In July, the National Grid Electricity System Operator (ESO) proposed changes to the Capacity Market (CM) de-rating factors methodology to a ‘Scaled Equivalent Firm Capacity’ (EFC) approach. The first time they will be in use will be for the T-1 and T-4 CM delivery years.
The EFC approach is a method used to determine the reliable capacity contribution of a variable renewable energy source – such as wind or solar – by calculating the amount of firm, conventional generation it can replace while maintaining the same level of system reliability. This approach quantifies the contribution of renewables in terms of the equivalent amount of reliable, dispatchable power they provide to the grid.
A de-rating factor is a reduction applied to the nominal capacity of electrical equipment or power systems, such as those managed by the National Grid, to ensure reliable performance under varying operational and environmental conditions. It assumes that nameplate capacity may not be available when its needed – for example, for solar, this could mean the system producing significantly less power due to reduced sunlight on a cloudy day.
Making the market more competitive
Years had passed with the de-factoring calculating methodologies largely being unchanged – however, at the time of their inception in 2017, the UK Battery Storage Database report from 2017 shows installations for large-scale battery storage only reached 100MW of capacity across the UK. As the Battery Energy Storage Systems (BESS) sector was still in its infancy compared to today, the ESO de-rating factors assessment mostly focused on pumped hydro.
Under the old methodology, the ESO published its de-rating factors assessment for duration limited storages. Those with a smaller energy duration were penalised more than those with a larger energy duration. This allowed asset owners to get creative by entering their batteries at a higher duration than the nameplate. They could enter a battery at 1MW for nine hours rather than 9MW for one hour. The energy received by the grid is the same in both examples, but the higher duration was penalised less under the previous system.
The proposed changes to the EFC approach are good news for battery storage in the CM auctions. This is because the proportion of the asset’s capacity that is paid under a CM contract will increase due to changes in the de-rating factors. This will tip the scales in time as more assets will count towards ESO’s overall procurement volume, therefore marking the market a more competitive space.
Extended Performance Testing
Extended performance testing (EPT) is a demonstration of the asset’s capability to deliver its CM obligations (power and duration) if it secures a CM contract. The threshold for passing this test is >= 95% of the full nameplate capacity, not its de-rated one – which is typically much lower. So, a 50MW/100MWh BESS needs to demonstrate a minimum of 47.5MWs (95% of nameplate) over a two-hour period. If it’s secured a two-hour CM contract, then this test is repeated every three years – usually in the winter months.
For a reasonably new asset, EPT is not a problem as it is able to deliver this comfortably. For an older asset, this becomes more difficult.
Batteries degrade over their useful life, which creates a problem for asset owners. A battery may be considered ‘end of life’ when it’s somewhere between 60-65% of its beginning of life capacity.
At this point, a 100MWh battery is now somewhere between 60-65MWh, and it can no longer meet the CM obligations of 50MW for two hours. If an asset has a 15-year CM contract, and degradation hasn’t been factored, there is a risk of defaulting, and the contract would be terminated.
An asset owner could consider bidding their asset on the degradation towards the end of the capacity warranty. However, this approach is counterintuitive for asset owners, as it leaves potential additional capacity on the table that ultimately cannot be optimised in this way.
Another option is to turn to the secondary market to ‘trade’ the capacity shortfall to a different Capacity Market Unit (CMU). Under the previous system, it could lead to unnecessary termination of CM contracts, or a reduction in volume so the EPT could still be passed.
The purpose of the CM is to strengthen the UK’s energy resilience. So, if the additional volume is being left outside of a contract, it will not help to strengthen energy resilience in the UK.
Removing uncertainty for BESS asset owners
This year, the UK Government outlined changes to the Capacity Market Rules. Previously, Capacity Market rules were understood to outline that, once a generating unit had prequalified for the CM, no changes could be made to that Capacity Market Unit (CMU). Although, it was later clarified that a battery could be augmented.
In the CM rule updates in July 2024, there is now updated guidance around the original rule that removes any ambiguity. Rule 4.4.4 now includes wording specifically for batteries. The new rule definition allows for augmenting and repowering of the Battery Energy Storage System (BESS). This is welcome news for BESS asset owners because it removes all uncertainties that existed before.
Most conscientious asset owners will be thinking of the ‘end of life’ from the beginning of life, such as when to consider replacing the batteries, or augmenting them. However, it’s not that straightforward, and considerations need to be made from the start of the project in the planning and procurement stages.
The recent changes to the UK Capacity Market, including the introduction of the EFC approach, and changes to EPT testing, present a promising opportunity for BESS asset owners. The changes offer enhanced revenue potential and a more stable investment environment as energy storage becomes increasingly critical in the UK’s energy transition.