The Association for Renewable Energy and Clean Technology (REA) has called for a new mechanism to support the development of long-duration energy storage.
The trade body said the current markets and mechanisms fail to provide the long-term certainty over income that is necessary to attract investment in large-scale projects with high upfront capital costs.
In a new report, the REA said an energy system powered mainly by variable renewables will require “drastically increased provision of energy storage at all scales.” Recent estimates that the UK will need at least 20GW to 40GW of long-duration storage with a storage capacity exceeding 200GWh are likely, if anything, to “increase rather than decrease”.
It said the growth of short-duration energy storage has not been matched by longer-duration technologies, which currently comprise 2.8GW of pumped hydro and a few liquid air and compressed air energy storage projects, whilst flexibility markets remain “dominated” by fossil fuel plants.
The report cited numerous barriers to entry covering existing markets and support mechanisms. It said arbitrage payments in the wholesale market do not provide “bankable and adequate investment signals due to the price uncertainty involved and their short-term nature”. Longer-term bilateral contracts with suppliers or renewable generators may emerge but are also unlikely to attract sufficient investment.
Meanwhile, the Capacity Market as it is currently designed incentivises “adequacy at the lowest cost” and does not incorporate the benefits that long-duration storage can provide in terms of network constraint management and balancing and ancillary services. These services are procured separately by National Grid Electricity System Operator (ESO) in an “ad hoc and piece-meal” fashion meaning “developers do not see a combined, reliable, long-term price signal that would allow them to attract funding at a reasonable cost of capital.”
Furthermore, the mechanism does not work for projects with lengthy construction periods as auctions take place four years ahead of delivery at most: “While technically, a developer could start building a project and then bid when four years of construction time remains, this is not a feasible way of developing any project and would be close-to impossible to finance.”
The Contrasts for Difference is not set up to encourage investment in flexible capacity either, merely incentivising generators to produce as much as electricity as possible: “As such, it is not appropriate for stimulating investment in flexible technologies, which bring value by operating at specific times, responding to market conditions and system requirements.”
The report highlighted a long list of issues with balancing and ancillary services. The contracts are often short and so are the lead times between procurement and delivery, creating uncertainty over revenues and increasing financing costs.
Markets are relatively “shallow and illiquid”, often location-specific and subject to ongoing reform: “This means investors cannot estimate with confidence how their value will evolve over long horizons.”
Different services are procured separately and cannot always be stacked. Some cannot be provided separately, meaning if a plant secures a contract for one but not the other, they are not fully renumerated. In the case of the inertia inherent to synchronous plants, this can mean it is effectively provided for free. Other services such as reactive power are undervalued.
The report said constraints on the “ageing” power grid are also an obstacle, limiting the amount of power that can be transferred between centres of generation and demand: “This legacy grid infrastructure means that the benefits of longer-duration energy storage are maximised when it is developed close to where the energy will be used. National Grid ESO uses the Balancing Mechanism to redispatch plants from the market schedule to a profile which can be delivered given the network constraints. However, this also prevents new projects, including storage, from gaining economically feasible grid connections.”
It said the potential for storage to reduce the cost of managing constraints “remain largely untapped as the current market provides limit price signal to reflect this,” adding: “While certain components that make up network charges could be charged in a more dynamic and cost-reflective manner to incentivise flexibility, these signals alone would most likely be insufficient.” As with balancing and ancillary services, the contracts in flexibility markets are too short.
The REA said the combination of all these issues creates an “onerous environment” for investment in longer-duration storage projects. It said a new support mechanism is therefore necessary – one which is: compatible with the operational profile of storage, incentivising efficient dispatch through price signals; de-risks investment and lowers financing costs, whilst protecting consumers from undue risks and excessive costs; and enable participation by a range of technologies, ensuring effective competition and encouraging the growth of new ones.
Of the mechanisms it considered, the REA said the most appropriate options would either an income floor that would expose investors to merchant risk whilst topping up their revenues to a minimum level, or fully regulated returns under the regulatory asset base (RAB) model already use to fund networks and also being considered for new nuclear plants.
The report said the income floor model “appears the most compatible with the operational profile of storage,” ensuring that “dispatch decisions would be driven by market price signals”. It said the RAB model could also be compatible with the operational profile of storage and would provide a higher level of certainty to investors but would also require incentives to be “carefully designed to avoid potential market distortions” and could leave consumers on the hook for construction risk.
REA director of policy Frank Gordon said: “Longer-duration energy storage will be vital to supporting our grid through the energy transition in the drive to net zero. However, as our report shows, we are a long way from meeting our targets on current trends.
“While I welcome the government’s announcement of a £68 million demonstration competition for first of a kind energy storage projects, this will not resolve the barriers to deployment that affect all longer-duration energy storage technologies.
“It’s clear that, in order to drive investment in this area, a new market mechanism is needed. We see an income floor as the most appropriate option, however, with a Regulated Asset Base model being the next best alternative. We will work with BEIS to push for change in this area and hope they respond by issuing a call for evidence alongside the smart systems and flexibility plan update.”