Capacity market loophole allows batteries to skirt revenue cuts

A loophole in the capacity market rules has enabled battery storage to avoid revenue cuts by disguising itself as demand-side response (DSR), an industry expert has warned.

Ahead of the latest auctions, the government slashed the de-rating factor for most batteries, drastically reducing the amount of money they can earn. By bidding as DSR, battery developers are able to receive a higher de-rating factor and therefore higher revenues.

Tom Palmer, principal consultant at Cornwall Insight, told Utility Week at least one storage project has secured a capacity agreement in this way – the 6MW Leighton Buzzard facility.

The site is owned by UK Power Networks and operated on its behalf by Limejump. It was built with the help of a £13.2 million grant from Ofgem’s Low Carbon Network Fund.

“That actually got classed as a DSR project, so it’s got a higher de-rating factor,” said Palmer. “It’s a battery storage project that’s connected directly to the substation. There’s no customers involved, so it’s not demand-side response in the true sense.”

Participants in the capacity market make bids and are paid according to their de-rated capacity. There are different de-rating factors for different technologies and, up until last year, all batteries received a de-rating factor of 96 per cent.

Then in July, the Department for Business, Energy and Industrial Strategy (BEIS) revealed plans to reduce the de-rating factor for most batteries due to concerns they were being overcompensated and may not be able to fulfil their obligations during stress events.

They would be divided into eight different classes based on their discharge duration, each with its own de-rating factor.

In December, BEIS announced the new de-rating factors for the eight classes. All but the longest-range batteries (four hours plus) were assigned a lower de-rating factor, with the shortest-range batteries (30 minutes plus) receiving a de-rating factor of less than 18 per cent in the four-year-ahead (T-4) auction.

The changes have made it advantageous for some projects to enter auctions as DSR which has a de-rating factor of 86 per cent.

To receive capacity payments, DSR providers must demonstrate the ability to reduce metered consumption against a baseline level during three separate settlement periods. As settlement periods last just 30 minutes, even the shortest-range batteries can pass this test.

The baseline can also be set to zero. “You can export from your battery and deduct megawatts from zero and still be classed as DSR,” Palmer explained. “The way the rules are written, they are too vague for National Grid, the EMR delivery body, to be able to give a firm no”.

He said the penalties for failing to meet a capacity market stress event are not sufficient to deter battery developers from listing their projects as DSR as “you can never lose more than you’ve gained”.

However, they would lose their eligibility to bid for 15-year new build contracts. As an existing facility, this would not have been a concern for Leighton Buzzard.

According to Palmer, there may be other projects which have secured capacity agreements under the guise of DSR, but it is difficult to tell because of the limited details listed in the capacity market register.

“There’s definitely one and there could be more,” he remarked.

Palmer said he raised the issue during the consultation on the reduced de-rating factors for batteries, but it was not resolved in time for the latest auctions.

A spokeswoman for BEIS, said: “Batteries and demand-side response can both play an important role in the capacity market and contribute to security of supply.

“After every capacity market auction, we reflect with our delivery partners on lessons that can be learnt for future auctions and we are working with National Grid to look into this claim.”

A spokesman for Limejump, added: “Limejump ensures that for all of our customers we comply with the relevant rules and regulations of the capacity market.

“Any unproven sites listed on the capacity market register are not confirmed until DSR testing begins and there have been no changes to the rules regarding DSR for this year’s auction process.”