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As frequency regulation markets across Europe saturate, new installations will be driven by new market opportunities and battery energy storage systems adding new sources of revenue.
Frequency regulation has been core driver for early
large-scale batteries across Europe
When people discuss electricity markets, they commonly refer to
the wholesale energy markets. This may include day-ahead energy
markets - where power can be bought and sold 24 hours ahead of
delivery, real time energy markets - where power is traded
typically less than an hour before delivery, and there are even
markets where power is traded years in advance. However, there are
a number of lesser known services in the electricity market which
maintain the balance between the supply of and demand for
electricity every second.
Across Europe, there are a multitude of markets and services
that network operators utilize to maintain this balance, the most
prominent being; primary, secondary, and tertiary reserve. Primary
reserve is the fastest response service, requiring active power to
be delivered within seconds. This is followed by secondary and then
tertiary reserve for significant power imbalances. The rapid
response requirements of the primary reserve market have been well
suited for BESS, which became the initial driver for large-scale
BESS deployments in Europe. Since then BESS have come to dominate
the common European primary reserve market.
Increasing competition in frequency regulation markets
across Europe has driven prices down to the point where BESS must
utilize multiple revenue streams to build a long-term business
case.
In 2017, a number of transmission system operators across Europe
launched a consultation on creating a harmonized cross-border
procurement of primary reserve called frequency control reserve
(FCR). Since then over 700 MW of BESS have been built primarily to
provide this service, making up 50% of the 1.4 GW market. Amongst
other factors, such as market reform, this has driven prices down
by 40% since 2016. Today, BESS are lucky to average €66,800 per MW
per year compared to average expected earnings of €141,400 per MW
in 2016. In turn, this has slowed the number of front-of-the-meter
(FTM) BESS being installed in the common European reserve
market.
Additionally, BESS participation in secondary (aFFR) and
tertiary (mFFR) reserve markets is limited as a result of duration
requirements and lower revenues. The value of secondary and
tertiary reserve markets for BESS varies by country, as no common
secondary or tertiary reserve market currently exists, but on
average revenues in these markets are only one quarter of potential
earnings in the primary reserve market. The secondary and tertiary
markets also require longer periods of sustained output from an
asset, up to several hours for tertiary. In order to ensure that
the BESS can meet these requirements, systems with greater duration
are required, which significantly increases the upfront capital
cost and lowers net returns from these markets.
To drive a profitable business case and thereby new
installations, BESS are having to pair multiple revenue streams.
For example, in France BESS are able to pair the roughly
€25,500/MW/year seven year capacity contract with FCR revenues. In
the United Kingdom, BESS are now increasingly able to pair these
primary reserve revenues with trading in wholesale markets
(particularly the balancing mechanism) which increases overall net
revenues.
New geographic markets for frequency regulation are
developing and will drive near term growth for FTM BESS
installations in Europe.
Direct procurements of frequency reserve, such as in Italy,
Ukraine or Lithuania, will be the major drivers of new FTM BESS in
Europe; however, these will only be one off procurements. The new
common Nordic common fast frequency reserve (FFR) market, and
Slovenia and western Denmark joining the European FCR market, will
provide some smaller pockets of opportunities for new BESS.
However, the depth of these markets will be small and so
opportunities will be limited.
Overall, FTM BESS in Europe will be shifting focus over the next
few years from primarily targeting primary reserve to taking a more
flexible approach and participating in a range of energy markets,
depending on which offers the best possible returns in any given
moment. This is beginning to happen already in the United Kingdom
and will spread to regions that already have well established
markets for primary reserve (and allow BESS to participate), and
eventually to most of Europe. This is a natural progression, as the
potentially high value but ultimately shallow ancillary markets
saturate, BESS begin to operate a more flexible business models to
also participate in the wholesale markets, which are less
predictable, but offer much greater depth.
