Utility Week

18 | 9TH - 15TH MARCH 2018 | UTILITY WEEK Finance & Investment Analysis E nergy storage lost out in the latest capacity market auction, with a mere 153MW de-rated capacity agreeing con- tracts. But continued investor interest in a broad range of storage technologies suggests there is hope for it yet. Since technology costs have come down in the past few years, energy storage – and batteries in particular – have been hailed as the next big thing in the power market. How- ever, the government cut to the technology's de-rating factor in capacity market auctions has caused the deployment opportunities in the UK to stall, at least for batteries hoping to leverage business models that rely on capacity provision. The results of the latest four-year-ahead auction came as a surprise to many – clear- ing at the record low price of £8.40 per kilowatt. This was well below the market's expectations, which ranged from £25/kW/ year to £17/kW/year. A big winner in the auction was interconnection – which won 4.6GW of capacity, including 2.15GW of new- build. For battery storage, however, the pic- ture was bleak. The win rate for storage that entered the auction was just 14 per cent, significantly down on the 89 per cent that won contracts last year. In the end, just 153MW of de-rated capacity agreed contracts this time around. Around 1.1GW had entered, meaning a whopping 949MW failed to secure contracts. Cornwall Insight energy analyst Tom Palmer says this is a "huge impact on the market". "It just shows there is an appetite, but com- mercials don't really stack up for many mar- kets at the moment." The barriers A report, published by the all-party parlia- mentary group (APPG) on energy storage and the Renewable Energy Association in Decem- ber 2017, claims there is around 3.23GW of energy storage capacity in the UK and, of that, around 60MW is battery storage. It laid out a "high deployment" scenario in which 12GW of additional battery energy storage is deployed by 2021, based on more projects being co-located at solar and onshore wind sites, and larger grid-connected projects. It said policy is the "largest barrier to deploy- ment" as the international electric vehicle supply chain develops, battery technology improves, and costs fall. Baringa partner Phil Grant tells Utility Week there are "lots of big projects being discussed", but questions whether the mar- ket can accommodate all of them alongside other forms of flexibility, such as gas engines and interconnectors. There is just over 1GW of electrochemical storage installed globally, most of which is lithium ion and has been installed within the past five years. According to Grant: "It's still a rapidly developing technology with associ- ated technology and maturity risks." In the UK, prospects for storage develop- ment have stalled since the government published its intention to lower the de-rating factor in capacity market auctions by almost 80 per cent for 30-minute duration batter- ies, because of industry concerns about the reliability with which certain short duration storage technologies could make themselves available during a system stress event According to KPMG analyst Simon Virley, the reduced de-rating factor is directly to blame for the reduced participation of energy storage in this year's auction, com- pared to the previous year where approxi- mately 500MW of battery storage secured agreements. It's a consequence which, he says, "runs somewhat counter" to the government's vision of using storage to create "the most efficient, most productive electricity system in the world". Storage is identified as one of the key technologies in the government's Clean Growth Strategy. Business development director at Burns and McDonnell, Jeffrey Casey, agrees, argu- ing that structural challenges are "slowing progress" and development of energy storage has "yet to achieve the outcomes and scale it should have". "The recent move to de-rate for shorter duration systems will have a dra- matic impact on project profitability for the technology," he wrote in a recent column for Utility Week. The future The future of storage investment does not rest solely on the shoulders of the capacity market, however. There are other ways in which energy storage can prosper, such as through arbitrage and participation in new balancing services to grid. Although energy storage featured mod- estly in the latest capacity market auction, battery storage, in concert with renewable technologies, continues to draw increased investment in bespoke industrial applica- tions as "traditional energy procurement strategies are recast to exploit the full cost reduction potential of hybrid solutions", according to PA Consulting Group energy storage expert James Morris. Cornwall's Palmer says lots of the bat- tery investment at the moment is "headed towards thinking about wholesale arbitrage and balancing mechanisms". However, he adds: "We're probably 3-4 years away from it being a truly dependable cashflow that's reliable… There are ways that people are making it work, but really the case is still not really there. "There is also a greater focus on the bal- ancing mechanism, but that doesn't change the overall business case for batteries. There Where next for storage? Electricity storage has been hailed as the missing link in a decarbonised energy system, but it emerged as the big loser in the last capacity auction. So what happens now, asks Lois Vallely? Clayhill: the UK's first subsidy-free solar farm incorporated grid-scale batteries

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