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Capacity Market set to 'come into play' for battery storage asset owners as investment in long-duration increases

Battery storage could play a greater role in both the Capacity Market and Balancing Mechanism, LCP found. Image: Getty

Battery storage could play a greater role in both the Capacity Market and Balancing Mechanism, LCP found. Image: Getty

Investors are increasingly turning attention to the Balancing Mechanism (BM) and Capacity Market (CM) for future long-duration battery storage revenue streams, with new research from LCP suggesting batteries can play a larger role in both.

LCP’s Energy Analytics team found that with 4GW of battery storage capacity, up to 50% of the BM demand could be met in the future by batteries, and if battery capacity increased to 10GW, up to 70% of BM demand could be met.

This could then result in cheaper energy bills for consumers – a hot topic currently due to the rise of the energy price cap – as the BM would be less reliant on volatile gas prices.

Meanwhile, LCP highlighted how the T-4 CM auction for 2025/26 saw 3.3GW of new battery storage assets secure contracts compared to less than 2GW currently on the system.

“With previous auction results considered, this could mean that by 2025/26 we have a total of 6GW of battery storage online, much of which will be targeting the Balancing Market, where we have seen lucrative returns in recent months,” Chris Matson from LCP said.

However, LCP cautioned that investors will need to closely consider how increasing competition and the impact of cannibalisation could affect returns.

LCP continued that the CM has previously offered limited opportunities for battery assets due to the limited durations of the systems, which are often one hour, resulting in batteries being heavily derated in the CM.

However, with more investment being made into longer duration batteries, the CM market is now set to "come into play" for asset owners, particularly due to the reliability of the revenue stream, with 15-year contracts on offer.

Indeed, of the 3.3GW of battery storage capacity that secured contracts in the recent T-4 auction, 1.7GW of this was battery storage with durations of two hours or more, signalling increased investment and a shift to larger systems.

Battery storage companies such Gresham House Energy Storage Fund have begun to eye two hour durations due to the trading opportunities becoming at least as profitable as shorter durations, while Harmony Energy recently lauded the value of two hour durations, stating it allows the company to take advantage of increases in wholesale market revenue opportunities.

LCP went on the highlight what it said are some key factors for investors to consider in the battery storage space. This included needing to be wary in the BM as more battery capacity is added to the market, resulting in the amount of volume that each unit can be expected to deliver reducing.

Investors should also consider co-location of battery storage alongside other renewable energies such as solar to spread their costs over a wider revenue base and maximise the use of limited connection capacity.

While the frequency response market remains attractive, LCP said investors must consider hybrid approaches that optimise between that and energy markets in order to maximise returns, while volatility must be considered as a core component to investors' revenue stacks and to be bankable.

"We have begun to see new strategies adopted to maximise returns not only from frequency but also from wholesale and balancing markets which offer a great opportunity for investors to stack their revenues," Matson added.

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