The UK's energy transition is firmly underway and significant milestones have been reached on the country's path to net zero in the last two years, as renewable output records have tumbled, and the grid recorded its lowest ever carbon intensity in April.
But the transition has come at a cost. Power prices have become more volatile as fossil fuel-burning plants that have provided reliable baseload power for decades are replaced with intermittent renewables. In the first quarter of this year, this intermittency was at the heart of a myriad of bullish factors that combined to push spot prices to record highs.
Flexibility is becoming the name of the game as grid operators look to manage the inflexible supply of renewable energy to the grid. Flexible assets can support the transition to a renewable-based grid, reducing misalignments in supply and demand and therefore limiting volatility that would otherwise only increase in frequency and magnitude as renewable penetration increases.
Batteries can charge up on cheaper, excess renewable energy that can be discharged during periods of slimmer spare capacity and therefore higher prices, and demand-side management capabilities can enable industrial and commercial consumers to reduce their power consumption during peak hours and/or shift consumption to lower price periods when there is a larger cushion of spare renewable capacity.
According to industry organization, RenewableUK, the UK's operational battery storage capacity is 1.1 GW, while consultant estimates point towards a range of 10-12 GW by 2030, said Genna Boyle, head of business development at Limejump.
"The UK probably needs 8-10 GW in its demand side to get to the position we want to be in terms of a secure supply of low-carbon electricity, currently there's only a few hundred megawatts," said Michael Phelan, CEO and chairman of GridBeyond, which controls flexible demand for industrial, commercial, institutional and utility partners across the UK, Ireland and North America.
The business case for these kinds of assets is set to improve as the share of renewables in the UK energy mix grows and power prices become more volatile.
"Ultimately, it will be market signals that drive that increase in battery capacity. As we see more intermittent renewables come online, we're likely to see changes in that volatility, which may provide further investment signals for batteries," said Boyle, who saw the record Winter 2020 power prices as only strengthening the business case for batteries.
However, Phelan said grid operators need to do more to incentivize the flexibility that can act as a safety net during those volatile periods, the uptake of which is currently being inhibited by low clearing prices and de-rating of shorter duration batteries in the Capacity Market.
Flexible assets including battery and pumped storage, alongside demand side response, accounted for less than 10% of 41 GW of capacity agreements awarded in the most recent T-4 Capacity Auction for delivery between October 2024 and September 2025. The awards are commitments by British power grid operator National Grid ESO to purchase generation or load management capacity, to ensure there is sufficient capacity to meet demand.
"Operators want a debt: equity ratio of a certain amount. The debt must be against something that's contracted for a decent amount of time so that you have certainty on the debt," said Phelan.
"The Capacity Market has the potential to provide this certainty. However, it's ultimately trying to solve a peaking problem so favours long duration batteries [such as a six hour battery], but it's not viable to put batteries with durations of several hours on the market for the kind of prices they're paying in capacity now."
Phelan said a battery with a duration of between 90 and 120 minutes, the time it takes for the battery to deplete it's full capacity while discharging, is probably best suited to capturing the arbitrage that the market is heading towards, between low overnight prices and high peak prices. However, "[cheaper] short duration batteries are de-rated heavily in the capacity market and the result is that they're not getting very many batteries at all into the peak supply."
All forms of electricity generation under capacity agreements are subject to 'de-rating' factors, since 100% of an asset's capacity is never available 100% of the time. The de-rating factor for an onshore wind farm, where output is a function of weather, for instance, is larger than the de-rating factor of a CCGT, while a battery with a duration of two hours is de-rated more heavily than a battery with a duration of six hours.
Flexible assets eye higher capacity prices
Alan Smallwood, optimization director at asset manager Anesco, sees it slightly differently. "It's difficult to argue with the de-rating factors used for shorter duration batteries," he said, since their duration is typically shorter than periods of peak tightness.
Smallwood also believes that a T-4 clearing price of £25/kW that can support the business case for batteries is on the horizon, as larger generating units drop off the system and competition decreases.
"Nuclear stations are coming offline, and people are coming to the sensible but emotional realization that the writing is on the wall for CCGTs. That capacity can't be replaced solely by renewables."
He added that as the market becomes more volatile and difficult to predict, capacity events, where NG ESO issues an advanced notice that less generation is expected to be available than required to meet transmission system demand, are likely to become more frequent, and operators will therefore want more money for their services.
