New auction format sees drop in frequency response prices

Lower clearing prices in frequency response auctions will mean battery operators increasingly look to wholesale markets to generate revenues, an industry figure has told Utility Week.

Chris McLeod, head of trading at Habitat Energy, was responding to the results from the first frequency response auctions to be held using the Electricity System Operator’s (ESO) new Enduring Auction Capability platform.

The platform allows providers to offer the same capacity in the same time block for all of the products within the ESO’s new suite of frequency response services, rather than having to choose one in advance. This then enables the ESO to co-optimise its procurement across the various products.

Providers have also been able to enter negatively priced bids for the first time.

The first live auction using the platform took place on Thursday last week (2 November).

Jamie Ward, a trader at Habitat Energy, said negative prices emerged immediately under the new arrangements, with the Dynamic Regulation High and Dynamic Moderation High products “consistently” clearing below zero over the first five days.

Prices for the former averaged around -£4/MW/h and bottomed out at almost -£8/MW/h, while prices for the latter averaged around -£2/MW/h.

Partly as a result, clearing prices across all products averaged £2.23/MW/h over the first five days, compared to £3.86/MW/h over the previous week.

McLeod told Utility Week the introduction of negative pricing and the new, more efficient, auction format has further exposed the saturation of the frequency market, which was, and will continue to be, oversubscribed for much of the year.

“You expect the highest demand for the service to be in the summer months when inertia is lower and National Grid is basically having to contend with a system that’s got more renewables and all of the thermal assets on their summer outages,” he explained.

“But we’ve already got about over 3GW of installed battery storage capacity in in the UK and currently across all of the services, you’re probably looking at a maximum procurement of about 2.5GW.

“That will grow over time as there’s more renewables deployed on the system but it’s already saturated and will continue to be outpaced with the growth of installed battery storage capacity.”

He said the drop in frequency response prices will mean battery developers and operators will increasingly shift their focus to wholesale markets: “I think that investors and developers are going to have to get more comfortable with merchant risk and they’re going to have to get a fuller understanding of what that means in terms of revenue volatility.

“But ultimately, we think the business cases is absolutely justified for battery storage and is grounded in the wholesale returns.”

For a fuller explanation of the new auction format and why providers may wish to offer negative prices, click here to read Utility Week’s previous analysis.