Summary: In addition to the benefits described in Part 1 of our article on behind the meter energy storage, the provision of ancillary services to National Grid may represent a vital additional revenue stream for storage developers.

This is Part 2 of our article on behind the meter (“BTM”) use of energy storage. Part 1 focused on some of the benefits from deploying BTM storage and can be found here. That article highlighted the potential benefits available through arbitrage, minimising use of system charges and use as an uninterruptible power supply (among others).

However, BTM storage developers may also be able to secure revenue by providing ancillary services to National Grid. This article takes a look at these ancillary services and how they may be best exploited by battery storage operators.

Overview

National Grid, in its role as system operator, is obliged to maintain the security of the electricity network by balancing supply and demand on a second by second basis. One of the ways National Grid achieves this is to procure ancillary services from users of the network.

Enhanced Frequency Response

Enhanced frequency response (“EFR”) is a new service, defined by National Grid as frequency response that achieves 100% active power output at one second (or less) of registering a frequency deviation. Given batteries’ ability to deliver active power almost immediately, they are ideally suited to providing such services (and the service was put together with batteries specifically in mind). In fact, all of the 201MW of capacity awarded an EFR contract in the first tender round was in relation to battery storage projects (see here for more information on this).

EFR contracts have a maximum duration of four years. This is longer than most ancillary services but still poses a significant challenge to funders and investors accustomed to long-term energy generation or infrastructure projects. National Grid recognises that a four year term may not be sufficient to allow the optimum financing of storage assets, however at this stage it considers that, as a regulated business, entering into longer term contracts entails too much risk to justify the potential savings that a longer term might bring.

As a result, EFR contracts are currently best suited to participants with strong corporate balance sheets (such as major utilities) and investors willing to take a view on the uncontracted revenues that are likely to be available following the expiry of the EFR contract.

Each participant can submit tenders between 1MW and 50MW, which can be aggregated and provided from multiple sites and assets.

For obvious reasons, batteries with an EFR contract cannot provide other services involving active power (e.g. Triad avoidance) at the same time. However, such services can be provided at times where the battery is not contracted for EFR.

A number of commentators were surprised at the prices secured by National Grid in the first EFR tender round - these ranged from £7 - £12 per MWh of availability. Contrast this with Firm Frequency Response (“FFR”), in relation to which the average availability payment was calculated as £35.49 per MWh according to the Energy Storage Operators Forum in its Good Practice Guide (December 2014).

Each EFR participant will have had their own motivations and models supporting their tender, however the following factors are likely to have been significant in driving down these prices: (i) the longer term of the EFR contracts compared with other ancillary services; (ii) participation by large utilities with a relatively low cost of capital; and (iii) the perceived gains from a first mover advantage.

Firm Frequency Response

Batteries may also be able to provide firm frequency response services. FFR is similar to EFR but with longer response times (generally within ten seconds).

FFR is procured monthly (up to six months in advance) and participants who are pre-qualified and have signed up to the required framework agreement can tender for one or more months (up to two years maximum). Tenders can be submitted for low frequency response, high frequency response or both.

Most participants only submit tenders on the basis of receiving an availability fee and a fee based on each hour that the asset provides FFR upon instruction, although other fees are available. As noted above, the average availability payment has previously been calculated as £35.49 per MWh of availability.

FFR participation generally requires a minimum 10MW of response energy, however it is possible for providers to build up their volume over a set term of one or two years by aggregating assets or entering into an FFR bridging contract with National Grid.

Frequency Control by Demand Management

Frequency Control by Demand Management (“FCDM”) provides frequency response through interruption of demand customers. FCDM requires electricity demand to be automatically interrupted when the system frequency transgresses the low frequency relay setting on site.

Performance under an FCDM contract is measured on a monthly basis rather than every half hour under FFR arrangements. This should help providers reduce potential penalties for inaccurate forecasting. FCDM has the added benefit over other ancillary services that FCDM contracts have an enduring term and so there is no need to continue to tender for contracts.

Fast reserve

Fast reserve is the provision of active power, following receipt of an electronic despatch instruction from National Grid.

To participate, providers need to pre qualify and enter into a framework agreement with National Grid. As with FFR, services are then procured via a tender on a monthly basis, although providers can submit bids on a monthly, short term or long term basis.

The technical requirements for participation are the ability to deliver power within two minutes of instruction at a delivery rate in excess of at least 25MW/minute. The power delivery should be sustainable for a minimum of fifteen minutes.

Providers must be able to deliver a minimum of 50MW of reserve so, in practice, many battery operators may need to enter into a contract with a third party aggregator in order to participate.

Short term operating reserve (“STOR”)

STOR is the provision of additional active power from either generation of active power or demand reduction. The basic technical requirements are the ability to: (i) offer a minimum of 3MW or more of generation or demand reduction (this can be from more than one site); (ii) deliver full contracted power within four hours from receiving instructions from National Grid; and (iii) provide full contracted power for at least two hours when instructed.

National Grid procures STOR services by tender, three times a year. National Grid seeks STOR services during reserve windows when generator failure is most likely to occur and it is currently inviting services to be tendered for up to two complete financial years.

STOR revenues comprise an availability payment and a utilisation payment. In order to guarantee an income before incurring any capital expenditure, providers may tender for STOR before installation of an asset (subject to agreeing works provisions). Although this is helpful, STOR contracts are for a maximum of two years and the short contract term is likely to be prohibitive.

Capacity market

Although not an ancillary service, the capacity market (“CM”) is also available to BTM battery users and so should be considered as another possible revenue stream. The CM is one of the main building blocks of the government’s Electricity Market Reform programme and requires a minimum size of 2MW. As with some of the services outlined above, participants can aggregate smaller systems to meet this requirement if necessary.

As things stand, the CM is unlikely to provide a viable revenue stream for most battery operators. Although batteries are able to participate in the CM, they must compete with mature technologies and would be restricted to the role of stand-by plant, thereby limiting its potential to provide other services such as arbitrage and Triad avoidance. As a result, the Energy Storage Network considers that the CM is not the correct incentive regime for storage at present, evidenced by the fact that no new storage assets were awarded CM contracts at the last tender round.

Conclusions

The range of revenue streams that are potentially available makes it possible to put together a diverse range of potential business models for BTM storage. Many participants will look to take advantage of a combination of EFR or FFR with arbitrage and Triad avoidance.

However, there is no single BTM business model that will suit all participants and it is not necessarily the case that provision of ancillary services is required for the investment case to stack up. In some cases, the value of arbitrage and triad avoidance alone may be sufficient to justify investment, especially for energy intensive users. Each of these different revenue streams have differing dependencies and understanding the circumstances under which they can be secured or lost is a key part of making any such business case.

In our final piece on BTM storage we will be taking a closer look at some of the most significant challenges for BTM battery use and possible ways of minimising the risks involved.