Battery storage versus gas gensets – a market snapshot
We are currently seeing a stronger market and appetite from developers for gas genset sites compared to battery storage sites. This results from several related market conditions which we explain below.
There has been rapid and feverish site acquisition activity by battery storage developers over the last two years. Some 4.5GW of battery storage schemes are now in the development pipeline with planning permission.
National Grid Frequency Response and Capacity Market factors
The proliferation of battery storage has led to an oversupply of storage schemes in National Grid’s Frequency Response market, which has depressed the Frequency Response revenues achieved in National Grid’s monthly auctions. This dent in revenues has coincided with a reduction in Capacity Market revenues for storage schemes.
The Capacity Market is effectively a retainer paid by National Grid to power providers. These contracts help National Grid encourage investment in power plants to ensure a continuity of supply when the nation has ‘system stress events’ such as large generators being unavailable.
The Capacity Market contract for new battery storage schemes can be up to 15 years. These long-term retainers pay storage schemes their ‘bread and butter’ revenues and guarantee a long-term element in the complicated revenues which stack together to make energy schemes profitable.
Battery storage market revenues
National Grid plans for 4-hour duration ‘system stress events’. Given that most storage in deployment has either ½-hour or 1-hour duration, National Grid and Ofgem rightly sought to ‘de-rate’ each KW of storage in the 2017 Capacity Market auction (which happened in February 2018).
The de-rating for a ½-hour duration scheme is 17.89% of the total installed capacity of the scheme and 36.44% for a 1-hour duration scheme. This re-rating is a reduction of 81% and 62% respectively compared to the 2016 capacity market.
In addition, the 2017 four-year ahead (T –4) Capacity Market auction cleared at £8.40, compared to £22.50 in the previous Capacity Market auction (2016).
The resulting annual revenue reduction for a typical 20MW 1-hour duration battery storage scheme is therefore some £370,000 and over the 15-year term of the Capacity Market contract is £5.6 million. This has, understandably, led to a decline in appetite from storage developers.
The other significant, although shorter-term, contract targeted by large-scale standalone battery storage schemes is National Grid’s Fast Frequency Response service. This revenue opportunity has reduced significantly due to the oversupply in battery storage in the last 12 months. The reduction for a typical scheme has been 50%.
However, on the positive side the cost of deploying battery storage schemes is tumbling owing to a reduction in lithium-ion cell costs and the economies and efficiencies that installing contractors (EPC contractors) are achieving. Some have seen cost reductions of as much as 45% between April 2017 and March 2018.
Gas genset market revenues
The revenue stacks for gas genset schemes have been strengthening all the time. While genset schemes have suffered the same clearing price downturn in the Capacity Market as storage schemes, they have not suffered the punishing de-rating delivered to storage.
Decreasing capacity margins, which is the amount of generating headroom on the UK’s energy system has been reducing (to as low as 4GW in Winter 2016/17). This has brought about increased price volatility in National Grid’s System (imbalance) Price.
In 2016/17, 75% of gas genset operators’ profits came from the highest 10% of price periods (½-hours). This was owing to the scarcity-driven price volatility, which the reduced Capacity Margin had brought about.
In 2016/17, with the lowest capacity margin for some time, gas genset operators achieved profitability some four times higher than in the previous year.
The underlying revenue opportunities gas genset schemes capture are strong. Indeed, given industry commentators are projecting a decrease in capacity margin to 2.5%, these revenues alone will be likely to increase.
Projections for Capacity Market clearing prices in 2020 and beyond suggest that as larger thermal and nuclear plants close, and we see fewer interconnectors (sub-sea cables) competing for new-build contracts, there will be a full recovery of Capacity Market prices.
Developer tolerance to grid connection costs for gas gensets and battery storage
At any point in time, Roadnight Taylor will have several clients who we have secured grid capacity for battery storage and gas genset schemes. We are in constant contact with developers of these technologies and can, therefore, gauge the relative appetite and demands for the different technologies.
As grid connection costs are a significant element of the capital expenditure of the schemes, we can measure the health of these markets, to an extent, by understanding developers’ tolerance for grid costs.
Developers’ tolerance for grid costs for gas gensets have been considerably above £50,000 per MW for the last three years. Battery storage developers’ tolerance of grid costs has been volatile. In late 2015 it was comfortably below £50,000 per MW; during the height of the storage bubble this went well above £50,000 per MW; this has now fallen to well below £50,000 again.
Ground rents for gas gensets and battery storage
Obviously, every site is different, and the ground rents commanded by a site will depend on several factors including, amongst others, the cost of the grid connection and whether the site has been put out safely to competitive offers. The ground rents offered also directly correlate to market conditions.
Ground rents for battery storage started at less than £3,000 pounds per MW. It reached a peak of £5,000 pounds per MW in 2016/17 and has now weakened significantly to around £2,000 pounds per MW in 2018.
The ground rents for good, well-marketed gas genset sites has consistently been between £2,500-£3,000 pounds per MW, and it has remained at this level. This assumes the right developers are being approached effectively, safely and in a competitive environment.
How Roadnight Taylor can help
Roadnight Taylor has the expertise to assess your site and local network for its suitability for viable gas gensets or battery storage schemes – and indeed large-scale solar which has returned. Being independent from any technology or developer, we will always advise the most suitable technology for your part of the grid and which gives you the greatest chances of success and the best returns.