UK capacity auction result is evidence of “broken market”, says storage developer

Nuclear was added to the mix at a late stage in the pre-auction process. Image: Nuclear Regulatory Commission.
A UK auction held to provide the nation with energy security, has failed to deliver the boost to energy storage that a top government minister had hinted would be the case, according to a number of commentators and industry figures.

Ed Davey, the UK’s Secretary of State for Energy and Climate Change told PV Tech Storage in a November interview that energy storage technologies could compete in so-called “capacity market” auctions, which took place around Christmas time.

When asked if the government would consider subsidies as a way of funding storage deployment at grid scale, Davey had said that in his view, the government’s role on storage at present was to focus on research and development, but that storage was also likely to be represented in capacity market auctions.

“I’m particularly focused on the capacity market, we’re looking at storage being able to play into the capacity market, so there will be market incentives as well [as R&D],” Davey said.

Based on a recommendation from the National Grid, which operates the UK’s transmission and distribution infrastructure, the government resolved to procure around 50GW (53.3GW) of generation capacity aimed at ensuring the nation’s energy security and “keeping the lights on”. In the wake of the auctions, Davey and his Conservative-Liberal Democrat coalition government broadly hailed the process as a success, with 49.26GW of generation capacity secured at a price of £19.40 per kWh.

Davey said the result was “fantastic news for bill-payers and businesses. We are guaranteeing security at the lowest cost for consumers,” he said.

“We’ve done this by ensuring that we get the best out of our existing power stations and unlocking new investment in flexible plants.”

Meanwhile his coalition government colleague, from the other side of the political fence, Matt Hancock, a Conservative Party member who serves, among other roles, as Minister of State at the Department of Energy and Climate Change (DECC), told a cross-parliamentary committee on UK Electricity Market Reform that he was pleased with the auction’s results. Speaking at the House of Commons’ Energy and Climate Change Committee event last week, Hancock said the £19.40 per kWh price was lower than expected and that the acquired generation capacity would be an “insurance fee to make sure that capacity is available and therefore to avoid price spikes”.

Hancock did however announce that the auction process would come under review in summer, at which point issues such as price and the composition of awards and the proportionally correct emphasis on the mix of new build, refurbishments and existing facilities could be addressed in detail.

Ed Davey at a visit to the UK offices of Chinese solar panel-maker Renesola, where he told PV Tech Storage of his belief that storage, including its pairing with solar, will be instrumental in shaping the future of the electrical grid and energy policy, if the UK is to reach “almost unimaginable” reductions in carbon emissions. Image: Monique Avila.
The auction has drawn criticism from a number of quarters. Dave Holmes, director of Quarry Battery Company, which puts pumped storage into disused quarries and similar sites, spoke not only of his disappointment at a lack of storage involvement but also said the awards were unlikely to improve the UK’s energy security. Holmes criticised the fact that nuclear and coal were allowed to participate in the auction, despite earlier assurances from DECC that they would not, which added a greater supply of generation capacity and drove down prices across the board. He said the only storage developers likely to be pleased were those operating existing assets which had been recipient of awards in the auction, including First Hydro and Scottish Hydro.

Holmes claims one of his business partners had asked Ed Davey – who sounded almost evangelical on the promise of storage when asked for his thoughts by PV Tech Storage and sister site Next Energy News – directly what the government would do to aid the storage industry. Meanwhile, he said, storage providers with newer technologies simply did not participate in the auction for the most part.

“My business partner was at the Reform Club where he asked Ed Davey what he is doing on storage and he said ‘there’s great news for you, as a storage developer, because storage is being put in the capacity mechanism and therefore that will help build this renaissance’.

“Ed Davey I’m sure meant what he said when he said more storage is needed in the UK and he hoped the capacity mechanism would support it, but then he allowed nuclear to compete in the capacity mechanism. He also reduced the target from 53GW down to 50-and-a-bit and it’s been watered down ever since,” Holmes said.

“So, no surprise then that the price came in low and actually the burden is placed on us by joining the capacity auction. For example we have to make sure that we can deliver by the winter of 2018, we have to jump through certain hoops. Those burdens of actually accepting a contract, we think, are higher than the value of the contract.”

Existing storage facilities such as the Dinorwig pumped hydro plant came out on top in the auction while it appears makers of newer storage technologies simply stayed away from the process, for the most part. Image: Flickr/Dennis Egan.
In the end the auction’s results were dominated by combined cycle gas turbine generation facilities which accounted for 45% of all awarded capacity.

A spokesman for the UK office of US renewable energy developer RES, said his company had been “interested early on but did not progress a bid”.

Elsewhere, renewables industry veteran and expert advisor Ray Noble said that while the auction’s outcome was not a surprise, it was nonetheless a “missed opportunity”.

“It would make far more sense to plug the capacity gap with renewables and storage,” Noble told PV Tech Storage.

“…the outcome -in terms of a lack of storage- isn’t unexpected, but it’s clearly a missed opportunity and education is required. Half of the [awarded] capacity was for gas and 10% for coal – and only 25% was new build rather than compensating existing assets.”

Meanwhile, research analyst Sam Wilkinson at IHS said that while details of the auction and its results had been slow in forthcoming from the government, the market forces at play made it unlikely newer storage technologies and facilities could compete with existing ones, or with other forms of generation on price.

“The majority of the contracts have gone to existing facilities,” Wilkinson said.

“It is still very early days, and at current prices, battery based energy storage is still some way off being able to compete as a capacity asset.”

Dave Holmes of Quarry Battery Company explained that the UK’s storage gap is only likely to increase as renewable energy generation is ramped up, with energy storage a good way of integrating renewables such as wind and solar onto the grid. Holmes also cited a study by Imperial College London professor Goran Strbac, a professor of energy systems, who forecast that under certain assumptions, the UK will need 16GW of energy storage on the grid by 2030 and 25GW on the grid by 2050.

Finally, as Holmes pointed out, support mechanisms other than subsidies could be used to support the deployment of storage, such as better recognition of the value storage can confer onto electricity networks. Similar discussions have been held elsewhere in the world, including a proposal by one Texas utility, Oncor, to be allowed to “stack” the benefits of adding storage to its networks.

“The reason that we’re not seeing more new storage built is not because of the cost to build, but because of the uncertainty of the revenue stream coming back from it – we have a market in the UK which doesn’t properly reward providing storage,” Holmes said.

“This is something that National Grid has said, that the benefits brought to the system by storage are much greater than the benefits felt by the one who built the storage – which is evidence of a broken market.”