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What happens to batteries as an energy storage market matures? That is the question facing energy storage project developers, owners, operators and lenders in the UK as early schemes see their primary source of revenues cannibalised and ultimately evaporating.
The answer could lie in the results of an auction held earlier this year. As in most energy storage markets, the first UK battery projects achieved lucrative returns through the provision of ancillary grid services such as frequency response.
Maintaining a constant frequency is essential for the stability of power grids, and batteries’ ability to deliver short, sharp jolts of energy that could correct wandering frequencies was a boon to UK electricity system operator National Grid ESO. Battery plants were richly rewarded for providing this service.
In January 2022, for example, almost half of all UK battery capacity was contracted to provide one of two ancillary response services to National Grid ESO. These were monthly fast frequency response and a newly introduced service called dynamic containment.
Fast frequency response has since been replaced by dynamic containment plus two other ancillary services flavours, called dynamic moderation and dynamic regulation. And something else has happened too.
While the amount of battery capacity in the UK has continued to grow, with the country now boasting around 5.5 GWh of electrical energy storage, the amount contracted to provide frequency response services has plateaued over the last year. This should not be a surprise: after all, there is only so much nudging that the grid needs.
Ancillary services are just that: ancillary and limited by definition. Above a certain level, there is no further demand for such services. Oversupply not only affects the availability of the contracts but also their value, resulting in cannibalisation as an ever greater supply of battery capacity competes for a limited market.
Prices fell 53% in the two months after National Grid ESO introduced a co-optimised day-ahead frequency response and reserve procurement process called Enduring Auction Capability, in November 2023, according to battery benchmarking service Modo Energy.
This loss of revenues adds to existing problems relating to grid capacity and planning complexity, sparking fears that the growth of the UK energy storage market could be dampened. And the question for project developers is: what happens next?
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There is one overriding requirement, which is that energy storage asset developers and operators will need to be much more careful about the schemes they put effort into. It is no longer the case that you can build a battery plant anywhere in the UK and sit back to enjoy the revenue it earns from frequency response.
This is not a bad thing, since there have been concerns that some developers have proposed projects with little chance realistically of being built, for whatever reason. These zombie projects have clogged up the grid connection application process and stretched queuing times to untenable levels.
In January 2024, there was more than 60 GW of battery energy storage in the transmission queue—with connection dates of anything up to 15 years away.
National Grid ESO has already moved to address this problem with a November 2023 reform that requires developers to hit certain milestones ahead of their connection date—or lose their place in the queue. But this does not solve the problem of how a battery can make money once it is connected.
For this, there are a couple of options. The first is to operate as a merchant plant and as part of your revenue stack pursue an arbitrage strategy in the wholesale market, buying energy when it is cheap and selling it when prices rise.
This is an increasingly popular option, with Modo Energy reporting that 1.9 GW of UK battery storage capacity—more than 50% of the market—was uncontracted as of January 2024. “With the current projected buildout, uncontracted battery capacity could reach 4.5 GW by the end of 2024,” said the firm.
Furthermore, said Modo: “By December, 75% of balancing mechanism-registered battery revenues came from merchant markets. This is the highest share recorded.”
Nevertheless, it added: “In many cases, merchant revenues are still paired with a complementary dynamic frequency response contract. Very few batteries are performing a solely merchant strategy.”
That is hardly surprising, since investors might be wary of funding projects that do not have at least some guaranteed income. But if that income cannot come from frequency response, where can it be found? This is where the alternative options for battery operator revenues come in.
As well as contracting ancillary services to keep electricity supply parameters in check, National Grid ESO holds annual auctions to make sure it has enough capacity in reserve to take care of any unforeseen events, such as a gas or nuclear plant failing at a time of peak demand.
These auctions procure capacity for the year ahead and for four years hence, and batteries have become regular participants in recent years—alongside traditional players such as gas plants, hydropower operations and even interconnectors.
An all time high price
What happened in the latest four-year auction, the T4, illustrates how battery players are becoming more aggressive in targeting this market.
"This year's T-4 capacity market auction, for delivery year 2027-28, cleared on 27th of February 2024 after just two rounds of bidding, with an all-time high clearing price of £65 per kW per year,” reported Fintan Devenney, a senior energy analyst at the market intelligence firm EnAppSys.
"Almost 1 GW of new-build battery assets secured 15-year contracts at this all-time high price."
Energy storage’s path to T-4 revenues was smoothed by 700 MW of pre-qualified gas turbine capacity failing to make the cut, but it was an impressive showing, nonetheless. Modo Energy noted that batteries saw the highest levels of new-build capacity winning contracts in the auction.
“Across all auctions so far, batteries will represent 16 GW of connection capacity in the capacity market by 2027,” said Modo Energy in February 2024. The total battery capacity operating in Great Britain currently stands at circa 4 GW, it added.
Admittedly, the remuneration that batteries obtain from providing up to two hours of capacity is less than what other market players can receive for offering nine. But there is a way round this, says Modo Energy.
“A one-hour unit would get a 35% uplift on its nameplate capacity if it entered the auction as a nine-hour unit, receiving £6,800 per MW per year on its nameplate capacity,” says Modo. “ESO has confirmed that this is allowed—as long as the unit can adhere to extended performance testing requirements.”
Publish date: 22 July, 2024