30 September 2016

The results of the first National Grid EFR auction were published on 26 August and successful bidders in the £65 million tender now have 18 months to complete their projects.

The success of battery storage in the auction marks a major step towards commercial viability for this key technology. In this article we have looked at the trends revealed in the tender results.

1. Energy storage dominated the tender

From the first round of submissions and through pre-qualification, battery energy storage dominated the tender process and so it was no surprise that the eight contract awards, totalling just over 200 MW went to storage providers. Of the 37 organisations that submitted final tenders almost all were proposed storage solutions, accounting for 61 out of 64 site applications, the only exceptions being Drax Power Ltd and a couple of demand response aggregators. This suggests that the market interest in energy storage is extremely strong and there are a significant number of companies who have seen a commercial opportunity in this area.

2. Established and larger utilities were extremely active

The pattern of bids suggests a determination on the part of existing utilities to establish themselves in the storage market. EDF Energy Renewables, Vattenfall, E.ON UK and RES all picked up contracts accounting for 116 MW, while losing bids also came from RWE, Centrica and SSE. Alongside the utilities and energy generation companies, the tender featured a number of relatively new companies and storage specialists.

3. The final bid prices were lower than had been anticipated

The pre-tender speculation suggested that the price paid for Enhanced Frequency Response services, given its sub-second response requirements, would be higher than that paid for its more established cousin, Firm Frequency Response. That would suggest a price potentially higher than £20 per MW per hour, although heightened market interest and the offer of a four year contract might have suggested a winning outcome closer to £15 per MW per hour. In fact the tender outcome produced winning bids in the range of £7 to £11.97 per MW per hour, although the overall average bid across all 203 bid submissions was just over £21 per MW per EFR hour.

4. Potential rationale for a low price outcome

Apart from the obvious conclusion that this was an extremely competitive tender there are a number of potential explanations why the final tender prices were lower than had been anticipated:

a) Site advantages played a role. Those tenders based on existing generating sites, potentially with easy grid access would have had a significant advantage.

b) The impact of economies of scale was also apparent - the larger bids of 40-50 MW had the lowest average price and, within each organisation’s bid portfolio, larger projects were generally more competitively priced. However, there were also a number of smaller projects in the 10 MW range which were price competitive and indeed three 10 MW contracts were awarded.

c) Competition was fierce and some bidders may have been willing to accept a lower return as a cost of entry, and to secure their position, in the vanguard of this new sector.

d) Potential build out and future revenue may have been a factor, with bidders seeing the EFR auction as an opportunity to secure a four year contract that would provide a base camp from which to expand energy storage capacity (adding battery storage modules) and offering a variety of future services.

5. Combining EFR with embedded benefits through Triad avoidance was a factor, but not an overriding one

National Grid has identified that a number of bidders intended, or kept open the possibility, to offer Triad avoidance services and reported that six of those companies withdrew their bids in the light of Ofgem’s recent open letter on future charging. Ultimately only two of the winning eight contracts, both submitted by Low Carbon, retained this option.

Future implications

So far, so good. The EFR tender has produced some very positive outcomes, saving National Grid an estimated £200 million whilst enabling the UK energy storage market to take a significant step forward with a £65 million, 200 MW, stimulus.

It’s not quite in the bag yet, and we could see some casualties as projects progress towards completion (for example due to commercial, planning or grid issues) but the industry does look to be in a good position to deliver on its tender commitments which would put energy storage at the heart of the new energy system.

The very low price, and the large number of bids that lost out, raises a number of questions. It is likely that future auctions and tenders will be keenly contested and, as storage costs fall, energy storage could become a disruptive technology in other markets such as Firm Frequency Response, STOR and the Capacity Markets. It will be very interesting to see how many energy storage contracts are awarded in the T4 Capacity Market auction later this year.

Download our paper, Energy storage – Towards a commercial model here.

Author: Johnny Gowdy

Contact: jgowdy@regensw.co.uk