The need to transition to renewables-based energy generation is driving significant change in energy markets around the world. As synchronous thermal generation of traditional power stations is gradually replaced by renewables, it is less straightforward to balance supply to meet demand. The different physical properties, weather-dependency, volatility and uncertainty of renewable power increase the need for greater flexibility on both the demand and generation side to achieve that balance.
As one of the first regions to evolve its energy mix with a higher penetration of renewable energy, the UK is a leading innovator in energy flexibility markets. Flexibility markets make balancing the grid system possible by releasing power back to the grid when demand is high or supply is low, and consuming it when supply is high or demand is low. As flexibility markets open up and evolve, they create new opportunities for businesses to realise value from their energy assets.
Businesses can reduce the costs or receive payment by being flexible with their energy consumption, or by making their energy assets, such as on-site generation or back-up power, available for different markets.
Alongside these financial rewards, businesses that participate also provide an environmental and social benefit. As ‘good grid citizens’ they help progress the path to net zero by advancing the adoption of renewable energy.
Where there are rewards, you will often find challenges. Constantly evolving, the energy flexibility markets are complex to navigate. Broadly, there are four markets: the capacity market, ancillary services, energy markets and customer benefits—with different programmes or value streams in each market.
Understanding different markets and their programmes, and forecasting obtainable value, takes knowledge and resources few businesses have in-house. Reliable systems are also essential to access and participate in the market and optimise an asset’s position.
Success in these markets is ultimately down to selecting the right market(s) to participate in at the right time. This involves understanding the requirements, market trends and dynamics, and evaluating risks, bidding, executing and settling. There are barriers to entry in most—upfront costs are a typical requirement. As well as upfront costs, in-depth knowledge and reliable systems are essential to avoid penalties and may not be found in-house. Being unable to meet certain requirements or failing to deliver during events can lead to significant financial penalties. The value of these markets is often driven by the asset’s quickness to respond.
Access to energy flexibility markets
Businesses can participate in flexibility markets with different asset types, including curtailment of different loads, utilisation of on-site generation through solar and wind, gas engines and also using combined heat and power or ‘co-generation’.
One of the most versatile assets for participation in flexibility markets is the battery energy storage system (BESS). The ability to respond in both directions by charging and discharging the asset and the fast response rate—typically less than one second—allows BESS to be the most effective and desirable asset across the whole suite of flexibility markets.
The versatility of BESS is illustrated by the growth in the UK pipeline during 2021, when deploying utility-scale battery energy storage shot up 70pc on 2020 levels. The total installed capacity of utility-scale storage approached 1.7GW across 127 sites in the UK in 2021, with the pipeline of future projects increasing to 27GW.
Many businesses deploy BESS on their site ‘behind-the-meter’ (BTM) to provide standby power for resilience and recovery after an energy event, to improve power quality, to store self-produced energy and to enable other technologies such as electric vehicle–charging for fleets. If the stored energy is not required by the site, or there is spare capacity, this can be used for grid services.
Developers and, increasingly, infrastructure funds also deploy utility-scale BESS in ‘front-of-meter’ (FTM) for financial return—often building assets specifically to participate in flexibility markets.
The primary function of battery storage used BTM will always be to satisfy the operational needs of the site. If the stored energy is not required by the site, or there is spare capacity, this can be used to participate in flexibility markets.
The way both BTM and FTM battery projects participate in flexibility markets needs to be optimised to maximise earnings. Optimising FTM projects across multiple markets will improve a scheme’s potential return.
Today’s opportunity at a glance
Over the past year, the UK’s frequency programmes have been overhauled, with new sub-programmes being launched. Battery assets are currently the only technology able to participate in all ten of the UK’s key programmes: dynamic containment low and high; dynamic moderation low and high; dynamic regulation low and high; firm frequency response; short-term operating reserve; wholesale; and balancing mechanism (BM). This gives battery assets an advantage to unlock the full market potential. It also implies having to develop more complex bidding strategies and deal with higher uncertainty.
Over the past 11 months, frequency programmes have represented more than 90pc of battery profits in the UK. This is followed by wholesale and, lastly, the BM. A common day-to-day bidding strategy has consisted of relying on frequency programmes revenues and moving to wholesale and the BM only at times of high price spreads—for example, during the volatility seen during the July 2022 heatwave.
The average contracted volumes in the new frequency programmes have seen almost a fourfold increase over the last nine months: from 427MW in November 2021 to 1,532MW in July 2022.
Unlike the new set of frequency programmes, wholesale and BM are technology-neutral programmes with a longer history of operation that offer a larger future opportunity based on the volume requirements. For battery assets, these offer several options to monetise volatility, and a common strategy is to secure volumes in the wholesale day-ahead market and to try to get extra profits in the BM.
The new energy opportunity
The growing need for grid flexibility resulting from the transition to renewables offers significant opportunities to monetise energy assets. The challenge for businesses is to optimise income opportunities while minimising risk in volatile markets.
The increasing and ever-changing choice of options and the range of assets needed to meet the demands of the coming decades will see owners and operators using new technology that integrates with their systems. The complexity and need for rapid decision-making will put the focus on intelligent technology with automated real-time control and measurement. Only this will enable asset owners to optimise margins and develop projects that enable them to realise the value of their assets.
Even now, advanced technology, driven by machine learning and AI, is allowing developers and operators to manage multiple assets across multiple markets, to optimise returns and exploit new and emerging revenue streams within operational constraints.
Technology alone is not enough. A trusted energy partner with the scale and expertise to provide strategic advice, alongside innovative technology, is crucial to overcome the complexity, reduce risk and ultimately optimise asset value by being in the right market at the right time.
Davide Miriello is the senior energy market analyst at Enel X.
This article is part of our special Outlook 2023 report, which features predictions and expectations from the energy industry on key trends in the year ahead. Click here to read the full report.