12 Dec 2022
Flora Biggins

Signal Update: December 2022

Welcome to the latest release of Signal, our three-year forward view of battery energy storage revenues. This new version of the forecast covers the period December 2022 - November 2025. In this article, we look at:

  • What our latest update suggests for battery revenues in the next three years.
  • What’s changed in the market since our last update - and what this means for battery energy storage.
  • A closer look at how duration impacts expected revenues.
Flora and Alex discuss what the latest Signal update predicts for battery revenues.

Key takeaways

Figure 1 (below) shows the latest p50 scenario from Signal, showing average battery energy storage fleet revenues from December 2022- November 2025, split by market. Here we assume site duration in line with that of the current fleet average: 1.1h, and a maximum of 1 cycle per day.

Figure 1: Signal’s battery revenue projection (p50 scenario) covering December 2022-November 2025.
  • Battery revenues have fallen since reaching an all-time high in June 2022. We expect this trend to continue over the next three years due to a combination of Dynamic Containment saturation and FFR phase-out.
  • We anticipate a lucrative start to 2023, with revenue projections exceeding £250k/MW/a for our p50 scenario in January 2023. This is due to strong wholesale opportunities (£148k/MW/a) caused by supply tightness over the winter months.
  • Year-on-year, we expect revenues to decrease steadily due to increased competition driving down prices in ancillary service markets. We expect wholesale to play an increasingly important role in the revenue stack, making up 60% in 2025.
  • Finally, we expect a strong seasonality in battery revenues, with winter revenues on average 2x summer revenues over the forecast horizon. This is because there are higher wholesale prices and larger spreads available in the colder months.

What’s changed, and why?

Gas prices replaced by power prices

Figure 2 (below) shows October’s forward gas curve compared to the curve used in our previous Signal update (taken from September 26th).

Figure 2: UK NBP natural gas calendar month forward curves.
  • Forward gas prices have fallen significantly. We see this particularly at the start of the forecast horizon, where the forward price for November 2023 dropped 50% from September to October.
  • This was due to uncharacteristically warm weather and record wind generation in October, decreasing gas demand and prices.

In our latest Signal update, we switch from using gas prices to power prices. This allows us to quantify wholesale revenues with fewer modelling steps and also reduces our dependency on changing carbon prices and thermal efficiencies. Using the forward power curve also ensures consistency with the current view of the power market.

Figure 3 (below) shows one sample for wholesale prices used in the Monte Carlo simulation, consistent with the market’s forward power prices.

Figure 3: One possible scenario for wholesale power prices over the forecast horizon (December 2023 - November 2025).
  • The above curve is consistent with the current market forward curve. That is, the average of the hourly data over peak hours is consistent with the forward peak load curve; the same holds true for baseload/off-peak.
  • The wholesale forward curve is broadly consistent with the gas forward curve once adjusted for thermal efficiencies and carbon price.
  • Wholesale prices experience a seasonal trend, with higher peak prices and spreads available in the winter months (October - March).
  • This is caused by lower margin and increased system tightness in the colder months.

Faster deployment of batteries

Figure 4 (below) shows our updated battery buildout compared to the buildout used in the previous Signal update.

Figure 4: GB battery buildout curve, updated and superseded.
  • We now predict more batteries to be deployed faster, based on a recently increasing deployment rate.
  • By the end of 2025, we expect 3970 MW of installed capacity; this is an increase of 310 MW compared with before.

How have these changed our projections?

Figure 5 (below) shows our revenue projections for a 1-hour battery from our latest Signal update (Dec 2022), compared against those from the previous update (Oct 2022).

Figure 5: Battery (1-hour duration) revenue projections from the latest update vs. the previous (October) update.
  • Our latest update sees revenues decrease over the forecast horizon, relative to the previous update (except in January 2023), following a downward revision to power prices. This is in line with current market sentiment based on the forward curve.
  • In January 2023, we expect a 59% increase in revenues compared to our previous forecast. This is driven by increased fears of gas tightness on the continent, which have pushed January forward prices higher.
  • Additionally, our updated buildout curve predicts faster deployment than before. This means more batteries competing to provide ancillary services, driving down prices and resulting in lower revenues.

Results deep dive

Changes to the revenue stack

Figure 6 (below) shows how revenues are distributed between markets, over the forecast horizon, for a 1.1-hour battery.

Figure 6: GB BESS revenue stack share by market (shown for 1.1-hour scenario).
  • In the future, wholesale revenues are expected to make up a growing proportion of total revenues. Year-to-date wholesale revenues made up 6% of the revenue stack; by 2025, we expect this number to rise to 60%.
  • This is caused by ancillary service saturation. The FFR phase-out, combined with a growing battery fleet, means increased competition to provide Dynamic Containment, Moderation and Regulation.

Impact of duration

Figure 7 (below) shows the p50 fleet revenue scenarios for two durations of assets, a 1-hour vs. a 2-hour variation.

Figure 7: GB BESS revenues for 1h and 2h durations - both cases show p50 revenue scenarios.
  • On average, revenues are 86% higher for 2-hour duration batteries.
  • The benefit of 2-hour systems is more pronounced in winter, where the 2-hour systems are expected to make 1.9x the revenue of 1-hour systems. In the summer, this is only 1.82x.
  • For 2-hour batteries, the wholesale market makes up 73% of the revenue stack (see figure 8, below) compared to 49% for 1-hour batteries. Proportionally 2-hour systems make less money in ancillary services than 1-hour systems. This is because longer-duration systems provide no additional benefits for the current frequency response services.
Figure 8: Relative market share of revenues for 1h and 2h durations - both cases show p50 revenue scenarios.

Battery revenues looking forwards

Bringing it all together, Figure 9 (below) shows the p10, p50 and p90 revenue projections for Modo Signal in the case of the 1.1h fleet scenario.

Figure 9: GB BESS revenue projections from December 2022 - November 2025 inc. p10, p50, and p90 revenues. Duration assumed 1.1h in line with the current fleet.
  • We expect high revenues this winter as the colder weather increases system tightness and wholesale prices.
  • Year-on-year, we anticipate a drop in revenues driven by ancillary service saturation, FFR phase-out and falling prices along the forward power curve.
  • Finally, we expect revenues to follow a seasonal pattern caused by seasonally varying wholesale prices - with weather and margin playing a key role.

One final announcement...

As we write this article, we are already working on a very exciting new addition to Signal... Yes, you guessed it: the Balancing Mechanism! More on this later in the week, when we publish our methodology update.