The installation and pipeline for large front-of-meter batteries in Great Britain has grown rapidly. In this episode, Jon Slowe is joined by LCP Delta experts Chris Matson, Jon Ferris and Rajiv Gogna to explore how and why this sector has developed, where it's headed, and whether we'll see similar growth in other countries.
Episode transcript
[00:00:04.410] – Jon Slow
Welcome to Talking New Energy, a podcast from LCP Delta. The new energy experts. In the podcast, we'll be exploring how the energy transition is unfolding across Europe through conversations with guests from the leading edge of the transition.
[00:00:22.210] – Jon Slowe
Hello and welcome to the episode. Today we're looking at the world of energy storage, and in particular, battery storage. Now, I remember reading in textbooks about the electricity system that electricity cannot be stored. Well, we all know that's wrong. It has been stored for a long time in batteries. Point was, it couldn't be stored cost effectively or practically for the electricity system in batteries. That has certainly changed. And one of the places in the world where that's changed the most has been the UK or the GB market, where we've had a well, explosion. Might be too strong. I guess we'll see what I think of that word in energy storage in recent years. So, to explore this topic, I am joined by three fellow experts from LCP Delta. Jon Ferris - hello Jon.
[00:01:10.280] - Jon Ferris
Hello, Jon.
[00:01:11.110] – Jon Slowe
Rajiv Gogna.
[00:01:12.330] - Rajiv
Hello, Jon.
[00:01:13.080] – Jon Slowe
Hi. And Chris Matson.
[00:01:14.830] - Chris
Hi, Jon.
[00:01:16.890] – Jon Slowe
So, let's start by painting a picture of where storage is today. Roughly how much battery storage do we have in the UK? I'd like to start off with that.
[00:01:28.970] - Chris
So I think it's about 1.7 gigawatts, somewhere between one and a half and two gigawatts battery storage.
[00:01:36.200] – Jon Slowe
And contextualising that Chris, total generation in the, in GB in the UK.
[00:01:40.750] - Chris
So peak demand is about 60 gigawatts. So you need about 60 gigawatts of firm capacity.
[00:01:47.890] – Jon Slowe
1.6 out of 60, something like that. And if our listeners were imagining a curve, what does that curve look like? Straight line, exponential. What's the shape of it?
[00:02:02.470] - Chris
I mean, think at the moment, it's exponential. We've, we've got, and the others might have some other numbers, but I know they're about three gigawatts cleared in the last capacity option. So that's for delivery and what, 2025-2026. And there's seven gigawatts pre qualified for the option taking place next month, which is for delivery in 2026, 2027. So that seems like a pretty exponential curve, at least at the moment, anyway.
[00:02:29.090] – Jon Slowe
That's very steep. And how quickly will that get built? Are we talking one year, five years? Or might some of it never get built?
[00:02:39.090] - Chris
Some of it might never get built. So I guess the seven gigawatts is only prequalified. It might not clear in the auction. So, yeah, it might not go ahead. I mean, I think I think would expect a lot of that to be coming on stream in the next two to three years.
[00:02:59.530] – Jon Slow
Is it fair to say storage has moved from the sidelines to an absolute core part of the electricity market in the UK today, or is that a bit strong?
[00:03:09.950] - Rajiv
I think probably a bit strong to say an absolute core just at this stage, but I think all the groundwork is now there for it to accelerate. That way storage was helped really to come onto the system by some quite lucrative revenue streams. That really helped accelerate interest in the sector, that helped the technology and the appetite for it mature probably quicker than we would have expected. We're now at the stage where battery storage are very well regarded technology. People can see the revenue streams, people have seen the profits materialising and that's just snowballing the interest in the sector. We're seeing bigger batteries, we're seeing longer duration batteries.
[00:03:53.200] – Jon Slowe
What sort of size are we talking about?
[00:03:54.840] - Rajiv
So even only a year ago the sort of standard batteries that would come onto the market were a half hour to 1 hour and now very much two hour is the norm for new batteries being built.
[00:04:06.420] – Jon Slowe
Was that in megawatts?
[00:04:08.350] - Rajiv
Again, maybe a year ago or so we would have thought. 10 MW was quite big and very quickly 50 MW became the usual size to be building. And now we're looking at projects of 100 MW, 200 MW come on in the next few years.
[00:04:27.910] - Jon Ferris
And looking at the longer term pipeline, we're still seeing growth, whether it's bigger projects, longer duration, the number of projects, so that the capacity of projects going through the planning process is in the tens of gigawatts. So a lot of those projects may struggle to get grid connections or be built in the next few years. But the direction of travel is very clear and it's continuing that strong growth.
