The UK government has consulted on a range of policy proposals aimed at enhancing the delivery assurance of Capacity Market (CM) and aligning the scheme with UK net zero plans.

Recent global events have impacted our energy security. The easing of Covid-19 restrictions in 2021 contributed to a surge in gas prices and in turn caused a significant increase in wholesale electricity prices. The Russian invasion of Ukraine generated even more instability and hikes in gas and electricity prices across Europe, increasing concerns about energy security. These factors have strengthened the need to improve the Capacity Market mechanism in the UK. Read the full report here.

 

Key points the consultation wanted to address:

1. Strengthening Security of Supply:

Includes measures to enhance the Capacity Market’s ability to meet demand.

2. Accelerating Investment in Low Carbon Technologies:

The government seeks to incentivise low-carbon technologies by introducing new contracts. These contracts encourage participation in Capacity Market auctions, supporting cleaner energy sources.

 

What does the consultation changes mean for batteries?

The government identified that there has been an increase of batteries participating in Capacity Market from around 0.1GW (de-rated) capacity awarded for the 2018/19 delivery year, to 4.2 GW (de-rated) for the 2027/28 delivery year. This shows the acceleration of investment into low-carbon technologies and the increased importance of batteries to support the UK’s security of energy supply.  As part of the consultation the government wanted to help improve two main issues for battery owners participation in Capacity Market:

1. Degradation and Capacity Market contracted values need to be decreased through the lifespan of an asset

Battery projects have some obstacles in participating in the Capacity Market because of the strict regular Performance Tests that are required. These tests provide assurance to the ESO who manages the Capacity Market that providers can deliver capacity for the relevant duration of the Capacity Market, at a level equal to or greater than their contracted amount.

The challenge for asset owners is that battery technology suffers from degradation and predicting future degradation is challenging. This is especially true in the UK where batteries are participating in an increasing number of different markets that require varying charge and discharge levels. More complexity also comes from the fact that the Capacity Market awards some long-term contracts, up to 15 years, and with degradation averaging between 0.5% and 5% per year, the variables can be vast in future years.

The government is aware that battery investors require Capacity Market revenue to be maximised as this assures returns and investor confidence. The other challenge for BESS owners is that batteries are de-rated considerably in the UK Capacity Market Scheme. At the moment batteries are de-rated at 24%, so getting the right predictions is important.  For example, a 100MWh battery will be de-rated to 24MW, so it’s already losing 75% of its value.

The consultation proposes to solve this issue by making changes to the rules which allow battery owners to secondary trade contracted capacity. This means if owners expect that their site will fail to meet its capacity obligation, they can secondary trade their capacity to another party. This is new for the BESS market and will enable battery developments to increase return on investment and bankability for future developments.

2. Long build time

The second challenge faced by battery development is the long build time with no certainty that batteries will be energised in time to comply with CM obligations.

The consultation has implemented a declared additional (24-month) long-stop date – this would enable new batteries to benefit from a total of 24 months of additional construction time.

Access to the Declared Additional (24-month) long stop date would only be available through a declaration at the prequalification stage. This ensures the government has enough time to amend any changes and maintain the capacity and security of supply.

Additionally, the 10-year review of the CM is due to be published by Summer 2024. This review will provide further insights into the market’s performance and effectiveness.

 

We will be watching to see what other good news for batteries comes from the government review. From these latest announcements, it’s clear that there is increasing awareness of how important energy storage is to the UK and global energy landscape. Watch this space for more positive news for energy storage.