Viewpoint: Bad news, buried: Capacity Market de-rating factors for storage

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Viewpoint: Bad news, buried: Capacity Market de-rating factors for storage

Bad news, buried: Capacity Market de-rating factors for storage

Felicity Jones,  Everoze Partners Ltd  &  IGov Advisory Group, 26th July 2017

Whilst everyone was celebrating £246m investment in batteries, BEIS smuggled in a consultation proposing cuts to storage de-rating factors in the UK Capacity Market. Here’s what you need to know.

Wasn’t Monday morning fantastic for us battery enthusiasts? Greg Clark promised to establish the UK as a world leader in batteries through launching the £246m Faraday Challenge. And – finally – after 9 long months of silence, BEIS released its action plan to remove barriers to system flexibility. Batteries were all over the mainstream news; even my Mum phoned me about it. I almost skipped into work.

And then, suddenly, the mood turned sour.

Early afternoon, I spotted a curious LinkedIn post by Tom Palmer: turned out the Faraday Challenge was not the only battery story of the day. Tom had uncovered a seemingly arcane consultation on the Capacity Market (CM), proposing some ‘essentially technical changes’. Except these changes had much bigger implications for storage developers than anything captured on Radio 4.

Headline messages

The consultation covers a number of areas, including tightening the rules around metering and proving ‘satisfactory performance’. But the real sting is this: Capacity Market de-rating factors for battery storage will be reduced in the next auction cycle.

The consultation states that storage technologies will be broken into a number of categories – for instance: 30min-1hr storage; 1hr-1.5hr storage; and so on. They will then be assigned a de-rating factor that is proportionate to how much support they can offer in a System Stress Event – with longer duration storage being rewarded with a higher %.

The implication is stark: short duration batteries bidding into the next CM auction will access just a proportion of the revenue they originally expected to secure.

Laudable aims

Everoze does not dispute the overarching aims of this consultation; indeed, we were expecting these changes longer-term. We believe that BEIS raises two valid concerns on the ability of batteries to respond to multi-hour System Stress Events, namely:

Duration: Nearly all projects being currently developed offer just 30min-1hour duration.

Degradation: Battery performance declines with time and usage.

In our view, there is an inevitability around the need to level the technology playing field, and de-rating factors are a reasonable, if blunt, instrument for addressing this.

We also appreciate the difficulty of BEIS’ position. The UK is in the midst of a battery bonanza, with a frantic scramble for sites and grid connections; Everoze expects >3GW of battery projects to prequalify in the upcoming CM auction, so it’s understandable that BEIS feels some urgency to move quickly.

Details to be refined

However, whilst the consultation’s aims are laudable, the detail needs work, including consideration of the following:

Relevant Balancing Services: EFR and FFR have special status as ‘Relevant Balancing Services’ under CM rules, with implications for how assets need to respond to CM warnings. This point is missing from the consultation, yet crucial, given that so many of the batteries bidding into CM seek to stack it with frequency response.

Warranties: Using warranties to demonstrate battery duration needs further thought due to the complexities of how battery warranties are structured – particularly their dependency on MWh throughput and state of charge assumptions.

State of charge management: Some of BEIS’s concerns are unfounded. There’s little need to worry about batteries being empty at the start of a stress event; the CM penalty structure provides a clear financial incentive to prepare state of charge such as to be ready to respond during times of system stress.

Come on guys, be straight with us

But BEIS should be aware that it’s the tone of this consultation, moreso than its content, that has received the greatest critique from industry so far. One developer I spoke to yesterday was aggrieved to read the consultation describe these changes as ‘making tweaks’ to CM design. It’s certainly not easy standing in front of an Investment Committee and describing a revenue slash of perhaps £10k/MW/yr as a mere ‘tweak’.

Others have expressed frustration that previous CM documentation suggested this de-rating factor was already settled. The Capacity Market Auction Guidelines released earlier this month stated the storage de-rating factor as 96.11%. This gave industry false comfort that the de-rating changes would not apply to this cycle.

These comments matter. Earlier this month I joined the inaugural IGov2 Advisory Panel meeting – an inspiring session convened by the University of Exeter probing the governance challenges of transitioning to our new energy system, with batteries a prime example. Early industry reception to BEIS’ Capacity Market consultation starkly reminds us both how difficult and important it is that industry feels it is fairly engaged throughout the process of regulatory change.

Make your views heard

To sum up: the aims of this Consultation are laudable; the manner of its delivery is not.

But let’s not despair. The changes are subject to consultation, and will be scrutinised by an Independent Panel. BEIS is welcoming feedback. I’ll be engaging with BEIS directly (and constructively!) to table the themes discussed above.

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Felicity Jones is a Partner – Energy storage, Everoze Partners Ltd and member of the IGov Advisory Group.

This post first appeared on Felicity’s Linked-in pages.

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