by Dan Moore, Head of BESS Asset Management, Root-Power
Daniel Moore
In July, the National Energy System Operator (NESO) 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 is for the T-1 and T-4 Capacity Market 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.
A de-rating factor is a reduction applied to the nominal capacity of electrical equipment or power systems, such as those managed by the NESO 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.
Previously, the NESO 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 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. However, it is expected that in future years de-rating factors will decline based on current methodology.
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.
For a reasonably new asset, EPT is not a problem as it is able to deliver this comfortably. However, with an aged asset this becomes difficult. 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.
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 won’t help strengthen the UK’s energy resilience.
Removing uncertainty for BESS asset owners
Previously, CM 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).
In the CM rule updates in July 2024, there is guidance around the original rule that removes any ambiguity, and includes wording specifically for batteries. The new rule definition allows for augmenting and repowering of the Battery Energy Storage System (BESS), removing all uncertainties that existed before.
Most conscientious asset owners will be thinking of the ‘end of life’ from the beginning of life, such as considering replacing the batteries, or augmenting them. However, it’s not that straightforward. 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.
