Welcome to the first release of Signal! This is our first update following the launch of our brand new, 3-year battery revenue projection. Here, we will look into the details of what our data-driven forecast is telling us about what the next three years may hold for BESS, from August 2022 - June 2025.
For more information on Signal we recommend checking out the following articles to learn more:
- Introducting Signal
- Signal use cases
- Methodology (coming soon!) - in the meantime, please reach out on Intercom to talk to a member of the Modo team.
Key takeaways
The last few months have seen record high revenues for BESS with the trend projected to continue this winter. Figure 1 (below) shows the latest p50 scenario from Modo Signal, showing BESS revenues from August 2022-June 2025 split by market.
- DC continues to be a key driver of the BESS revenue stack making up ~45% of revenues over the next three years.
- With the increased build-out of BESS, the retirement of FFR and saturation across the frequency response markets, wholesale revenues begin to make up more of the revenue stack for BESS.
- High gas prices, and consequently high power prices, continue along the forward curve resulting in substantial wholesale opportunities for BESS, with projected annualised revenues for 2022 totalling £167k/MW/a, up 35% on last year's realised earnings (£123k/MW/a).
Inputs deep dive
Buildout
Figure 2 (below) shows our assumptions on GB BESS deployment over the forecast horizon in addition to the capacity expected based on the Capacity Market register.
- Capacity market figures suggest 5.6 GW by mid-2025 however, since the start of the pandemic, deployment has been considerably slower than anticipated.
- To account for continued disruptions to supply chains, our forward view assumes a deployment rate consistent with energisation rates over the past three years.
- For more information check out our article on how our proposed buildout curve tracks with other deployment projections.
Response holding
Figure 3 (below) shows indicative frequency response holding over the forecast horizon, with high and low requirements shown on the negative and positive y-axis respectively.
- FFR phase-out has been extended past the ESO’s earliest possible retirement date of April 2023 to the start of 2024 to reflect Modo’s internal view of the market.
- Volumes for DC high and low are assumed constant on 2022 indicative requirements, with appropriate seasonality of higher requirements in summer months to account for higher risk of consequential RoCoF (rate of change of frequency) losses from embedded solar generation.
- DM and DR requirements are assumed to be increased to 200 MW (in both directions) from Q2 2023, in line with the ESO’s launch plan (detailed in the ESO’s February frequency response market information report).
Gas prices
Figure 4 (below) shows the NBP calendar month forward curve, used as our base assumption for a forward view of gas prices. Forward gas prices are used as an input to calculate the short-run marginal cost of operation for gas-fired generation, a feature used to determine the minimum and maximum daily prices in the wholesale power price spread model.
- Gas prices for this update are based on the July forward NBP calendar month gas curve with the front month trading in excess of 250p/therm and gas for December delivery trading at around 450p/therm.
- High gas prices have had a knock-on effect on power prices with the December baseload futures contract trading at £645/MWh as of 01 August 2022.
- As seen above, subsequent increases in NBP spot prices have seen increases across the whole curve. These changes will be reflected in future updates to Signal.
- Note, a parallel shift in the forward curve impacts BESS revenues as a second-order effect since daily power price spreads are a function of varying efficiencies of gas-fired generation and subsequently differences in the short-run marginal cost of operation. As such, a parallel shift in gas forwards does not equate to a parallel shift of wholesale opportunity for BESS.
Demand
Figure 5 (below) shows realised and forecast daily avg. demand. Note, the outlook depicted below represents our base case for demand and excludes additional noise overlayed to provide samples for Monte Carlo simulations.
- Avg. annual demand level is derived from NG ESO’s, System Transformation scenario, featured in the 2022 Future Energy Scenarios publication.
- Over the forecast horizon, avg. annual demand is assumed to remain relatively flat, increasing in 2025 to account for increasing levels of electrification.
- The above demand shape shows several instances of low margin days across winter 2022/23 as demand peaks relative to dispatchable generation, thereby driving scarcity pricing in wholesale markets.
Results deep dive
Response market saturation
Frequency response has historically been the mainstay revenue stream for BESS, from Enhanced and Firm Frequency Response (EFR and FFR) to the new suite of services introduced in NG ESO’s response reform programme: Dynamic Containment (DC), Dynamic Moderation (DM) and Dynamic Regulation (DR).
Within frequency response, a key driver of prices is saturation - namely, how many response providers there are relative to the ESO’s response requirement. In figures 2 and 3 (above) we’ve seen how supply and demand for frequency response are likely to change over the coming years. Figure 6 (below) combines these two variables to show a forward view of response market saturation - namely the ratio of usable capacity to response requirement. A saturation over 100% indicates there is more usable capacity than requirement.
Note, in the graphic below, we adjust the requirements to provide a view of ‘real requirement’. Real requirement takes into account the derating factors required to meet the ESO’s state of energy management rules. For example in DC, a site must hold back ~10% of nameplate capacity to deliver the service symmetrically, so a DC high and low requirement of 100 MW equates to a real requirement of 111 MW = 100 MW / 0.9.
- From August onwards saturation consistently stays above 100%, following a brief period of undersupply across June and July - in part the driver of record high BESS revenues.
- Newly saturated markets are expected to push down prices across the response markets and reduce the frequency at which prices clear at or near the price caps of each service.
- Since response markets are saturated from here on out, prices across FFR and DC/R/M markets are assumed to tend toward wholesale opportunity costs.
Change in monetisation strategy
As we’ve seen in the previous section, the phase-out of FFR alongside increasing deployment of BESS has led to saturation in the response markets which is expected to reduce prices in said markets. Figure 7 (below) shows how revenues are distributed between markets over the forecast horizon in addition to historical trends.
- Revenues move out of FFR in line with our assumptions around the ESO’s phase-out plan - namely falling away to 0 by January 2024.
- DC revenues begin to fall away in line with increased build-out of BESS and subsequent market saturation.
- Wholesale revenues begin to play a significant role in the revenue stack from as early as August 2022, as BESS searches for opportunities outside of frequency response markets. Wholesale market share peaks across winter in line with higher gas prices and increased likelihood of scarcity impacting pricing.
A lucrative winter ahead
Bringing it all together, Figure 8 (below) shows the p10, p50 and p90 revenue projections for Modo Signal.
- In the short term, we see BESS revenues falling from their highs of July in addition to a move into the wholesale market as requirements in DC fall (in response to lower RoCoF risks) and the subsequent saturation of the response markets.
- Looking ahead to winter, high gas prices and a high likelihood of low margin events drive revenues upwards of £200k/MW in December with both high daily spreads and scarcity driving up the opportunity.
- Backwardation in the forward gas and power curves see a high wholesale opportunity for BESS on the front of the curve, with revenue expectations falling over the forecast horizon.
- Summer 2023 sees higher than anticipated revenues with the forward view of dispatchable generation lower than usual, resulting in an increased likelihood of summer scarcity pricing.
Psst... we’d love your feedback! 🙏
This is our first iteration of Modo Signal, and we’re super excited to hear your feedback. Please get in touch via Intercom if you’d like to discuss anything with the Modo team and we’d be happy to schedule a call!
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