In a previous blog published on Monday 25 October, we discussed the issue of Extended Performance Tests within the GB Capacity Market (CM). In summary, due to degradation overtime it is currently not possible for batteries to be paid for their full capacity in the CM without risking significant fines. In this follow up blog, we put forward some potential solutions to this issue.
What are the options?
With the Extended Performance test in mind, what can potential new-build storage CMUs do to ensure they balance CM revenues against risk? In my mind there are three high level options:
- Option 1 – ‘Overbuild’ and have a higher battery capacity than the “Connection Capacity” such that it will still be able to deliver 95% of the capacity stated in its CM agreement for the full duration stated in its CM agreement.
- Option 2 – Enter a 15-year agreement with a lower capacity/duration that the asset would always be able to achieve.
- Option 3 – Take rolling 1-year contracts rather than a 15-year contract and enter the capacity/duration that the battery is able to achieve at that point in time.
Option 1 would likely require building a battery that has a greater capacity (in MW) than its grid connection would allow it to export. It would allow the CMU to meet the Extended Performance test in later years, although this will obviously be highly dependent on actual degradation compared to forecasts. The main negative of this approach is it would require significant additional capex to build enough additional capacity to meet the Extended Performance test, which may outweigh the benefit of the higher CM payments achievable. This is also dependent on the CM clearing price achieved.
Option 2 is a low-risk approach as the CMU would essentially be entered with the minimum capacity/duration it will reach during the 15-year period covered by the agreement. This means the site will always be able to meet the Extended Performance test, but it will mean lower overall revenues achieved from the CM, particularly in the earlier years of the agreement.
Option 3 would essentially sacrifice the long-term revenue certainty of a single 15-year agreement in favour of trying to maximise CM payments and minimise the risk of agreement termination. It would do this by entering the maximum capacity/duration possible for each delivery year, with this falling year-on-year as the asset degrades. This is a higher risk strategy as prices in the future will vary and risks undermining the typical purpose of the CM in storage business models as a bankable revenue stream. It would also require additional administration time to enter the CMU into the auction for every year.
Conclusion
Batteries are exposed to unique risks when providing security of supply because of the degradation of the cells as they are cycled. It is likely the contribution towards security of supply is non-negotiable as falling duration would mean capacity has to be re-procured, in all likelihood at higher prices.
Therefore, the cost of managing this risk is a key consideration for the future of the CM and the transition to net zero as batteries (especially lithium-ion) are likely to be a keystone technology in our future electricity system. It is worth considering, as part of the Call for Evidence on aligning the CM with net zero, if there are other ways to manage the anticipated duration of battery technologies over their lifetime.
For example, a battery project could provide the Electricity Market Reform (EMR) Delivery Body with their expected duration curve for the life of the 15 year agreement, and they only have to prove their duration against that, their payments would decrease over time if their duration, and de-rated capacity as a result fell, but the consumer would be protected against unexpected changes in capacity, and the battery developer would be able to concentrate on designing an optimal system.
One of the key factors in determining the best approach for battery developers is the expected CM clearing price, and Cornwall Insight will shortly be publishing our latest forecast for the upcoming T-1 and T-4 auctions. If you would like to discuss this subscription or any of the points raised in this blog please feel free to get in touch.
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