In 2022, the cost-of-living crisis, largely driven by high fossil fuel prices, has dominated headlines. But it’s also been a year to remember for the flexibility market. The growing penetration of intermittent, renewable generation, especially wind, has increased the need for flexibility from non-fossil fuel sources. National Grid Electricity System Operator (NGESO) launched new products to address this challenge. However, there is still a long way to go if we are to achieve our net zero targets and batteries are adapting to meet the challenge.
Record levels of renewable generation, but will we reach our target?
Following a decade of increases (Fig.1) wind generation had a record-breaking year. In November, it generated over the 20GW mark for the first time ever and met more than 53% of the UK’s electricity demand. This was over 2GW higher than the previous wind generation record in 2021. The combined onshore and offshore installed wind capacity has been over 20GW for the last four years, so this is a sign that flexibility is helping the system operator to manage more wind on the network. With the government targeting 50GW of offshore wind and lifting the ban on onshore wind, we should expect to see wind generation more regularly breaking records providing flexibility can keep pace.
Figure 1. Monthly maximum wind generation (MW) over the last 10 years. Source data NGESO.
50GW of offshore wind would be enough to power every home in Britain, when generating close to full capacity. However, starting from just over 12GW offshore wind capacity today, it’s a large expansion. To achieve 50GW by 2030, we need to install approximately 1000 new wind turbines, one new turbine every three days[1]. This is a huge challenge for the current network capacity to take that volume of intermittent generation coupled with the (current) limited options for long term storage.
Increasing levels of renewable generation requires faster acting frequency products, but this provides limited upside for batteries
This year, NGESO launched the final two products of their new ancillary service suite, Dynamic Regulation and Dynamic Moderation. These new products respond up to ten times faster than previous products to keep system frequency at 50Hz. This is necessary in our more renewable world because retiring fossil fuel generation removes system inertia and increases the vulnerability to frequent swings of imbalances.
Ancillary services are important for the battery revenue stack. Overall, for batteries, ancillary services (DC-L[2]) have been more profitable than energy trading. However, last month delivered the lowest monthly DC-L revenues for almost two years[3] due to the market reaching saturation (Fig. 2). This is a substantial contrast to high prices in June and July when NGESO introduced dynamic price caps and raised the maximum price they were willing to pay for the service in certain EFA blocks. These high prices increased battery revenues substantially.
Figure 2. Twelve month battery revenue stack for 24/7 DC-L verses 24/7 day ahead and intraday trading and a 60% capture rate NIV chasing.
Batteries also took advantage of volatile spot markets (Fig. 3). This is likely to continue as the installed battery capacity is greater than the volume procured in the ancillary service market and the batteries can supplement intermittent renewable generation for short periods of time. The revenues batteries are earning in the wholesale market and NIV has been increasing year on year (Fig. 4).
Figure 3. Day ahead HH price frequency and share of variable renewable energy generation as a proportion of the GB generation mix. Data sourced from EPEX and National Grid ESO.
Figure 4. Annual battery revenues from day ahead intraday and NIV chasing for a 1 hour battery (2 cycles). Source data from EPEX and Elexon.
Batteries, energy security and balancing
CCGTs and coal have played a huge role throughout this year when renewable generation has been low. We need a more diverse energy mix to provide energy security. Although electricity demand is higher in winter, energy security is not just a winter issue. In July NGESO issued a capacity market notice[4] (CM) due to system tightness, despite transmission demand being 8-10GW lower than winter averages.
The battery storage development pipeline is now just shy of 50GW, double the total pipeline this time last year. This suggests that investors are becoming more confident in the profitability of batteries.
Volatile gas and carbon prices have led to periods of exceptionally high day and system prices – highlighting the need for cheaper sources of short-term flexibility at scale as well as dispatchable clean baseload generation. This has allowed gas generators to benefit significantly (Fig. 5): over 4 times higher than last year in certain months.
Figure 5. Gas generator revenue in the wholesale market using Final Physical Notifications from BMRS.
