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Revenue opportunities for battery storage

Author: Andy Lowe 03rd Mar 2020

Revenue opportunities for battery storage

Flexitricity has been aggregating flexibility and making it available to National Grid for over a decade and we now have a half a gigawatt flexible portfolio which we optimise across multiple services from our manned 24/7 control room in Edinburgh. This portfolio includes:

  • combined heat and power generators
  • flexible industrial and commercial load from a range of different sectors
  • hydro
  • gas peakers
  • increased focus on domestic flexibility
  • front of the meter and behind the meter batteries

It’s batteries that I want to talk about today. The energy storage market has evolved significantly over the last couple of years. There are now a wide variety of views of the market, the opportunities, how you should access these, which will earn you the most money, how to get comfortable that the business plan revenues are realistic and more. Most investment committees will want these questions answered before they deploy capital into this asset class. 

The last question is -  who should I give the keys to? Trading desks, platforms, machine learning, algorithms, experience, customer service and particularly customer engagement, are all important considerations when making that decision. That’s why I want to take a few minutes to highlight what we think are the key opportunities for batteries, focusing mainly on front of the meter assets.

Frequency response

Delivering frequency response has been an important income stream for batteries for a while, but it’s well known that the market has become more competitive over the last couple of years and as a result we’ve generally seen price cannibalisation. What’s gone against this trend are the prices we’ve seen this winter in Firm Frequency Response, which is the largest frequency contract. Specifically, during the evening peak, prices have been as high as £50-60/MW/hr. These prices are much higher than at other times of day or during other seasons. The obvious difference in winter evenings is the opportunity cost of running for triads, or the TNUoS Embedded Export Tariff. If optimisers are going to risk missing a triad, which typically land during the evening peak, then it makes sense for them to price in this opportunity cost when tendering for FFR. This has driven prices very high and the 24/7 average price for FFR has been around £15/MW/hr over the winter. Flexitricity’s customers have done very well out of this.

If someone were to extrapolate from these winter prices over the whole year, they would get an annualised revenue of 143,000/MW. But there’s no reason to think that winter triad value sets the price for the whole year. In fact, we have now seen that FFR prices for March delivery, which is not in the triad season, averaged around £7.50, half of what we have seen over the winter.  Furthermore, triad value will drop substantially next winter, so anyone relying on triads to drive FFR prices to the levels we saw this winter could find themselves disappointed. 

With all that said, FFR is delivering decent value.  It’s doing well at the moment against things like other ancillary services, day-ahead and intraday trading, and the Balancing Mechanism, which is why we’re doing it. Especially when you consider the health of the asset and the reduced degradation that batteries in frequency response experience. And don’t forget that it isn’t just about FFR anymore. We’ve seen lithium ion participate in both the new Low Frequency Static and the Dynamic Low High weekly pay as clear auctions, and we are not far from the launch of Dynamic Containment, a new frequency service. This is a highly technical service where the most capable assets and aggregators will do best. All of these present more opportunities to secure frequency contracts on a shorter-term basis. 

Wholesale markets

We trade our customers’ batteries on the day ahead and intraday markets. The day ahead market, which runs on daily auctions, does show some of the volatility that batteries can exploit.  As a pay-as-clear market, it is relatively straight forward to stay in control of it.  However, opportunities to do the best for batteries – capturing a very cheap charge and selling the energy back at high prices – don’t happen that often in these day-ahead auctions.  There are clear opportunities to secure volumes to prepare for delivering other services, but this is more of a risk management than an optimisation question.

The intraday market presents more opportunities for energy storage. There are generally hundreds of megawatts traded in every settlement period, and at times there will be exciting prices. You might be trying to secure a spread, or balance the state of charge ahead of delivering frequency response, or you might be trying to secure some charge volume to sell back into the Balancing Mechanism later. Or, perhaps you’re trying to exploit churn opportunities for batteries by shifting the charge or discharge several times as the prices move intra-day. We do all of this with our batteries. Some days the volatility is in the market, on other days it isn’t, but we believe it should be part of an optimisation strategy.

BM participants fix their plans an hour ahead of real time and declare them to National Grid using Physical Notifications, or PNs.  If you’re not in the BM, then you can keep trading in the intraday market until very close to the moment of delivery.  The trade-off is between access to the BM and trying to capture the very last of the intraday opportunities.  We believe the BM wins here, but we can do both, in accordance with our customers and their needs. One final thing I would say on wholesale markets is that predicting revenues using hindcasting is very difficult. Anyone relying on hindcasting in their business models should make sure they understand the assumptions being made and the caveats that the illustrations come with.

Balancing Mechanism

At Flexitricity we’ve been trading flexibility with National Grid in the Balancing Mechanism since autumn 2018, and we’ve recently contracted several other sites which we’ll be bringing into the BM over the next few months.  One of the great things about the Balancing Mechanism is that every single trade or action is public. And when you look at the performance of batteries in the BM over the last few months, you should be encouraged. Average spreads have increased from the low £50s to the mid £80s, and the amount of activity each asset sees has increased as well.  