[00:04:58.190] – Jon Slowe
I'm sure all our listeners appreciate the underlying drivers of more renewables means more variability, more volatility and therefore business case of storage. But what are the specific, are the specific revenue streams? So when companies are coming along looking at a 200 megawatt battery, where's the money? Is it in that ultra fine, second by second balancing of the electricity system? Is it in the intraday trading market, is it a whole mix of things?
[00:05:36.090] - Rajiv
One of the benefits of batteries is that it can benefit from a range of revenue streams and is able to dynamically jump between them and a good trader will spot those opportunities. So that is certainly a plus historically for batteries. Historically only really been the last couple of years. Most of the money's been in frequency response and specifically the new dynamic containment markets.
[00:05:59.900] – Jon Slowe
So that's the ultra quick response, second by second.
[00:06:02.840] - Rajiv
Ultra, ultra fast response. Whereas going forwards we see a limited need for that ultra fast frequency response.
[00:06:13.550] – Jon Slowe
Because the system will only need so much.
[00:06:15.610] - Rajiv
Exactly. And particularly as we look at those 1200 megawatt batteries that are going to be multiple hours, the real money for them is in that arbitrage and balancing of the system overall. So actually delivering power when it's needed, being able to smooth the peaks and the troughs of the day and capitalise on, as you said, that price volatility in the market.
[00:06:39.220] – Jon Slowe
Yeah.
[00:06:39.810] - Jon Ferris
And that's a change that we've seen over the last few years. And one area where the GB market is perhaps in advance of some of the other countries that we look at, where long term contracts for frequency response is still the entry point. Like the enhanced frequency response auction was to kick start the storage market in GB. But as those markets become saturated, then battery owners are having to look at multiple markets and optimising when and how they take their decisions of when to charge and when to provide services to the grid.
[00:07:18.750] – Jon Slowe
Presumably there's enough confidence amongst the people building a 200 megawatt battery, and in particular the people financing that battery, that those revenue streams are there or is there an element of it's hard to imagine that at that scale you can make that investment based on faith that those revenue streams will be there. I know, Jeev and Chris, you spend a lot of your time doing this, but modelling those future revenue streams, how robust are those future revenue streams?
[00:07:52.630] - Chris
So there are uncertainties. I guess one of the key uncertainties is what commodity prices do. So we have very high gas prices at the moment and that's lucrative storage because the prices, when you're discharging, are going to be very high because they're set by the price of gas, typically in the electricity market. So that presents an uncertainty and a risk if gas prices were to crash down to levels that they were a few years ago or even lower, potentially. But I guess one thing that is relatively certain is the penetration of renewables onto the GB system we know is coming. So there's large amounts of offshore wind in particular that already has already has CFD contracts and so will be coming on stream over the next few years. And we know that there are going to be some, but there are going to be more and more periods across the day or across the year where you have renewables actually setting the price of electricity at essentially a price of zero or even negative levels. That's what batteries can charge.
[00:08:54.910] – Jon Slowe
So you can't model that no one knows precisely when that will happen, but you can model with a fair degree of certainty that that will happen on a certain number or relatively predict on more number of occasions throughout the year.
[00:09:10.350] - Chris
Exactly, yeah.
[00:09:12.590] - Rajiv
And I think as we look at more and more deployment of storage and the assets get bigger, you do need to start looking a little bit more in the details of where should this asset be and who is the trader that's going to be trading that battery and are they able to capitalise on the within day opportunities as well as the day ahead opportunities as well as the balancing opportunities? So not every business case of batteries are equal. It's not just the macro drivers. There are those individual specific issues as well.
[00:09:45.850] - Jon Ferris
And there's a lot more confidence, I think, in that sort of half hour to 1 hour, or even the shorter term services where we are seeing some investors and developers take a bit more of a view on how the future is going to develop, is the ones that are looking at two to four hour batteries and even longer. Because at the moment, the markets don't reward that. There is no product for long term storage. But as renewables grow, then some developers are taking the view that they want to be the first mover and have a battery capable of providing that service.
[00:10:25.750] – Jon Slowe
The more that people get comfortable with a business case or less a risk, imagine the lower the cost of capital. So is there a bit of a feedback loop there that as the market develops, more certainty, less risk, low cost of capital, and that just makes the economics better and better?
