant markets have become the dominant source of revenue for batteries
Falling ancillary service prices across Q4 means more operators have depended on wholesale markets and the Balancing Mechanism to provide revenues.
- By December, 75% of Balancing Mechanism registered battery revenues came from merchant markets. This is the highest share recorded.
- In many cases, merchant revenues are still paired with a complimentary Dynamic Frequency Response contract. Very few batteries are performing a solely merchant strategy.
6) Optimization strategies have evolved following the launch of the EAC
Revenue strategies have shifted in falling frequency response revenues, with all but the shortest-duration assets now active in the wholesale market.
- Strategies by non-Balancing Mechanism systems focused on Dynamic Regulation Low contracts have been very effective since the launch of the EAC.
- Some Balancing Mechanism-registered batteries paid to deliver Dynamic Regulation High for the first time to support their optimization strategy.
- Due to co-optimization, frequency response revenues from the whole suite of services are more evenly spread across all batteries.
Read more about this in our deep dive into how strategies are changing post-EAC launch:
7) Balancing Mechanism volumes reached a new high despite bulk dispatch problems
The Open Balancing Platform launched on December 12th. This introduced bulk dispatch functionality, allowing more instructions to be issued to batteries simultaneously. However, technical issues meant it was paused for batteries from December 15th onwards. It was resurrected on January 8th, 2024.
- Daily battery dispatches in the BM averaged almost 1GWh in December, a new record. This was mostly due to a significant increase in Offers.
- Despite this increase, the in-merit dispatch rate remained at 4%*. This means this volume increase was not a result of any shift in skip rates but increased availability instead.
* The volume dispatched vs. the volume that was in merit and available
8) Batteries are cycling more than ever in search of additional revenue
Falling revenues have led to changes in operational strategies and increased operators' willingness to cycle more. Battery energy storage systems averaged more than 1 cycle per day for the first time in Q4 of 2023.
- This increase was mainly driven by one-hour batteries, which saw a 20% increase in daily cycles. This came from more wholesale trading and some systems focusing on Dynamic Regulation High - a strategy previously pursued mostly by two-hour systems.
- Developers are likely to regularly re-evaluate their sites' future cycling demands to try and select the optimal cycle warranty parameters with this rising cycling trend.
Read more about this in our deep dive on the topic of cycling changes:
9) Increased cycles are returning proportionally more value following falls in revenue
Additional cycling has historically returned more value to batteries, however the dominance of Dynamic Containment has dampened this effect. Falls in the price of this service are beginning to change this.
- In Q4, one-hour systems that performed two cycles per day earned £10.8k/MW/year more than those only doing one cycle per day. This compares to an uplift of £11.1k/MW/year in Q3.
- However, falling baseline revenues mean that the percentage uplift of additional cycles has increased. Cycling twice daily rather than once increased revenues by 38% for one-hour batteries in December, compared to 23% across Q3.
10) Trading strategies still primarily focus on the day-ahead market rather than intraday
Final Physical Notifications (FPNs) suggest that most operators optimize their battery energy storage systems primarily within the day-ahead power market. This is despite the intraday market potentially offering the ability to improve trading returns.
- Intraday trading comes with increased complexity in capturing the best price spreads, and an optimizer may be unable to execute the optimal trades due to unpredictable market disruptions or their state of charge.
- There is no one best path; however, the highest revenues are available to systems trading across the day-ahead and intraday markets.
- Much of the premium for this strategy comes from re-optimization - with perfect foresight, revenues could be 80% higher than the day-ahead market and 34% higher than the intraday market alone.
Read more about this in our deep dive on intraday trading:
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