Where now for energy storage?

Energy storage lost out in the latest capacity market auction, with a mere 153MW de-rated capacity agreeing contracts. But continued investor interest in a broad range of storage technologies suggests there is still hope for it yet.

Since technology costs have come down in the last few years, energy storage, and batteries in particular, have been hailed the next big thing in the power market. However, the government cut to the de-rating factor in capacity market auctions has caused the deployment opportunities of the technology in the UK to stall, at least for batteries hoping to leverage business models which rely on capacity provision.

The results of the latest four-year-ahead auction came as a surprise to many – clearing at the record-low price of £8.40 per kW. This was well below the market’s expectations, which had ranged from £25/kW/year to £17/kW/year. A big winner in the auction was interconnection – which won 4.6GW of capacity, including 2.15GW of new-build. For battery storage, however, the picture was bleak.

The win rate for storage which entered the auction was just 14 per cent, significantly down on the 89 per cent which won contracts last year. In the end, just 153MW of de-rated capacity agreed contracts this time around. Around 1.1GW had entered, meaning a whopping 949MW failed to secure contracts. Cornwall Insight energy analyst Tom Palmer says this is a “huge impact on the market”. “It just shows there is an appetite, but commercials don’t really stack up for many markets at the moment.”

The barriers

A report, published by the all-party parliamentary group (APPG) on energy storage and the Renewable Energy Association in December 2017, claims there is around 3.23GW of existing energy storage capacity in the UK and of that, around 60MW is battery storage. It laid out a “high-deployment” scenario in which 12GW of additional battery energy storage is deployed by 2021, based on more projects being co-located at solar and onshore wind sites, and larger-grid connected projects. It said policy is the “largest barrier to deployment” as the international EV supply chain developments, batter technology improves, and costs fall.

Baringa partner Phil Grant tells Utility Week there are “lots of big projects being discussed”, but questions whether the market can accommodate all of these alongside other forms of flexibility, such as gas engines and interconnectors.

There is just over 1GW of electrochemical storage installed globally, most of which is lithium ion and has been installed within the past five years. According to Grant. “It’s still a rapidly developing technology with associated technology and maturity risks.”

In the UK, prospects for storage development have stalled since the government published its intention to lower the de-rating factor in capacity market auctions by almost 80 per cent for 30-minute duration batteries, due to industry concerns about the reliability with which certain short-duration storage technologies could make themselves available during a system stress event

According to KPMG analyst Simon Virley the reduced de-rating factor is directly to blame for the reduced participation of energy storage in this year’s auction, compared to the previous year where approximately 500MW of battery storage secured agreements.

It’s a consequence which, he says, “runs somewhat counter” to the government’s vision of using storage to create “the most efficient, most productive electricity system in the world”. Storage is identified as one of the key technologies in the government’s clean growth strategy.

Business development director at Burns and McDonnell, Jeffrey Casey, agrees, arguing that structural challenges are “slowing progress” and development of energy storage has “yet to achieve the outcomes and scale that it should have”. “The recent move to de-rate for shorter-duration systems will have a dramatic impact on project profitability for the technology,” he writes in a column for Utility Week.

The future

But the future of storage investment does not rest solely on the shoulders of the capacity market. There are other ways in which energy storage can prosper, such as arbitrage and participation in new balancing services to grid.

Although energy storage featured modestly in the latest capacity market auction, battery storage, in concert with renewable technologies, continues to draw “increased investment” in bespoke industrial applications as “traditional energy procurement strategies are re-cast to exploit the full cost reduction potential of hybrid solutions”, according to PA Consulting Group energy storage expert James Morris.

Cornwall’s Palmer says lots of the battery investment at the moment is “headed towards thinking about wholesale arbitrage and balancing mechanisms”. However, he adds, “we’re probably 3-4 years away from it being a truly dependable cash flow that’s reliable”. “There are ways that people are making it work, but really the case is still not really there.”

“There is also a greater focus on the balancing mechanism,” he says, “but that doesn’t change the overall business case for batteries, there is still an uncertain future with unpredictable revenue streams.”

Palmer says there has recently been a ramp-up of behind-the-meter solutions on industrial sites, which are bigger scale. These, he argues, are beneficial in that they can capture higher capacity market payments from being demand-side response rather than pure battery play, so they are not impacted by BEIS’s de-rating changes.

“They’re more advantageous in the short-term,” he says, “but they’ve got a number of challenges as well coming up in the future, with the targeted charging review in probably about 2020-21. They’re going to face a tough time then, but at the moment they look good because they’re protected and get access to network benefits.”

Despite its promise that it will help in the move to a more flexible energy system, prospects for energy storage are still uncertain.

Baringa’s Grant suggests we may see a “wave” of storage providing grid services, followed by a “softening in the market”, until battery technology matures and price points drop to make arbitrage models sustainable in the long-term.

The government claims it is committed to storage. However, if it wants rapid deployment it must keep to the targets and timelines it has set out to create a level playing field for the technology.

Recent energy storage announcements

14 Feb 2018 – government announces £30 million funding for 21 vehicle-to-grid projects

01 Feb 2018 – National Grid, Northern Powergrid and UK Power Networks join forces with a Nissan-led consortium to roll out a “world-first” £9.8 million trial for 1,000 vehicle-to-grid (V2G) chargers

26 Jan 2018 – Faraday Institution announces £42 million funding to develop “lighter and safer” electric vehicle batteries

25 Jan 2018 – new consortium is launched to develop the first large-scale UK domestic trial of vehicle-to-grid charging technology for drivers of electric vehicles

11 Jan 2018 – storage developer VLC Energy completes the installation the UK’s largest utility-scale battery portfolio to date – 50MW

13 Dec 2017 – investment company ILI Pump Storage Hydro reveals plans to develop three pumped hydro storage companies in Scotland, with an estimated total capacity of around 1,200MW