To reach net zero, alternative, cleaner sources must provide real-time system flexibility. NGESO currently uses the Balancing Mechanism (BM) as the primary mechanism to balance real-time changes in demand and supply. On average they require 1-2GW of power and energy flexibility in each settlement period for the small scale changes in demand and supply
Current BM participation rates suggest that up to 80% of accepted offers (to turn up generation) are from gas assets, compared to 0.2% from batteries. Gas assets waiting to be used in the BM are often running at lower efficiencies and therefore their emissions are higher. Where energy storage is used in the BM, its actions are short duration, often in five minute intervals. Longer actions (30 minutes to one hour) for both energy and system constraints are less accessible to batteries because NGESO doesn’t have visibility on real-time state of charge. Without this, it is difficult to understand a battery’s capability and therefore the safest option is to use thermal units. Consequently, the BM currently comprises a very small proportion of battery revenues in comparison to energy trading and NIV chasing (Fig. 4).
However, consumers can also be flexible
For the first time, last month, NGESO procured 200MW (10%) of this capacity from residential, commercial and industrial consumers (Fig. 6) in a new service called the Demand Flexibility Service (DFS). This is the first UK trial to allow consumers to generate revenue from grid services and a great step towards placing the consumer at the heart of the energy transition. By 2050, 70GW of flexibility could originate from the end consumer through smart charging and electric heating, providing a low carbon alternative to CCGT flexibility.
Figure 6. Demand Flexibility Service forecasted volumes over the first 5 events from each provider.
Long term storage is currently carbon intensive
Several support mechanisms are still in place for fossil fuelled assets: the Energy Security Strategy released in April, references continued support for domestic oil and gas production; and the CM has already procured 4 GW of carbon intensive assets beyond 2035, the date set by the government for a net zero electricity system. Whilst this ensures security of supply, it highlights that the CM relies on fossil fuel firm capacity because there aren't sufficient clean dispatchable options (longer than 4 hours in duration). Nevertheless, 2022 has been a step forward in the journey towards longer duration energy storage (LDES) options, with the government publishing its innovation competition to accelerate commercialisation of LDES and its ‘benefits of longer duration energy storage’ paper.
Allowing carbon intensive generation continued access to support risks hindering low carbon technologies’ ability to compete successfully. Furthermore, it’s ultimately the consumer who funds this support. The end consumer incurs a cost for the CM and this is likely to remain high (Fig. 7); new build capacity has a high probability of setting the price given the existing volume is lower than the procured target.
Figure 7. Capacity market clearing prices and cost to end consumers for the last four T-4 auctions.
The stark reality
Over the last decade, average grid carbon intensity decreased significantly. However, since the pandemic, average grid carbon intensity has increased back to pre-pandemic levels (Fig. 8).
Figure 8. Average annual grid carbon intensity since 2012 compared to the Government’s 2030 target. Source data National Grid ESO.
Conclusion
In the short term, the growing penetration of intermittent generation has increased the need for flexibility. We need this flexibility when wind generation is low to mitigate system tightness but also when wind generation is abundant and we see low / negative prices. For batteries, this has highlighted the value of energy trading and the saturation of the dynamic containment market. As gas prices are expected to remain high for much of the next year and as volatility is still above average, flexible assets are likely to profit.
In the longer term, by 2030 the UK energy system will be very different from today. The remaining coal fleet will have retired (4.5 GW), just under 6 GW nuclear will have been decommissioned and 7 GW of ageing CCGTs will retire – a total loss of just under 20 GW or over 50% of average electricity demand.
Whilst renewable energy will continue to grow, it is unlikely we will reach the government’s targets for offshore wind. Therefore, we need to speed up the deployment of clean dispatchable baseload generation as well as short duration flexibility on the demand side.
[1] Assuming that the average offshore turbine is 5MW.
[2] DC-L is currently the most profitable ancillary service.
[3] Prior to Nov-21 the DC-L price was fixed at £17 / MW /hr.
[4] In July, the CM noticed was issued due to a combination of low CCGT efficiency and high losses on transmission lines in hot weather, as well as maintenance of thermal units during summer and lack of imports from France.