Frequency response services
NG ESO's suite of evolving balancing services, which ensure national power supply matches demand in real time, will become increasingly important during the energy transition, and are already a significant part of the business case for flexible assets.
As system inertia decreases due to the phase-out of polluting power plants, NG ESO's job of managing grid frequency within the statutory limits of plus/minus 1% of 50 Hz will become more difficult. Batteries, which can respond rapidly to frequency changes, are perfectly suited for frequency response services, and will play an important part in ensuring security of supply.
"Typically, a battery that is operating in the GB market will spend most of its time (95%) in the frequency response market, and this is where most of the revenue comes from now," said Phelan, who added that given current capacity market prices, "capacity is only a very small contribution to the business case."
Dynamic Containment was rolled out by NG ESO in 2020 as a faster, stepped version of Firm Frequency Response, an existing frequency response service, due to be phased out by Q4 2021, which requires assets to quickly reduce demand or increase generation in response to frequency deviations.
While high prices for Dynamic Containment are welcome news for battery owners, market participants expect prices to fall as the market saturates.
"Dynamic containment is great now, but towards the end of the year it'll be filled. By the end of November, prices will start to normalize but then something else will come along. Short Term Operating Reserve is going to be next," said Boyle.
Short Term Operating Reserve is a recently reintroduced legacy reserve service, though not intended for batteries. Procurement takes place at the day-ahead stage, with service providers generating a level of power or reduce their demand inside contractually obliged "availability" windows.
Other services may present battery owners with opportunities in the future, but the current approach by NG ESO to these services is not inspiring certainty among some flexible asset owners.
Boyle and Phelan pointed to the frequent introduction of new ancillary services and lack of forward visibility or long-term procurement for the flexible services that batteries and DSR can provide.
"The only clear signal [National Grid are] giving is, 'we're day-ahead procuring now and we're thinking of going to hour ahead,' which doesn't help to create any long-term certainty," Phelan said.
There are benefits to the short-term procurement of these services, however. "I'm a big advocate of these services moving towards real time delivery. This provides the best price for consumers each day," said Smallwood.
Ultimately, batteries will come into their own, capturing the arbitrage between periods of low and high prices as renewable penetration increases and prices become more volatile. In the meantime, the very fact that batteries and DSR are perfectly suited to solving the issues facing the grid during the energy transition should provide adequate certainty for investors.
"Investors have to trust that these are always services that will be required by National Grid, who have demonstrated that they are fond of batteries and want to use them in the most cost-effective way," said Smallwood.
Grid approach continues to evolve
An NG ESO spokesman told S&P Global Platts that although the operator is moving away from long-term contracts for energy services, procurement of Dynamic Containment will continue to evolve over time and, "for the more novel technology solutions, we are taking a longer term procurement approach to bring these on board."
Much of the focus in the UK power market has been on batteries but in its Future Energy Scenarios: Bridging the Gap to Net Zero report, NG ESO recommends for the wider energy industry to focus as much on demand markets as supply markets.
"Demand side is what eventually needs to be flexible since we can't meet demand with batteries alone," said Phelan. "The load market was a difficult market for the last two years in the UK, and everybody else bar GridBeyond has walked away from it."
Phelan added, "An underused asset in most countries is the water systems, which have huge flexibility —I don't think any pumped storage sites are pumping off renewables now."
The success of the energy transition will ultimately be measured by how fast the grid can flip from a centralized system, where supply can be conveniently scaled up or down to meet demand, to a decentralized system where demand responds to intermittent supply. Grid operators, whose historic role has been to manage centralized grids, will have to adapt as their role and responsibilities change.
"It's a fundamental change, and the lights have to stay on in the meantime. That's why it's hard for [National] Grid to cause that change to happen in a calculated, controlled manner," Phelan said.
Control of the transition is vital, however, to avoid unwelcome outages along the way. While volatile prices may build the business case for flexibility, it is flexibility that will protect against the collapse of the grid during volatile periods, such as that witnessed in Texas in February during an unprecedented cold-weather event.
"In Texas, they didn't guide the market in the direction they wanted to go," said Phelan, "and look where it got them."
Clarifies that Short Term Operating Reserve is not intended for batteries in twenty-fifth paragraph.