[00:10:46.990] - Rajiv
I guess we've seen some of that pull back a little bit, actually, recently, with both interest rates rising, if you're looking at debt financing, and also the cost of materials underpinning batteries. So it's the first time we've seen a little bit of a slowdown in ability to get these projects away because of wider drivers. But I think overall, yes, the long term projections of those costs will continue to fall.
[00:11:13.660] – Jon Slowe
Yeah, I want to think of a point that, Jon, I think you mentioned about optimising the operation of the battery. So as I think of the battery value chain, there's many different parts to it. There's finding a site, maybe come back to where the battery is being built in a minute. But finding a site, the building of it, the financing of it, but that operation of it, and that working out when you charge it, when you discharge it, where's the most lucrative revenue streams? How specialised is that job? And who's doing those sort of jobs?
[00:11:48.130] - Jon Ferris
So we've certainly seen in the GB market the emergence of a class of company that focuses on trading batteries. It used to be that bidding into an ancillary service and getting a year long or multi year contract for frequency response was sufficient to justify an investment decision. Now, there is much more merchant risk that markets like dynamic containment are not long term contracts, but they're auctioned on a daily basis. There is more capacity, more batch capacity overall than some of these markets can than some of these markets can accommodate. So choosing which markets to bid into, at what price and at what time is becoming very much a specialist, specialist role.
[00:12:42.470] – Jon Slowe
And who's fulfilling those roles? Is it, I imagine the skills are very akin to the trading desks or generators or vertically integrated energy companies. So is it the EDFs, the E.ONs of this world or is it new entrants who are doing that? Or combinations?
[00:13:02.070] - Jon Ferris
There's a mix of companies, probably three types. One, you've got the incumbents with the trading desk that are used to trading their own generation assets. You've got the companies that emerged in the early days of aggregation and they're moving more from ancillary services into the wholesale market. So the likes of Flexitricity is an example, and then you've got a new breed of entrants that are coming in and say the likes of Habitat that are focused on trading batteries and optimising them as a specialism.
[00:13:38.480] – Jon Slowe
Okay. Do you think that will carry on with those sort of three classes or Chris, any views on how that will play out?
[00:13:47.120] - Rajiv
I think we've certainly seen a lot of consolidation in the market with, particularly in the last couple of years, the growth of the optimizer, and then the acquisition of the optimizer by larger desks who were looking to fast forward their capabilities rather than necessarily bringing that all through in house. But that said, a few of the traditional companies, EDF Energy and increasingly SSE, now looking at their desk, Centrica as well, all growing their own in house capabilities. So I think we're still seeing a healthy level of competition in the market from both the incumbents and the standalone optimizers.
[00:14:27.970] – Jon Slowe
Yeah. Coming back to where the batteries are, I can't quite picture a 200 megawatt battery in terms of how big it would be, but is there any patterns as to where these batteries being built, for example, co located with a wind farm or more nearer to the point of demand, where there might be congestion or a mixture?
[00:14:51.630] - Chris
Yes, I guess one big restriction in general in the UK is grid connection availability and grid connection capacity. So I guess one place these are getting built is where there's grid connection available.
[00:15:03.570] - Jon
And that could be not anywhere, but yeah.
[00:15:06.660] - Chris
And it could be on the site of previous power stations that have been decommissioned, for example, in terms of when there's a choice being made of where these are going to be located in order to, I guess, capture greater revenues. It's potentially looking at parts of the system where there are more constraints. So essentially where wind has been curtailed, for example, because the network is able to live that power to consumers, and that presents a potential additional revenue stream for the battery in terms of being able to charge rather than curtail the wind and get paid to do that. So we have seen people looking at batteries in Scotland, for example, where there's higher constraints in general on the network.
[00:15:53.560] – Jon Slowe
Yeah.
[00:15:54.210] - Jon Ferris
Over the last twelve months, the constraint cost the spend from National Grid ESO has exceeded £2 billion, so there's really a huge opportunity for batteries to reduce that cost.
[00:16:07.990] - Chris
I guess the danger with that though, for a battery is if there's too much constraints, then you don't have an opportunity to discharge the battery. There's potentially a balance to be struck between finding somewhere where there's enough constraint but not too much, of course.
[00:16:19.880] – Jon Slowe
Calls for a lot of modelling I would imagine Chris. Might we get to a point where storage does such a good job of smoothing out the volatility and the constraints that the opportunities to store, the economics of stores suffer?
[00:16:41.470] - Chris
I think it's definitely possible that you'll go through those sort of cycles where there might be a bit of overbuild and then you get overly smooth. I think the general direction is that there's going to be more needed over the long term because there's more and more renewables being put on the system. Here.
