The UK’s battery market can boom again

The last few years have shaken up global energy markets. 

In the United Kingdom and Europe, for instance, the Russian invasion of Ukraine contributed to soaring prices and high volatility in the gas and electricity markets in early 2022. Since those peaks, though, markets have substantially calmed, with prices and volatility gradually returning to pre-2021 levels.

But as the market has fluctuated, so has the revenue — and general attractiveness — of the U.K.’s battery storage market. These highs and lows provide a window into what the future might hold for revenues in this space.

Making money from batteries

One feature of the U.K. market that makes it attractive to owners of batteries is the ability to easily ‘stack’ and jump between a series of different revenue streams, allowing for the maximization of returns. 

Revenues can broadly be broken down into four main areas: wholesale arbitrage, the balancing mechanism (BM), the capacity market (CM), and ancillary services.

National Grid, the U.K.’s system operator, uses BM as a tool to match supply and demand every 30 minutes, with participants submitting bids and offers to increase or decrease their supply as required. Meanwhile, the CM is a fixed payment made to generators to maintain long-term security of supply, with capacity procured through competitive auctions ahead of delivery.

National Grid procures ancillary services to cover a range of services to support the management of the electricity system. These include managing system frequency or voltage, as well as reserve capacity to manage supply imbalance. Ancillary services have been a longstanding revenue stream for flexible generators like battery storage in the U.K. In 2022, ancillary services accounted for more than 80% of revenues for the country’s battery assets. 

Boom and bust

The high prices and volatility seen in gas and electricity markets in 2022 and early 2023 resulted in record revenues for U.K. batteries. 

For instance, an ancillary service known as dynamic containment — a system frequency management tool — obtained average revenues of more than 20 pounds ($25.58) per megawatt-hour and a maximum of nearly 80 pounds ($102.33) per MWh during 2022. 

These high revenues helped to bolster investor confidence in U.K. batteries and encourage the growth of this sector. However, the declining wholesale prices and the growing saturation of the ancillary service markets have dampened these revenues throughout most of 2023 and early 2024 — 1.5GW of battery storage capacity came online in 2023, bringing the total to 3.5 gigawatts. In that period, dynamic containment averaged less than 1.50 pounds per MWh before dropping to less than 50 pence per MWh last February.

This decline has led to reduced confidence from investors and developers, with some investors stating that they will not be announcing any new projects in 2024.

Boom again?

Despite the slump, recent trends indicate that all is not lost, and that the latter half of 2024 could see at least a partial resurgence in battery revenues. 

In April 2024, high volumes of wind generation — 35.1% of the monthly electricity generation mix in the U.K. — have resulted in a number of low- or negatively-priced periods and have therefore increased the revenue potential from wholesale arbitrage. This is a trend we expect to see continue, with greater focus by battery operators on activity in wholesale markets and the BM, that is then supplemented by the ancillary service revenues that previously dominated the revenue stack. 

This evolution of the revenue stack for U.K batteries is helping to steady the ship and drive a strong long-term trajectory. 

Meanwhile, in March 2024 the system operator launched its new balancing reserve service, which is already providing a valuable additional revenue source for batteries — although at present only 400MW are being procured. Balancing reserve is a day-ahead service designed to help correct imbalances between supply and demand, which the BM would have historically done in real time. The hope is that this new service provides greater system security by procuring reserve volumes in advance of day-ahead energy market trading.

What does the future hold?

While U.K. battery storage revenues have experienced a turbulent few years, the overall investment case remains strong. The saturation of the ancillary services market and accompanying shift in the revenue stack have made a case for participating in wholesale arbitrage and the BM. 

There is a huge pipeline of viable renewable projects in the U.K., and with this increase in renewables will come a growing need to manage the intermittency of generation and provide other system services to manage the system’s inertia. 

Revenues are unlikely to return to the extremes of 2022, which were driven by atypical factors linked to the Russian invasion of Ukraine, but the long-term trajectory for batteries remains strong. It will be important for investors to focus on this rather than comparing against the most recent trends.

Matthew Chadwick, PhD, is a lead research analyst and Joe Camish is a lead analyst at Cornwall Insight. The opinions represented in this contributed article are solely those of the author, and do not reflect the views of Latitude Media or any of its staff.