Posted on: 09/11/2017
Following Aurora’s Battery and Flexibility Conference last week, Boz Bozhkov, Head of Markets in our Asset Optimisation team, discusses how storage can continue its growth while facing new revenue challenges.
This year we have seen renewable energy contributing more to the UK’s electricity supply than ever before, with almost 30% of electricity coming from renewable sources in the second quarter of 2017.
Alongside this great progress towards decarbonisation comes the new challenge of balancing a grid with more intermittent renewables and less baseload generation.
New flexible technologies are being deployed rapidly and at scale to manage this fundamentally different energy system. Less than 10% of the new build contracts in the last T-4 Capacity Market auction were awarded to baseload plants, with the remainder going to peaking generation, Demand Side Response (DSR) and batteries.
The wide consensus is that flexibility will be crucial to support a decentralised, digitised and decarbonised electricity system.
Here comes the almighty battery!
The technology dominating all the headlines and industry events is battery storage. Commercial scale batteries are seen as the ‘holy grail’ to address many issues we are facing now or will be struggling with in the future, particularly with managing frequency fluctuations in the system.
Lithium-Ion battery costs have fallen quickly and are expected to further decline, and battery storage has enjoyed the support of both National Grid and Government. All this has attracted a lot of interest from investors and developers - just this week it was announced that battery storage in the UK has hit 100MW of installed capacity.
These early battery projects have been able to secure attractive revenues through 4-year Enhanced Frequency Response (EFR) contracts, bilateral Firm Frequency Response (FFR) contracts and high prices on the enduring FFR tender market.
But here is where we begin to see troubling signs around the dynamic frequency response revenue opportunity. The 600-1200MW FFR requirement is disproportionately matched by up to 12-15GW of battery projects in different development stages and showing different degrees of commitment.
This has led to a 22% drop in FFR prices in the last 6 months - a result of the market adjusting itself from a position of significant shortage or a general downward trend in frequency revenues?
What’s next for battery revenues?
Last week, National Grid announced it will discontinue issuing EFR and FFR contracts and any required frequency response capacity will be procured via the enduring market. With the market maturing so quickly, this was not unexpected news, but it has left investors feeling uneasy.
Without the attractive prices and revenue certainty of the dynamic FFR market, battery developers are now facing a lack of revenue guarantee in the form of long-term contracts, compounded by policy uncertainty and technology risks.
These difficulties in demonstrating value to the financial community present a serious challenge to any new battery development projects and with National Grid and Government taking a step back, it will be up to the industry to prove the worthiness of these investments.
So where will the value come from? The answer is still within the flexibility market, but its other segments.
Stacking revenues from multiple markets
The future of flexibility lies within the power markets and exchanges. The volatility of the Balancing Mechanism (BM) and the wholesale market is expected to persist, supported by declining capacity margin on the system, making it ideal for the quick response capability of battery storage.
Access to all the available markets will be crucial for projects to unlock optimal value from energy arbitrage. The most successful projects will be those that can respond to opportunities in whichever market presents the best price signals at any given time.
This is very much the approach SmartestEnergy is taking with our Asset Optimisation business. We can enable battery developers, and other flexible asset owners, to access virtually all revenue streams in a smart, dynamic and tactical manner. If you would like to discuss how we could optimise revenues for your project, please get in touch.
There are undoubtedly some challenges ahead for the fast-growing battery sector, but overall the future looks bright for this new wave of energy entrepreneurs.
About the author
Bozhidar is responsible for analysing market opportunities to help asset owners maximise revenues. His role includes the continued development of processes and systems to enable customers to always optimise their positions and he also liaises with National Grid and DNOs to ensure access to all relevant opportunities. Bozhidar joined SmartestEnergy from KiWi Power where he was Head of UK Operations. He holds a Bachelor of Business Administration from Northeastern University, USA and a Master of Science in Economics and Policy of Energy and the Environment from University College London.