Battery storage making strides in UK capacity market auctions

Battery storage assets representing multiple gigawatts of capacity have cleared the first hurdle towards competing in UK power distribution provider National Grid’s forthcoming capacity market auctions. However, changes to de-rating of battery projects will mean many of those qualified projects will be able to effectively compete for the auction’s subsidies – and there is a risk that this could damage investor confidence in the capacity auction and low capacity battery technology itself.

The capacity market works by offering all capacity providers a steady and predictable revenue stream on which they can base future investments – selling electricity into what are essentially fixed contracts. It was set up to incentivize investment in more sustainable, low-carbon electricity capacity at the lowest cost to energy consumers.

Technologies vying for Capacity Market support include battery storage, other storage technologies such as pumped hydro, open cycle gas turbines and nuclear power stations. This week, National Grid confirmed its T-1 (2018-19) and T-4 (2021-22) prequalification results, and will reveal the number of projects that can compete for capacity auction payments are revealed.

In the T-1 auction, comprised of limited one-year contracts, a total of 594 assets were prequalified to take place in the auction, with a combined capacity of 15.58GW. Of those successful assets, a total of 138 are battery storage with a combined capacity of more than 2.1GW. The T-1 contracts have shorter lifetimes than the T-4, but battery storage makes up a higher proportion of the pool in T-1 than T-4 – around 13%, suggesting that battery storage vendors think their technologies are better suited to shorter contracts.

The T-4 contracts, for the 2021/22 delivery, are for 4-year projects, and are therefore highly sought after. Some 227 battery storage projects were successful in prequalification, meaning that a total of 4.8GW of battery storage capacity will compete in the T-4 auction. The previous auction for long-term contracts, held in February this year saw 2.7GW of battery storage projects win contracts, to provide back-up power for the grid. However much of this capacity in T-1 and T-4 auctions could now be in doubt, due to a de-rating rule change.

The UK government recently published a series of de-rating scales that will determine the payments made to battery storage projects, based on the length for which a battery can deliver output. Under the new rules, batteries which can only deliver output for half an hour will be rated at around a fifth of their maximum output, while assets that discharge for four hours will receive the same de-rating factor as pumped hydro.

The de-rating factor for a technology reflects its expected availability on the power grid. Participants in capacity auctions bid and receive payments on the basis of their de-rated capacity, which is calculated by applying the de-rating factor to their total capacity.

The Department of Business, Energy and Industrial Strategy (BEIS), in charge of the capacity auctions, appears to have bowed to pressure from participants using other technologies, who claimed that batteries had the potential to pose a risk to security of supply – owing to the short duration facilities used to bid in auctions.

These changes to the de-rating mechanism will be brought in before the 2018 T-1 & T-4 auctions, and will have severe consequences for the business cases of those projects which have already secured pre-qualification.

BEIS claims that after calculating that the mean stress event duration in the UK is around two hours, with some events lasting much longer, the auctions would have secured insufficient capacity to meet the capacity market’s reliability standard under the previous de-rating regime.

The effect of the de-rating rule change could mean that many of the battery projects that had qualified for the capacity market auctions cannot propose viable bid prices, and will fail to secure a subsidy payment from the government.

Energy analysts have expressed further concerns that six coal-fired power stations pre-qualified for the T4 capacity auction, warning that past auction results suggest as much as £500m in subsidies could be paid out to coal-fired generators between 2017 and 2022 – bad news for renewables advocates.

This week also saw UK electricity distribution network operators (DNO) pledge to collaborate on new markets for flexibility services and smart grid technologies. The big six DNOs in England, Scotland, and Wales announced a joint commitment, as part of the Energy Network Association’s (ENA) Open Network project in a report published at this week’s Low Carbon Networks & Innovation (LCNI) conference. The group says the collaboration will deliver $22bn in savings by 2050 for consumers.

Last week, two of the DNOs, SSE and Northern Powergrid, revealed extensive additional smart grid plans, and this announcement rubber-stamps smart grid commitments from the other DNOs. These measures could also include increasing electricity generation from distributed energy resources (DERs), or adjusting their consumption to support balancing of supply and demand in return for financial incentives.

In other battery-related news, NEXTracker has launched a new Lithium-ion battery, to accompany the flow battery it launched last year. NEXTracker has taken over the containerized lithium-ion storage product developed by parent company Flex. The Lithium-ion battery known as the NX Drive comes in conventional 20 and 40-foot sizes – literally housed in shipping containers.

NEXTracker is regarded as the market leader for solar tracker systems. The trackers market has boomed even under tough conditions, and now accounts for 70 percent of U.S. ground-mounted solar projects – which align the panels to follow the sun as it travels across the sky.

NEXTracker believes solar-plus-storage is trending up, with most large solar-plus-storage installations favoring tracking. The competition is fierce between solar tracker vendors NEXTracker and Array Technologies, which respectively controlled 24% and 20% of the global market in 2015 – and solar-plus-storage could become a defining factor in determining future market share.

However, recent tax provision changes approved in the US Senate are likely to damage investment in renewable technology, shrinking the prospects of NEXTracker and Array Technologies as well as other renewable technology vendors in the US.