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A winter of content:
the trends driving battery storage growth

Our viewpoint

The battery storage market has been enjoying a good start to 2021. Dynamic Containment (DC) prices have continued to clear at £17/MW/h, the Capacity Market (CM) T-4 auction cleared at £18/kW/yr, and the high prices seen in the wholesale market have meant batteries could have captured arbitrage values of up to £1,442/MWh. But as these markets mature and battery deployment increases what can we expect to see in the future? 

Headroom in Dynamic Containment remains 

The DC market, National Grid’s new frequency response ancillary service, is getting lots of attention as prices have remained at £17/MW/h for the past six months, even though there has been a six-fold increase in participation in this market since it was launched in October 2020. This price far outstrips competing Firm Frequency Response (FFR) auctions, which have been clearing between £4-£7/MW/h. This is primarily because the capacity cap (which has been raised since launch) still has yet to be hit. The relative undersupply of this market, owing to the technical requirements of DC meaning only batteries can compete, is allowing participants to continue to receive the full value for providing this service. But DC is an ancillary service with the size of the market being relatively small (compared to the Balancing Mechanism or the wholesale market). National Grid has set out its capacity procurement expectations for this service with 1,400MW being the highest amount it expects to procure. The highest volume to clear the DC auction was on 17 April, when it reached 604MW. This means that once the capacity entering the auction reaches this level, we expect the price of this service to drop.  

0100200300400500600700Capacity (MW)Dynamic Containment volume cleared by ownerGridBeyondPeak Gen Top Co LtdArenko Cleantech LimitedHabitat Energy LimitedStatkraft Markets GmbHCentrica Brigg LtdKiwi Power LtdTesla Motors LimitedEDF Energy Customers LtdOpen Energi LtdUK Power Reserve LtdFlexitricity LimitedOrigami Energy LimitedZenobe Energy Limited02/10/202009/10/202016/10/202023/10/202030/10/202006/11/202013/11/202020/11/202027/11/202004/12/202011/12/202018/12/202025/12/202001/01/202108/01/202115/01/202122/01/202129/01/202105/02/202112/02/202119/02/202126/02/202105/03/202112/03/202119/03/202126/03/202102/04/202109/04/202116/04/202123/04/202130/04/2021

Dynamic Containment volumes have been steadily increasing since October 2020, but there have been notable days in January and March which saw volumes exit to chase higher prices in the wholesale market.

In the longer term, we expect DC value, as well as the other new products, to be set by the returns available in the wholesale market, as the ancillary markets become saturated. The daily auctions should help the markets reach this equilibrium, as operators can quickly move in and out of each market, as we saw in January when energy prices were high enough to rival DC returns. Moving to Electricity Forward Agreement (EFA) block procurement will mean that the prices can follow the daily price shape even closer. However, this will also require the price cap to be lifted to ensure DC volume can be procured when prices in the wholesale market soar. 

Favourable market conditions spur Capacity Market growth 

This year we have seen the T-4 Capacity Market cleared at £18/kW/yr, with 225MW of new build battery capacity winning agreements – almost double the 117MW that were awarded agreements in last year’s T-4 auction that cleared at £15.97/kW/yr. Limited duration storage is de-rated depending on its ability to help the system during stress events. This ranges from 12% for 30-minute duration storage through to 95% for more than 5-hour duration storage. LCP’s view is that market fundamentals in future years will shift to make the business case for longer duration batteries more attractive than they are now. This shift has began to manifest in this year’s auction results, with 69% of the cleared battery capacity being longer than 2-hour duration for delivery in 2024/25 compared to 17% and 0% for delivery in 2023/24 and 2022/23 respectively.  

Other possible drivers behind the increase in the overall battery storage deployment are the favourable policy and regulatory changes that have come in recently. Firstly, we have seen the classification for batteries change to electricity generation, aided by the removal of final consumption levies alongside the earlier removal of double charging electricity storage, both as generation and demand. Secondly, the changes in planning law to allow energy storage projects over 50MW to bypass the expensive and time consuming “Nationally Significant Infrastructure Project” process.  

Wholesale market and Balancing Mechanism offer a bright future 

The start of this year saw some of the highest prices seen in the wholesale market with the day ahead auctions both clearing at the price cap of £1,500/MWh and Bid Offer Acceptances (BOAs) reaching £4,000/MWh. LCP analysed what caused these events in more detail in a previous blog ‘What caused January’s record high electricity prices and is this the new normal?’ which found that these prices were not caused by an unexpectedly low wind or high demand outturn, but given the level of plant outage on the system these prices were not entirely unexpected. With arbitrage being one of the most important revenue sources for batteries, these large spreads are good news and with these markets being relatively deep, the risk of cannibalisation is much smaller compared to some of the other markets.  

£0£500£1,000£1,500£2,000£2,500£3,000£3,500£4,000£4,500Oct 2020Nov 2020Dec 2020Jan 2021Feb 2021Mar 2021Apr 2021£/MWhDatePrice Ranges in the GB Power MarketDay Ahead Price (range) - GBCashout Price (range) - GBAPX Price (range) - GB

January 2021 saw record spreads in the day ahead, continuous intraday and cashout markets 
In the long term and with more renewable generation being built every year, we see flexible sources of generation needing to recover costs over relatively few and infrequent periods, or through higher CM prices. This points to a power system where high prices such as those seen this winter could become more common. Again, this is good news for batteries as they are well placed to take advantage of zero/low prices produced by large amounts of renewable generation and the high prices needed by other flexible units. 

There’s significant value for batteries across the different markets at the moment and, as our recent battery report ‘Is battery storage a good investment opportunity?’ concluded, we remain cautiously optimistic about the GB battery market. But while current prices might be providing batteries with strong returns now, the future of each market needs to be carefully considered by investors to ensure battery assets are successful. As these markets become closer to real time, begin to interact with each other and become increasingly competitive, successfully investing in and operating battery assets will become more challenging and requires a dynamic, considered approach. 

To help investors, asset owners, optimisers and traders navigate the complex lifecycle of making a battery asset profitable, we offer a range of services from long term strategy and valuation analysis through to intraday optimisation. For more information on how we can help you with your battery storage project click here.  

Is battery storage a good investment opportunity?

Is battery storage a good investment opportunity?

Thought Leadership

In this report we analyse the business case for battery storage investment and how trading strategies need to adapt to ensure these forecasts are realised.

Explore our analysis