The capacity market auctions, Winter 2017 / 2018: certainty or uncertainty in the storage sector?

Posted on Dec 6, 2017
The capacity market auctions, Winter 2017 / 2018: certainty or uncertainty in the storage sector?

There’s a rigid timetable for the Capacity Market Auctions in GB. Probably, the timetable is the most certain of all the variables in the auction process. Last Friday, ( 1 December 2017), the EMR delivery body published details of the projects and their status in the prequalification phase of the auction. Our interest is in electricity storage, so we have started our analysis by looking at those who have put their names down for storage projects, and specifically battery projects) in the two auctions, T-1 and T-4.

The T-1 auctions are for delivery in the next year, and the T-4 auctions are for delivery in four years’ time. We can expect that there is a strong intent to deliver the projects in the T-1 category, these will have all the planning and project details in place, so that no time is wasted once the auction results are in. Projects in the T-4 auction are more likely to be speculative as the lead time is longer. If we bear in mind that storage can be delivered quickly (from start on site to commissioning for a battery project can be as little as three months) then participants in the T-4 auction are playing a much longer game.

But the confidence in planning for energy storage in the Capacity Market was dented again yesterday ( 4 December) by the decisions on proposed changes to some of the rules in the Capacity Market rules. The changes don’t affect existing Capacity Market contract holders, but they will have a major effect on many participants in the auctions next month. The main change concerns the derating factors which will be applied to storage – as a contract for capacity is now expected to deliver its output through the duration of a capacity market event. The arguments presented in the consultation were complex, but in essence, the energy content of a storage project, will now have a significant impact on the revenue available to a successful bidder in the Capacity Market auctions.

We’re used to changes in the energy storage arena. We have seen great changes in the way that participants in the power industry have approached energy storage. A few years ago, it was a struggle to find more than a handful of businesses who were prepared to invest in building and operating storage. This month we have seen companies propose 4600 MW of new energy storage over the next four years- and that is just for those aspiring to a capacity market contract. If all of that were to be built, it might cost more than £250 million, so this is a big opportunity for manufacturers, contractors, investors, power companies and so on. If we add in the significant interest in storage from other parties, looking at behind the meter storage, the flexibility market and the rest, the numbers are greater. But how will this shake out?

First, the proposed derating factors may cause some developers to change their minds and drop out of the auction process. Other developers will start revisiting their business models and look to see if changing their energy storage type (perhaps switching from a short duration battery to a longer duration system) will improve their economics. This may not be easy if planning permission or other consents have been made on the basis of a specific technology type.

Secondly, not everyone is going to be successful in the auction. Energy storage projects have widely different costs depending on location (the cost of the site, cost of electrical connection, technology choice, and more) and revenue prediction is always uncertain.

The soft dynamics of the market creates the most uncertainty. We have plotted the prequalified storage projects (only batteries) in this year’s auction on the attached graphic. It shows some interesting things:

New storage projects seem to be clustered. Availability of connections, the possibility of co-location including co-location with behind the meter applications – may influence these, as well as the attractiveness of working either in clusters (companies may be submitting multiple applications on nearby sites) or taking comfort from known local contacts

There is a preference for projects below 50 MW. Of course, the larger projects (shown by the height of the columns) have high visibility on the graphic as they seem to be like tower blocks compared to the low-rise landscape across the rest of the country. The larger projects are in the T-4 auction, and many are on the same site as a similar project in the T-1 auction, allowing an early income from a phased approach to construction to be obtained. In future years, as the licensing for storage projects is clarified, we expect the 50 MW threshold to change.

A stable income from the Capacity Market is a help in predicting the income for a storage project, but developers will continue to need guidance on optimising their projects, to ensure financial and commercial resilience, and just as important, to make sure that they have made the right technical choices. We are delighted that there is so much interest in energy storage, but there is still much uncertainty to be addressed. That’s where our company, Swanbarton, can help.

Data extracted from the pre-qualification register published by the EMR Delivery Body. Swanbarton has taken care in producing this graphic, but we do not accept any responsibility for errors or omissions, as the graphic is shown for information purposes only.