[00:16:58.490] – Jon Slowe
We know we're near the end of building out a renewable electricity system.. And we know we're near the end of, just at the right very beginning of electrification, of heating, transport.
[00:17:07.810] - Rajiv
Exactly. The actual demand on the power system will grow, as well as that increasing penetration. So those swings of peak demand when renewables drop off the book get larger and larger.
[00:17:23.330] - Jon Ferris
But one thing I think we will see is more specialisation. So, at the moment, the stationary battery market has largely been following the EV battery supply. So it's lithium ion batteries and it's moved from NMC to LFP, which is slightly cheaper. But they're not technologies that are focused on the needs of the electricity system. And we are seeing the emergence of new technologies and new chemistry batteries that could, as time goes by, fit a niche in the needs of the system in a way that will end up with different types of batteries in different areas, providing different services.
[00:18:10.740] – Jon Slowe
Like flow batteries, for example.
[00:18:13.070] - Jon Ferris
We could have flow batteries. There's iron air, sodium ion, which is more similar to lithium ion, but doesn't have the energy density required to put it in a box on wheels and move it around, but is potentially more suited to putting it in a container in a field to provide services to the electricity system rather than to the EV owner.
[00:18:40.170] – Jon Slowe
I read a depressing article a few years ago that said no technology has ever been commercialised specifically for the electricity system. If you think of gas engines, gas turbines, probably the solar panels for space originally, maybe all technologies have been commercialised or developed to some other applications and then hoovered up by the energy sector. Lithium ion, I guess, is a point in case those other technologies, are they likewise coming from other areas, or will this break the trend, break the history that something has to be developed for the electricity sector? For the first time?
[00:19:20.450] - Jon Ferris
I think it's likely that it will. Some of these are being developed for the electricity sector, but I think that door has been opened by the emergency lithium ion yeah, which really has come of age in the electricity sector. It is competing with the traditional pump hydro for storage and looking at the additions of new storage capacity over the next ten years. It is largely lithium ion batteries that are in the pipeline.
[00:19:51.390] – Jon Slowe
Okay, so a lot more growth for storage, even if we may see cases where there's a bit of overbuild and it takes a bit of time for the market needs to rise up again. But no shortage in overall demand long term for the storage.
[00:20:08.990] – Jon Ferris
Absolutely.
[00:20:11.890] – Jon Slowe
The UK is probably far ahead of other European countries in how much storage there is. If we look back, what we see the UK as a sort of outlier or is the UK a forerunner of what we're going to see across Europe?
[00:20:33.210] - Jon Ferris
So the UK market is different to other countries, so more of an island, less interconnected. However, we are seeing the growth of pipelines in number of other countries, but not necessarily growing in the same way or with the same drivers. So Germany is probably the other large market in Europe that's been driven by the residential sector. Italy was seeing strong growth that's being driven both by residential and the front of meter sector. Thanks to the super bonus and the capacity market, there's a huge pipeline in Greece that dwarfs their actual generation capacity. And looking at the opportunities there for storage, whether it's on the islands to replace diesel or on the mainland, and then to have interconnectors and being able to co-locate with solar store renewable generation and send that to other parts of Europe, there are different opportunities and different drivers. But in terms of the pipeline of storage projects, we're seeing more and more across nearly every country in Europe.
[00:21:50.680] – Jon Slowe
That sounds to me like the UK is a bit of an outlier in some ways in that it's got some more unique circumstances being in Ireland, being on the edge of the connected European system, but the overall trend will be the same across Europe. But how that plays out country by country might be quite different.
[00:22:10.250] - Rajiv
Yeah, and I think the need was catalysed in the UK for those reasons. But then the creation of revenue streams that incentivize batteries and the very rapid deployment of wind recently in the UK as well allowed the UK to fast forward really its storage deployment. But that's also then given investors confidence that the battery storage does realise real revenues and they can see it both in frequency response and wholesale opportunities as well. And we're now seeing a lot of investors who have invested in the UK already start to turn their attention to Europe and look for other opportunities.
[00:22:51.570] – Jon Slowe
So be it the investor confidence, be it specialist optimizers that are now looking to put their skills into other markets, be it individuals with that capacity that are looking elsewhere, the UK has served to really kickstart the confidence and capability and that will speed up the growth across Europe.
[00:23:11.730] - Chris
Exactly.
