Over the past 18 months, BESS in the UK have generated more revenue than ever before. Why? Well, markets have matured and grown providing targeted and more premium frequency services, such as Dynamic Containment (DC). Where once National Grid was procuring 600MW in the FFR market, they are now procuring the same but an additional 1GW in the DC market and now additional volume in both the Dynamic Moderation (DM) and Dynamic Regulation (DR) markets; these ancillary service markets are in addition to opportunities in the wholesale market. The growing markets open to BESS are enabling increased revenues, with some assets experiencing pro-rated annual returns of over to £150,000/MW for a 1hr system. However, with new grid-scale BESS being continually integrated, such markets are expected to become more saturated, which could lead to the cannibalisation of ancillary market revenues. We must also address the winding down of the FFR service, and National Grid decreasing the DC volume it procures by up to 68% during certain EFA blocks from a high of over 1GW per EFA Block. These combining factors suggested an impending downward pressure on the DC clearing price by the end of the year, although DC prices broke new records this June 2022.
Currently, lithium-ion battery storage is leading the way for energy storage systems on a commercial scale. There are alternative energy storage technologies, such as flow batteries, pumped hydro, or compressed air storage but these are either not fully commercialised, have geographical limitations or don’t have the technological benefits that BESS do. The lithium-ion technology has been developed over the past 50 years, allowing for the cost of cells to drop by up to 98%. During this time, advances in performance and durability have been equally impressive. This has made BESS very valuable due to a strong combination of power and energy density and round trip efficiency. Alternative technologies will play a role in the transition to a completely renewable grid but none are likely to fill the same role of BESS in the near-medium future – National Grid will always have a need for sub-second flexibility and this is a core strength of battery storage assets.
Currently, the UK is leading the global push for grid scale BESS deployment. A key factor in this was the Government’s actions to create the regulatory environment several years ago to support its deployment. The UK is an island, the benefits of large-scale batteries are most beneficial to island nations as they can provide critical grid frequency stability. Although the UK is connected to mainland Europe through interconnectors, there are still significant stability issues to overcome, as interconnector capacity is significantly below total electricity demand. As renewable penetration increases globally, we will see Australia, the US and other major economies become potential growth areas for BESS.
As previously mentioned, BESS revenues have been driven by ancillary services, however, a particularly interesting and arguably the most financially significant development for BESS investors of late has been the record breaking volatility in wholesale prices across Winter 2021/22. The market witnessed the significant and crucial role BESS will need to play as National Grid strives to meet its commitment to be able to fully operate Great Britain’s electricity system with zero carbon by 2025. The price volatility was primarily due to the operational challenge of balancing the grid during times of very low winds and high gas prices. Across this period, we saw Day Ahead spreads of over £500/MWh 19 times. Much of these spreads are readily captured by BESS. A single Day Ahead spread of £500/MWh would have been considered unprecedented prior to 2021. The frequency of these high spreads highlights the regular returns that could be gained in the coming years as the UK transitions towards an increasingly renewable and intermittent grid. More recently, we saw two Capacity Market Margin Notices called on the same day in July. This occurs when the system is under extreme stress due to very low generation and exceptionally high demand.
This activity during the summer months, where traditionally the power markets are more subdued as a result of lower demand and higher renewable supply, is arguably as significant as the winter volatility.
Revenue stacks for batteries in the UK continue to evolve as ancillary products are adapted to the ever-maturing market. Initially, there was EFR which over the last five years has been shifting into FFR.
Even though Dynamic Containment is a relatively new service and revenue stream for BESS, we have witnessed significant changes to how it is procured over the last 18 months. When deployed, asset optimisers would bid into DC for a whole day but it is now split into six four-hour EFA blocks. This has made the market more complex as traders look to achieve the highest returns day on day. At times, such as the aforementioned winter volatility, Limejump has and with increasing frequency, will take an asset out of DC throughout certain EFA blocks and trade volume in the wholesale market to maximise revenues.
Another development was the introduction of the Dynamic Containment High Frequency (DCH) service in November 2021. Up until then, the Dynamic Containment product only safeguarded against periods of low system frequency. The release of the DCH product has provided further revenue opportunities as assets have the ability to provide both services simultaneously. Notably, if stacking the high and low service, some volume must be withheld to manage the battery’s state of charge, adding further complexity to the optimisation challenge. This concept is detailed in the chart displayed, developed by Modo for a typical BESS asset. If you fail to adhere to these strict requirements you are at risk of receiving costly penalties.
