The energy sector has not been immune to the dramatic changes that have taken place over the last 18 months. Wholesale trading prices were affected by fluctuating demand as lockdowns came and went, forcing the sector to adapt quickly to the changing environment.
As the energy system evolves to become more connected, and consumer needs develop, there is a growing opportunity for flexibility and storage to have a real impact. With the uptake of electric vehicles (EVs) and the shift towards low carbon generation, batteries will be crucial in enabling the much-needed increase in renewable generation while keeping the system balanced – two vital components as we work towards net zero.
Battery storage capacity is continuing to grow rapidly, with an increase from 1GW to 5GW expected by 2025. As this market grows in both size and complexity, the role of trading and optimisation partners will become more important and valuable.
As well as the growth in batteries, frequency response services are evolving at pace with the outlook remaining positive for assets able to access these services. Overall, the current frequency response market is between 1850MW and 2050MW. This is made up of between 1200MW and 1400MW of Dynamic Containment (DC), together with 650MW of monthly/weekly Firm Frequency Response (FFR) – the practice of providing either dynamic or static service to reduce demand or increase generation in order to balance the grid.
By the end of this year, the DC volume procured by National Grid will be limited to between 800MW and 1000MW, leading us to predict that supply volume will exceed demand, while revenues will be similar to FFR levels. Despite these changing market conditions, however, frequency response markets should continue to be the most lucrative revenue stream for the next 12 to 18 months.
DC has provided valuable insight into how frequency response services will be contracted in the future and how this will impact the role of the Route to Market (RtM) provider. Due to an evolved, day-ahead procurement process, National Grid now has the ability to manage DC requirements on a daily basis and – from August 2021 – at Electricity Forward Agreement (EFA) block granularity.
However, day-ahead procurement of DC allows RtM providers to trade their assets on high value days – or even just for individual EFA blocks – rather than through the delivery of DC. We can therefore expect to see more days where RtM providers pivot out of frequency response services in order to secure more money from wholesale trading and the Balancing Mechanism (BM) – reflecting the trend that occurred earlier in the year.
Another newcomer to the market in January was stacking, which allows an asset to have a DC contract, while simultaneously participating in the Balancing Mechanism. This is currently limited to bids alongside the DC Low product but will be expanded with the introduction of DC High in October. When one considers the introduction of two further frequency services – Dynamic Moderation and Dynamic Regulation, which will stack with DC/BM once launched in early 2022 – it is clear that the market is moving at pace.
In the future, the RtM provider will have to work out the optimal proportions of the various frequency response services to stack, as well as deciding how much capacity to hold back for trading or BM. These decisions are not based on revenue alone but also need to take account of battery degradation whilst delivering these services. The increased complexity is also triggering renewed excitement for new opportunities, technology and approaches. This can only be achieved through excellent relationships with the Electricity System Operator, outstanding data science and DevOps capabilities, continually evolving strategies and tooling, and experienced traders using their market knowledge alongside the tooling to implement the trading and optimisation strategy.
As a result of the increased complexity of the RtM role, EDF is becoming involved much earlier in the battery development lifecycle, contributing to business model preparation for battery developers with analysis on revenue, cycles and battery performance. From a customer perspective, this not only provides important insights, but also creates a partnership dynamic that serves to improve performance in both the short and long-term.
EDF currently has a substantial portfolio of batteries in the UK, with 195MW operational and a further 295MW under construction. Those with an extensive portfolio of assets are best placed to advise the growing number of owners and investors on how they can derive maximum revenue, while minimising investment risk.
A recent example of a business benefiting from such services is Zenobe – the UK’s leading independent owner and operator of battery storage. It recently selected EDF as the company’s trading and optimisation partner for a new 100MW battery that will be the largest transmission-connected battery storage project in Europe. This partnership will see EDF optimise the battery through its market-leading trading platform, allowing Zenobe to gain access to a variety of revenue streams, including frequency response services such as DC, BM and wholesale optimisation, whilst also leveraging our trading expertise.
It is clear for any asset owner that – with such a fast-moving market and evolving trends – finding the right partner with the knowledge and expertise to successfully implement the best optimisation strategies is vital. For those looking to reap the benefits of the next step in battery storage, the next year will provide numerous opportunities in quick succession.