The most important point is that even what the BM is delivering now to batteries is nowhere near the optimum that it can and will deliver.  It’s well known – and publicly verifiable – that National Grid doesn’t yet use the BM as well as it could.  Up to now, Grid simply hasn’t had the operational toolkit or the business processes to make full use of relatively small, nimble assets like batteries,but this is already changing.  We’ve been working closely with National Grid on this, and we’re absolutely delighted with the work they’re doing to increase the use of distributed flexibility in the BM and are encouraged by the results we’ve seen.  Whilst our battery assets have been drawn to FFR recently by the high prices I described, we’ve seen National Grid’s performance with our combined heat and power assets improve by around 25 percentage points over the winter, measured on a skip rate basis.  

The BM is a real contender for batteries.  FFR prices are high just now, but battery owners need options to shield themselves from market risk.  In other words, what will your asset do if it doesn’t secure a frequency response contract? Having BM access in your route to market options provides essential revenue resilience. 

Balancing Mechanism Wider Access

You may have seen in the press at the end of last year that BM Wider Access is now live. This is fantastic for the market. We’ll be able to take a wide range of different types of flexibility directly into the BM. Domestic flexibility like EV charge points, batteries or heat pumps, and different types of I&C flexibility will be able to participate without needing their electricity supplier to provide the market access. But, to be clear, no one is actively doing it yet. Amongst other things, to be able to participate you need to qualify as a Virtual Lead Party, accede to the BSC and the CUSC, and you need to have registered each of your Secondary BMUs.  At the time of writing there are two companies approved as VLPs by Elexon - only one is an established aggregator in the GB market, and that’s Flexitricity. 

The first aggregated customer group we’re taking through the wider access route includes a behind the meter battery and we have already submitted our registration for the Secondary BMU that it’s going to sit in. BM Wider Access won’t stop the battery delivering ancillary services and has no impact on the electricity supply arrangements for the rest of the site.  

For front of the meter assets, I believe that a fully wrapped up service that includes access to everything is the best approach, but if you have an asset sitting with another supplier and you would like to have the BM as an option, then the wider access route with Flexitricity is open to you.

NIV chasing

NIV stands for Net Imbalance Volume.  It’s essentially a measure of how hard National Grid is having to work to keep supply and demand in balance.  NIV chasing involves making real time decisions to consume or generate to exploit volatility in the the System Imbalance Price (SIP), without telling National Grid that you’re doing it. 

It’s important to emphasise that you cannot real time NIV chase if you are an active participant in the BM. By real time NIV chase I mean changing your plans within one hour of real time to try and exploit volatility in SIP. If you want to be in the BM and NIV chase, the best you can do is tell Grid an hour ahead that you are going to be NIV chasing in a particular half hour. But, to do this, traders or algorithms will have to be able to predict SIP over an hour ahead. Given what drives SIP, making these decisions that far out is pretty high risk. 

Realistically, we believe that a proper NIV chasing strategy means you are opting out of the BM to be free to make those real time decisions. We’ve not seen any evidence that NIV chasing with a battery can drive the same revenues as BM participation can. NIV chasing has merit in the right circumstances, but for batteries, the publicly available, verifiable returns in the BM make more sense in our opinion.

DSO services

As flexible energy grows, Distribution Network Operators are slowly rebranding themselves as Distribution System Operators (DSO).  They are increasingly looking to procure flexibility to help manage constraint issues and avoid the costs of upgrading the distribution network. The nature of the service and the values change geographically and, whilst we expect the volumes required by the DSOs to increase, the critical question will always be what is the opportunity cost associated with delivering a service to a DSO? This is a question that has to be answered on a case by case basis, but, in certain areas, we would expect DSO services to be important for batteries as this part of the market evolves. Indeed, one of the batteries in our portfolio has a contract with a DSO, whereby they have been incentivised by reduced charges to curtail their import during the weekday evening peak through the winter. This has enhanced the financial performance for the asset and is a great example of a battery delivering a service to a DSO.

In conclusion

Batteries can deliver a range of different services. We do not believe that any one service holds the answer to the battery business case. We believe in revenue agility. We think that assets need access to ancillary services, DSO services, reliable triad management, energy markets, the Balancing Mechanism, and any other services that emerge, to be truly optimised. 

We think that route to market providers like Flexitricity need traders, data scientists, algorithms and operators to capture the full opportunity, and that an automated platform is not enough. We think that having a manned 24/7 operation is critical, rather than relying on out of hours automation to deliver a critical service. Our clients are our Energy Partners, with partnership and customer engagement embedded into everything that we do. The market will continue to evolve and partnering with someone like Flexitricity who has the agility to follow the money around these different opportunities will remain as important as ever.


Get in touch to discuss our battery storage revenue optimisation service:

info@flexitricity.com

0131 221 8100

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About the author

Andy Lowe

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