[00:23:15.710] – Jon Slowe
Okay, I'm going to bring up the talking new energy crystal ball and let's wind forward to 2030 and I'd like each of you to give me one – imagine you are in 2030 - one observation of the storage sector in 2030. One thing that will changed, that might be different where we might have reached any different angle you want. Plus one of your biggest challenges that you see for the storage sector, I've sprung that on you now who would like to have a go with that first?
[00:23:57.450] - Rajiv
I’ll go first, before my idea is taken. I think the emergence of the four hour battery will be something that we're seeing more and more by 2030.
[00:24:10.290] – Jon Slowe
The longer duration.
[00:24:11.210] - Rajiv
The longer, longer duration.
[00:24:12.700] – Jon Slowe
So still intraday.
[00:24:16.690] - Rajiv
Still looking about intraday, but really as we deploy significantly more wind and Chris will have the numbers on how much we think they'll be by 2030. But as those peaks and troughs get broadened by larger wind patterns, the opportunity for those longer duration batteries will be there. The barrier, I think we sort of touched on it earlier, but I think the commodity prices and the evolution over the next couple of years, particularly with relative macro drivers.
[00:24:49.090] – Jon Slowe
Is that the actual evolution or is it the uncertainty or both?
[00:24:52.590] - Rajiv
I think both, actually. Regardless of other drivers in the market, high gas prices help batteries because they capture bigger spreads. So as Chris said, if that crashes earlier than people are forecasting, that will be a challenge, potentially to get future projects away.
[00:25:14.370] – Jon Slowe
Okay, Jon or Chris, trade off between a bit more thinking time, and get your point in first!
[00:25:17.760] - Chris
First, I mean, we've already sort of touched on it, but I think diversity of the storage sector, so at the moment we're pretty much pretty much all lithium ion, 1 hour or less, one and a half hour or less batteries in the system. Whereas I think we'll see a more diverse range.
[00:25:33.470] - Jon Slowe
Some doing very fast acting, short term…
[00:25:39.140] - Chris
Some doing, yeah, some longer duration, but some long duration stuff. And some potentially with those newer technologies as well coming in, and potentially longer duration storage as well, which I guess we're focusing on battery storage in this discussion. Longer duration storage looks across multiple days in the system as well. Okay, I think on the challenges, there's a lot of policy uncertainty at the moment. The government, I think, rightly, is looking into ways that it can kind of update the market arrangements in the UK to kind of best drive forward the net zero transition. But I think that presents quite a bit of uncertainty.
[00:26:17.490] – Jon Slowe
When you're changing, reforming markets, it makes it harder.
[00:26:21.190] - Chris
Are we going to have location and pricing? Is there going to be some changes to the way that renewables are supported or storage is supported? Capacity options and those sorts of things. So there's some uncertainty right now which presents a bit of a challenge for people who are doing modelling, like me, and presumably for people who are investing in these assets as well.
[00:26:40.180] – Jon Slowe
So more sensitivity analysis and more scenarios in the modelling section.
[00:26:45.090] - Jon Ferris
I think for me, tying a lot of that together. We will see evolution of markets, we will see more long duration storage. I think we're probably going to be surprised at how longer batteries can compete for multiday or can compete with multiday technologies because of the capacity of batteries that we're going to have on the system. Having said that, getting the grid connections, getting them connected is still a challenge. It's going to be an ongoing challenge and we really need to see a change in the mindset from the network operators from assuming that a battery in a congested area is going to increase that congestion when the investment case for making it is to resolve congestion.
[00:27:36.370] – Jon Slowe
Well, it sounds like a hugely exciting time for battery storage in the UK. And if you're listening in another country where it's not exciting yet, it sounds like that may well be coming to your country soon. Like with probably every aspect of the energy transition, not short of challenges, but big opportunity to help us move to a more renewable, more electrified energy system. Jon, Jeev, Chris, thanks for sharing your time.
[00:28:07.770] - Rajiv
Thank you, Jon.
[00:28:08.570] - Jon Ferris
Thank you.
[00:28:09.550] – Jon Slowe
And it's been a fascinating whistlestop tour of the UK battery storage sector and looking beyond that, hope that everyone listening has learned a bit today and taken some new learning, thinking, inspiration perhaps back to your day jobs in the energy transition. Thanks for listening and look forward to welcoming you back next week. Thanks and goodbye.
[00:28:38.610] – Jon Slowe
If you enjoyed the podcast then please rate it and share it with your friends and colleagues. If you're as passionate the energy transition as we are, then you can keep in touch with us and look at our research, insights, podcast, transcripts and download reports all at www.lcpdelta.com.
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