Almost a decade ago, Government and Ofgem embarked on separate exercises aimed at addressing the so-called “missing money” problem, where market rules were accused of leaving power stations underfunded for the security role they provided. Government’s answer was the Capacity Market (CM), while Ofgem’s was to create scarcity rents by sharpening imbalance prices. No-one was quite sure why we needed both.
It looks like Ofgem’s measures have finally stolen the lead from the CM. Batteries, which the CM largely spurns, are the hot new investment class. The volatility seen in day-ahead auctions – by far the most accessible of the short-term market opportunities – is driven directly by cashout risk. As real time approaches, intraday churn opportunities arise as uncertainty gradually diminishes and system stress either becomes real or melts away. Most importantly, National Grid ESO’s ability to make use of batteries in the Balancing Mechanism (BM) has leapt ahead, despite the burden of legacy IT. The BM contributes one extra feature of great importance to battery investment: a directly attributable track record of revenue performance.
However, the growth in renewables has drawn batteries into a different market: ancillary services, most particularly Dynamic Containment (DC). DC is a new flavour of frequency response suitable only for the fastest assets, and it has produced revenues at levels not seen in such markets for some time. Batteries are very well suited to DC – indeed, every other asset class has had great difficulty qualifying. National Grid ESO’s soft launch of the DC service has worked well – providers have had time to adapt as the product has become more sophisticated.
The recent launch of BM stacking with DC is a most welcome step forward, as it increases revenue agility without increasing risk. In fact, it’s something of a step into the unknown for National Grid ESO, who would previously prefer to have assets “sterilised” for particular ancillary services which they might provide. Nevertheless, the strict requirements of DC and indeed the BM are not relaxed. It’s for providers to be certain that they can do everything they’re committing to. This takes good control gear, constant supervision, and diligence observance of the rules.
It remains to be seen whether market volatility will continue to deliver the scarcity rents seen in early January. This is, ultimately, the reason that Government and Ofgem took different tracks. Paradoxically, volatility has most value when it is consistent. However, the fundamental requirements of operating a secure electricity system transitioning to net zero are driving opportunities across the different revenue categories. The investment case for batteries has never been stronger.
Our publisher Solar Media will be hosting the Energy Storage Summit 2021 in an exciting new format on 23-24 February and again on 3-4 March. See the website for more details.