Government cuts payments to limited duration storage

On 4 December 2017, the Government published its response to the consultation on improving the framework of the Capacity Market (the “Consultation”) (the “Response”). The Government concluded that the majority of the proposals it put forward in the Consultation (discussed in our previous article) should be implemented through changes to the Capacity Market (“CM”) Rules. The notable exception is the termination fee for failure to demonstrate satisfactory performance in a delivery year, which will be £15,000/MW rather than the £35,000/MW that had been proposed. All changes relating to the storage generating technology class will come into effect ahead of the 2018 T-1 and T-4 auctions, with the remaining changes coming into effect for prequalification in 2018.

Short duration storage and security of supply

The Department for Business, Energy and Industrial Strategy (“BEIS”) issued the Consultation in response to industry concern that storage was being over-rewarded in the CM relative to its ability to contribute capacity during longer system stress events, thereby distorting competition and risking inefficient auction outcomes. The report by National Grid on its Duration-Limited Storage De-rating Factor Assessment confirmed its preliminary analysis that the duration of system stress events – measured at an average of just over two hours - frequently exceeds the ability of many of the battery storage projects being developed which are often sized to generate continuously for between 30 minutes and 1 hour.

To date, there has been one single de-rating factor of 96.11% for storage. There will now be a sliding scale of de-rating factors for storage at different durations, fixed at half an hour intervals.

Source: National Grid, Duration-Limited Storage De-Rating Factor Assessment - Final Report

The Response to the Consultation concluded implementing a de-rating factor scale for the storage technology class was the most cost-efficient and effective solution for consumers. The Response estimated that the total cost saving to consumers by implementing this solution could be between £50m and £500m over 15 years, with a central estimate of around £200m (2017 prices, discounted).

The Government will introduce these changes prior to the upcoming T-1 and T-4 auctions. However, the Response confirmed that new de-rating factors will only apply to new capacity agreements, meaning projects which won agreements in previous auctions are unaffected.

Other significant decisions announced in relation to limited duration storage are:

• There is no “grace period” for implementation of the new de-rating factors for those storage CM Units (“CMUs”) where Final Investment Decisions had been taken prior to the consultation.
• Storage CMUs will be required to declare which duration banding should apply to them as part of prequalification, although a transitional process will apply for the auctions in 2018, where prequalified bidders must select their Generating Technology Class by 9 January 2018.
• No sliding scales will be taken in relation to other duration limited Generating Technology Classes, such as DSR and diesel, although the Government may put forward proposals at a later date.
• The Government does not intend to allow storage CMUs to change bands on an annual basis over the life-time of multi-year agreements to allow for the augmentation or degeneration of an asset. However, it will explore options which allow battery developers to bid in additional capacity to accommodate augmentation in future auctions.
• All storage resources will have uniform CM de-rating factors regardless of any ancillary service provision. Allowances are made in the CM Rules to exempt CM contracted capacity that simultaneously provides a Relevant Balancing Service from penalty payments during system stress events.
• The Government will not make any further distinction of storage technology class by constituent technology, such as between pumped storage, battery storage and compressed air storage, until sufficient performance data is available.

Testing or warranties?

The Consultation sought views on how the relevant technology class’ capacity can be verified, proposing either a testing option or a manufacturer’s guarantee. BEIS has decided to introduce a new extended performance requirement; storage CM units that secure new CM agreements will be required to generate continuously at an average of their connection capacity multiplied by the Technology Class Weighted Average Availability (“TCWAA”) for the same number of consecutive settlement periods as the lower bound of the duration band they declared should apply to them. In response to concerns raised by the industry about costs, this extended performance requirement will only be required once every three Delivery Years as one of the three standard Satisfactory Performance Days (“SPDs”). BEIS have also confirmed that one of these SPDs must be demonstrated in January – April of the relevant Delivery Year. Failure to meet the extended performance requirement will result in similar penalties being imposed as a failure to meet the SPDs.

Satisfactory Performance Days

The Response also confirms that a new termination event will be introduced where the CMU has failed to complete a further three SPDs. This includes suspension of Capacity Payments or termination of the CM Agreement.

This is despite calls for a more moderate “partial termination” event. However, the Response does commit to examine alternative options alongside future regulatory changes. The Government has also withdrawn its proposal to set the termination fee for this termination event at category TF5 (£35,000/MW of de-rated capacity). It will instead implement the proposal at the level of TF4 (£15,000/MW of de-rated capacity).

Credit cover

Those prequalified bidders who have had their de-rated capacity reduced for the upcoming auctions as a consequence of the new approach to storage will be able to request the partial return of their credit cover in accordance with the Electricity Capacity Regulations. The Practical Steps paper issued by BEIS indicates that this can occur once the Capacity Market Register is updated by 12 January 2018. Storage CMUs that have their de-rated capacity reduced as a result of the change will be able to submit a request to the CM Settlement Body for a portion of its applicant credit cover to be released in accordance with the Regulations.

What next?

The final Auction Guidelines will be published by National Grid on 9 January 2018. Storage applicants must ensure that they send the template with the updated Generating Technology Class (for each storage CMU the applicant is responsible for) to the EMR Delivery Body by this date. If no template is received from the applicant, it will be assumed that the Generating Technology Class is “Storage Duration 0.5h”. The Delivery Body will update the Capacity Market Register with the new de-rated capacities by 12 January 2018 for the T-1 and T-4 auctions.

If applicants no longer wish to participate in an auction as a result of a change to the de-rated capacity of their storage CMU, they can withdraw from the auction process between 9 January 2018 and 10 working days prior to the auction (16 January 2018 for the T-1 auction and 23 January 2018 for the T-4 auction).