On 24 July 2017, the Department for Business, Energy and Industrial Strategy (BEIS) set out the government's new de-rating proposals

The plans alter the de-rating formula for energy storage projects entering into the Capacity Market (CM).

As expected, the new methodology for storage CM Units (CMUs) proposes scaling de-rated capacity according to the asset's durability – i.e. the period of time at which it is capable of discharging at full capacity.

The government is looking to implement the new de-rating methodology ahead of the upcoming T-4 Capacity Market auction, which means battery storage projects hoping to secure capacity agreements in the current CM auction cycle could end up with a lower de-rated capacity than in previous auctions.

If preparing to bid into the next CM auction, battery storage developers may wish to revisit their financial models so that they take account of the lower capacity payments which could result from a lower de-rated capacity.

Why are these changes being introduced?

A number of stakeholders have raised concerns that battery assets have finite "generating" capacity and some providers may not be capable of discharging their full capacity obligation for the duration of a system stress event (which estimates suggest could last between two and four hours).

Ofgem has taken the view that the best way of dealing with this problem is by introducing a more flexible de-rating methodology that is scaled according to the duration of the battery asset in question – so assets that are capable of discharging at full capacity for longer will generally be rewarded with a higher de-rated capacity and vice versa.

Have details of the new de-rating methodology been published?

No. BEIS has only published the principles of its proposed de-rating methodology.

Under the proposals it is likely that storage assets capable of generating at full capacity for at least four hours will continue to be de-rated in the same way. However, those with durability below four hours will to be classified as "energy limited" and their de-rated capacities will be reduced depending on how long they are capable of discharging.

BEIS has provided an indicative example of eight "classes" of energy limited storage, starting with four hours' durability and then descending downward in 30 minute increments of to the lowest (30 minutes durability).

Unfortunately no indicative de-rating factors have been provided yet, so it is difficult to predict how much lower they will be compared to the current de-rating factor for energy storage CMUs – which is around 96%.

BEIS has said that the government's proposals are subject to further consolidation by National Grid, which will be scrutinised by the Independent Panel of Technical Experts.

How will battery duration be verified?

Under the BEIS proposals, CM applicants will have to "self-certify" the battery's duration from within a range of asset classes at the prequalification stage.

To evidence this, BEIS proposes amending the "Satisfactory Performance Days" requirement so that on at least one occasion per delivery year, battery CMUs would be required to demonstrate that they can generate at full connection capacity for a number of consecutive settlement periods. For example, a storage CMU in the three hour category would be required to generate for at least six consecutive 30-minute settlement periods.

BEIS also proposes amending the CM Rules so that failure to meet the Satisfactory Performance Days requirement would be classified as a termination event. This means that battery CM units that overstate their durability could be at risk of having their CM Agreements terminated early and incurring termination fees of £35,000/MW.

When will new de-rating rules come into force?

BEIS says that the new rules will apply to all CM agreements awarded going forward, including those secured through the upcoming auctions this winter. But beyond that, it is difficult to say when exactly the rules will take effect.

The government says it will take into account responses from National Grid before making a final decision and implementing changes to the CM Rules, although those same rules also suggest confirmation from Ofgem may be required, which could cause further delay.

BEIS expects to introduce the new rules at some point between the current prequalification window (which opened on 24 July 2017 and closes on 29 September 2017) and the auction itself at the beginning of 2018. These timings are likely to frustrate many battery developers with many projects already at an advanced stage of development.

The news is also likely to cause considerable confusion within the sector, not least because Ofgem closed its consultation on changes to the Capacity Market Rules in June after clearly deciding that no changes would be made to the de-rating rules ahead of the forthcoming prequalification window. Capacity Market Auction Guidelines issued by National Grid on 7 July 2017 stated that energy storage will be de-rated at a factor of 96.11%.

Are the BEIS proposals open for consultation?

Yes. Those affected by these proposals may respond before the consultation closes on 8 September 2017 to energy.security@beis.gov.uk

The government is alive to the fact that the changes could result in less CM revenue than some energy storage providers might otherwise have secured, however on balance it has taken the view that the changes are not likely to significantly affect storage deployment.

One of the reasons the government puts forward in support of this view is that "market participants may already have been expecting these proposed changes, so may have already factored this into their future investment decisions." This is a suggestion we suspect many in the sector will disagree with.

While a change in the de-rating methodology may have been foreseen ahead of next year's CM auction cycle, there was little to suggest the changes would be brought forward this year – particularly in light of Ofgem's decision in June 2017 and the auction guidance published to date. The proposals appear to have been tabled outside of Ofgem's normal procedure for amending the CM Rules, so it is difficult to see how imminent changes could have been foreseeable.