Why analysts are bullish about batteries in Britain

It is fair to say the last couple of years have not been great for battery energy storage projects in the UK. Project revenues have fallen by around two thirds since 2022, according to the data provider Modo Energy, mainly because of a drop in frequency response prices. 

At the same time, says Modo Energy, the amount of operational battery capacity in the UK has tripled, meaning more batteries are chasing lower revenues. Combined with ongoing delays for grid connections, this has led to a downturn in commissioning precisely at a time when the country needs to be increasing installations. 

“The first half of 2024 saw the lowest new operational capacity since 2022, totaling 370 MW, due to delayed projects,” Modo Energy says. 

In February, meanwhile, Gresham House Energy Storage Fund—one of the top battery project investors in the country—said it was putting new projects on hold in 2024 as it worked through a backlog of schemes in progress and waited for the outlook to improve. 

Importantly, though, the company said: “The revenue environment is expected to improve, … although there is some uncertainty on the timing and trajectory of such improvement.”

Just a few months later, in June, analysts from Cornwall Insight echoed this sentiment. “Despite the slump, recent trends indicate that all is not lost, and that the latter half of 2024 could see at least a partial resurgence in battery revenues,” wrote Matthew Chadwick and Joe Camish in an article for US-based Latitude Media.

Arbitrage is the key to a battery resurgence

“Revenues are unlikely to return to the extremes of 2022, which were driven by atypical factors linked to the Russian invasion of Ukraine, but the long-term trajectory for batteries remains strong,” they said. “It will be important for investors to focus on this rather than comparing against the most recent trends.”

The key to a resurgence in UK battery revenues is in arbitrage, or the ability of energy storage plant operators to buy electricity when it is cheap and sell megawatt-hours back to the grid when demand—and prices—rise. 

Arbitrage has always been an optional UK energy storage revenue stream, but until recently it has not been relied upon much because richer and easier pickings were available. 

First among these was frequency response, which is where small nudges of battery power are used to stop grid current oscillations from straying too far from their 50-hertz standard. 

Frequency regulation is vital for grids that have incorporated a high level of intermittent renewable energy sources, because at higher or lower frequencies the electricity network becomes unstable and may even suffer a blackout. 

Hence, electricity system operators such as National Grid ESO in the UK are willing to pay relatively high rates for frequency response. In 2022, for example, UK battery plant operators were paid up to £80 per MWh for a frequency response service called dynamic containment, according to Chadwick and Camish.

That same year, ancillary services—which includes dynamic containment and other types of frequency response activity—accounted for 80% of UK battery system revenues, the analysts said. However, the problem with ancillary services is that there is only limited demand for tasks such as keeping grid frequency on track. 

Thus, as more and more battery capacity has been attached to Britain’s electricity network, the frequency response market has become more competitive—and the price of the service has dropped. 

As Cornwall Insight’s analysts noted: “1.5 GW of battery storage capacity came online in 2023, bringing the total to 3.5 GW. In that period, dynamic containment averaged less than £1.50 per MWh before dropping to less than 50 pence per MWh last February.”

It is important to note that this fall in revenues was entirely predictable. And so, too, is a corresponding rise in the revenue opportunity arising from arbitrage. 

As dispatchable, fossil fuel-powered generation is increasingly replaced with intermittent renewables, there will be more times when energy production exceeds demand—leading to zero or negative electricity pricing—and when the amount produced is insufficient to meet the nation’s needs, resulting in high demand and prices. 

This is already starting to happen. “In April 2024, high volumes of wind generation—35.1% of the monthly electricity generation mix in the UK—have resulted in low- or negatively-priced periods and have therefore increased the revenue potential from wholesale arbitrage,” the analysts observed. 

Arbitrage opportunities mean UK battery plants will increasingly operate in the wholesale electricity market and in the balancing mechanism, which National Grid ESO uses to match supply with demand every 30 minutes. 

How can battery project developers increase revenue opportunities?

Because of the increased variability of the grid’s reliance on intermittent renewables, this year National Grid ESO launched a new market called the balancing reserve, which aims to ensure sufficient capacity to meet demand on a day-ahead basis. 

This is “already providing a valuable additional revenue source for batteries,” said Chadwick and Camish.

It also spells growing opportunity for new battery projects. “There is a huge pipeline of viable renewable projects in the UK, and with this increase in renewables will come a growing need to manage the intermittency of generation and provide other system services to manage the system’s inertia,” they said.

Notably for international energy storage investors, the dynamic seen in the UK is also starting to play out in other markets with growing levels of renewable generation. Take Australia, where there has been a massive increase in the annual number of trading intervals where the 30-minute price for electricity was below zero. 

Before 2019, negative electricity spot market pricing in Australia was a rare affair, only affecting a few hundred trading intervals a year. In 2023, there were 12,865 trading intervals where the price of a megawatt-hour dipped below zero, meaning offtakers were essentially being paid to take the electricity. 

At the same time, last year saw 60 half-hour intervals where the price per MWh rose above AUD$5,000. This was the fifth-highest level of $5,000-plus interval pricing so far this century, further highlighting a growing global arbitrage opportunity for battery plant operators in electricity spot markets.