Lack of UK battery balancing action 'harming investment,' says energy storage trader

London — Batteries are being pulled from the UK's balancing mechanism and put into frequency services because they are not being dispatched regularly enough by National Grid, an energy storage trader told S&P Global Platts June 10.

This is harming investment in batteries because frequency control is not seen as a sustainable source of income, while the balancing market is, Aaron Lally said.

Lally works for a large UK aggregator of distributed energy assets as a storage and quantitative trader, having worked in investment banking and commodity trade houses. He was speaking to Platts in a personal capacity.

National Grid has been asked to respond to the comments.

"All that is needed is a level playing field in the Balancing Mechanism, where batteries are dispatched in price merit order," Lally said.

An availability payment similar to those made to conventional generators in the BM would help, he said.

"Do that and batteries would generate between GBP60,000-100,000 per MW per year [$76,000-127,000/MW/year]. Investors are looking for GBP40,000-50,000/MW/year return. There is more than enough money to incentivize 7 GW-8 GW of battery storage planned in the UK, while saving on current non-commodity system costs," he said.

His comments were in step with a June 5 report by UK storage association the Electricity Storage Network.

The ESN said it was working with system operator National Grid to improve market access, pushing for a level playing field in control room decision-making and automation.

"However, non-fossil fuel assets are still struggling to compete on this uneven playing field. Market barriers must be eliminated to fully value the services that storage can provide. Flexibility markets should value carbon and provide transparent reporting on the carbon intensity of all services," it said.

Massive premium

Lally said the coronavirus crisis had underlined the need to move on from the current focus of curtailing wind and solar farms, paying large gas plants and signing opaque bilateral contracts with central generators like EDF.

"Subsidized renewables are being paid a massive premium to turn down in the emergency ODFM [Optional Downward Flexibility Management] service as well as in the balancing mechanism," he said.

"Wind generators are only willing to turn off when prices reach negative GBP60-70/MWh, offsetting their subsidies. They are not losing when the price goes through zero," he said.

Batteries could be soaking up this surplus free power and saving the grid GBP60-70/MWh, he said.

In defence of an expected spike in balancing costs this year, National Grid says it is dealing with unprecedented circumstances due to the coronavirus, battling low demand and high renewables generation.

"But this is what the system is going to look like in a few years' times as renewables grow. Promises to integrate flexibility were made two years ago, but since then little has changed. Future costs and carbon emissions are going to be higher than they need be unless change starts soon," Lally said.

GBP30/MWh cycle

Battery costs have come down steeply, Lally said, adding: "GBP25/MWh spread now covers developer costs while a GBP30/MWh spread generates a small profit."

At times, National Grid had been taking power off the grid at negative GBP60/MWh, when a battery would be charging, and sending it out at GBP200/MWh, when a battery would be discharging, he said.

As such the ESO has been cycling power at a GBP260/MWh spread.

"That is before you note the economics of using the same power you curtailed to meet a grid shortage, instead of curtailing and then producing more energy that has higher CO2 emissions, from gas for example," he said.

At the current level of dispatch, however, returns were too low to keep battery assets in the BM.

"Investors are looking at all this volatility in the power market but also seeing that batteries are not being called, so why bother to build? Now batteries are being pulled from the BM and put back into frequency services, which are not deep or liquid enough to encourage new investment," he said.

The UK has around 1 GW of operational battery storage capacity and 9.8 GW either applying for or holding construction permits. Of some 6 GW of successful applications, 3% are in construction.

In mid-May the system operator admitted an extended period of low demand could push balancing costs up to GBP826.3 million ($1.011 billion) for the four months to September, almost GBP500 million more than for the same period last year.

Balancing costs for April were up 49% year on year as constraint payments to gas plants more than doubled to GBP56 million ($70 million), according to data from National Grid. Costs of GBP125 million for the month compared with GBP84 million for April 2019.

For the four months to end-April, UK balancing costs were up 40% or GBP226 million on year at GBP557 million.