Greater wholesale participation will bring further challenges with optimisers needing to keep a close eye on battery cycle warranties. National Grid have recently released Dynamic Regulation and Dynamic Moderation ancillary products providing even more opportunities for batteries to demonstrate and be rewarded for the very real-time value that they deliver to National Grid. This will provide some relief for asset owners as other ancillary services are phased out or become increasingly saturated.
Despite many predicting DC being set for ‘saturation’ later this year or early next (as a result of more BESS coming online), one thing is clear: more batteries are needed. Concerned investors need not to look any further than the National Grid’s Future Energy Scenarios (FES) which lays out a number of scenarios including how the UK will transition to Net Zero by 2050. Currently, the UK’s BESS capacity sits at approximately 1.5GW. The FES update in 2022 calls for between 15 and 30 GW of storage by 2030. Looking further to 2050, these figures increase to between 40 and 71GW. Grid-scale battery systems are one of the core enablers of high intermittent renewable penetration and will be required to balance the system alongside emerging technology types including long duration storage and hydrogen. Without storage, in the future, we will see large amounts of excess power when the wind blows and the sun shines but huge shortfalls in their absence. This is exactly when we will see those periods of wholesale price volatility and record high wholesale prices. BESS must keep pace with renewables, and as much as the sector has grown in the past few years, the rate of deployment is still lagging far behind what is required.
There are many areas where markets will need to evolve to incentivise adequate BESS onto the grid. A good place to start would be the Balancing Mechanism (BM). As a result of the record high prices seen across late 2021 which saw the ten most expensive days in the history of the BM, the National Grid kicked off a review of its market rules, behaviours and learnings from other markets. As leading participants in the BM market, Limejump through its regulatory experts have been actively participating in this review, and have advocated for system improvements to better facilitate the participation of BESS assets. Frequency related products will continue to play a pivotal role in the revenue stack for BESS. National Grid has a roadmap of Response, Reserve and Stability related products to combat the growing challenges we will experience with a renewables-led grid. It bears repeating that BESS can do what, currently, no other technology can do with their sub-second response rates. These products are where BESS excel and it is promising to see there is a strong future for these ancillary services.
The future looks very bright for the UK BESS sector, with assets likely to get past any short-term drop in revenue with DC potentially trading downwards. Central case IRRs from third-party consultants are sitting between 9 – 12.5% for a 1hr system and 11 – 13.5% for a 2hr system over a 20-year period. One thing that is seemingly beyond doubt is there will be volatility across wholesale markets which will continue to power returns for BESS investments. Bolstering these are the developments in automation and market parameters to incentivise BESS participation within the BM should add further opportunities to increase revenues and also improve the efficiency of this market. Combining these developments with increased Intraday volatility driven by intermittent renewable generation and the continued release of necessary frequency products in the future, will drive not only the investment case for BESS but also the UK’s transition to a renewable grid.
These evolving markets will be difficult to navigate through, which is why asset owners need to ensure they have a strong optimiser – to benefit from all relevant markets. For example, at Limejump, we have a specialist regulatory team who liaise with key regulatory and market bodies including National Grid, Ofgem and BEIS to ensure we and our customers are across new market developments. We have been involved in new product development (e.g. Dynamic Containment) from ideation to its inception and beyond, providing key feedback throughout, achieving meaningful rule changes across current and future projects, such as the design of the new Dynamic Response suite of products. It also means that we are able to develop our solution for these products throughout this process leaving us in the strongest position to enter these markets at the earliest convenience. Responding to this rapidly changing market also requires more than just a modelled/algorithmic approach. A strong trading and analytics team is crucial, with the ability to combine algorithmic results with the experience of, for example, Shell’s trading and fundamentals team in order to fully appreciate how markets will respond and optimise owners assets to achieve the highest possible returns.
The BESS market in the UK has come a long way since 2016 and the days of long term EFR contracts. The number of markets will grow and adapt, not only in number but also the frequency of auctions. Limejump strongly believes that BESS will play a pivotal role in ensuring the UK creates the net zero grid it needs and desires. Currently, the market isn’t saturated and we don’t see it being so in the near to medium future, helped by the reiteration from the government regarding the urgent need and push for even more renewables as the nation seeks energy security. With the right guidance and support, now is an exciting time to be active in the BESS market. Limejump is at the forefront of this intensely intricate, technically challenging and evolving market, and can support interested investors every step on the way.