What’s next after Enhanced Frequency Response?
On Friday 26th August, just before we all left to enjoy the last Bank Holiday of the summer, National Grid announced the results of the first Enhanced Frequency Response (EFR) auction.
Eight projects, with a combined capacity of 201MW, were successful in the auction. Six of these projects, making up 60% of the awarded capacity, are to be developed by independent companies.
This is good news for independent developers as it shows they can compete with the Big Six, who many in the industry expected to dominate the EFR auction because of their access to funding.
However, the successful bids in the auction are certainly at lower prices than we anticipated. At an average price of £9.78/MW, the business cases for these projects must be tight.
With only one successful bidder excluding typical Triad hours and assuming at best a net neutral position from electricity import and export, the EFR contracts will be the principal source of revenue for the projects for their first four years of operation. It would therefore be really interesting to understand what assumptions have been made on year five onwards revenues and how much of an impact these assumptions had on each business case.
So why did the prices outturn so low? The projects that won contracts with these low bids have clearly done their due diligence, so they must be confident of their supply chain delivering to an aggressive budget, have been able to secure low cost funding and have a longer term strategy to optimise the value of the assets in future years.
We published a report just before the EFR auction looking at some of the commercial challenges for battery developers. One of the main issues highlighted was that multiple revenue streams would be needed to meet the business case - so for these projects with EFR, we will watch with interest to see how they demonstrate their commercial promise.
We will also be waiting for further clarity from National Grid on how they plan to engage with the rest of the UK’s battery pipeline, estimated to be around 1GW. For the projects that were unsuccessful in this first EFR auction there is no clear route forward for grid services contracts.
Until there is more detail on future revenue opportunities, the UK’s battery revolution might be slower to develop. Batteries may be able to achieve higher returns over a shorter term period from FFR contracts, along with revenues from wholesale energy trading or by providing services to Distribution Network Operators (DNOs) but at the risk of asking the same question again, will this be sufficient to unlock the full potential of the sector?
National Grid has made a really positive step forward with the EFR auction but we now hope they continue the momentum by announcing details of future auctions.