3 hard won lessons from the UK’s Enhanced Frequency Response tender
Published August 2016
With the deadline for the UK’s biggest storage tender now firmly behind us, Fliss Jones soaks up the sun and shares her thoughts on what’s been learnt.
It’s fair to say that some in the UK storage world looked a little worse for wear on 15th July. This was Deadline Day for the 200MW Enhanced Frequency Response (EFR) pilot tender. With National Grid releasing the final version of its Invitation to Tender just 1 working day before the tender opened, most bid teams were polishing their submissions right up to the wire.
It was a slog for sure. So, whilst we wait for the results on 26th August, perhaps like me you’ll find it cathartic to take stock of what’s been learnt:
1. Grid, as ever, is the recurring showstopper
Finding good sites is tough. And it’s even tougher when National Grid cranks up the stringency of its administrative requirements in the weeks running up to the tender deadline.
When, on Friday 24th June, the country was preoccupied with the small matter of the Brexit referendum result, the storage community was in fact reeling from something quite different: Clause 6.2 of the updated tender document. National Grid slipped in an extra requirement that assets must be on a double circuit connection.
This might at first seem like a pedantic grid point that only Technical Advisers like Everoze would ever be bothered with. But the reality was that it disqualified many of the smaller projects from bidding in. National Grid was so deluged with panicked questions over the weekend that it responded by Monday with a further update creating more wriggle-room in accepting different grid connections.
Such teething problems are inevitable with a pilot tender – and credit is due to National Grid for responding so promptly. But this issue points to something more fundamental: it is one thing to prequalify for a tender, and quite another to find a site that ticks all of the boxes. The reality is that many EFR projects fell by the wayside in the battle to find a decent site – and in particular, a decent grid connection.
2. Short contract length increases financing costs
Due to long-term revenue uncertainty, we saw the four year EFR contract create pressure to amortise storage assets over four years. This is despite the fact that most batteries would otherwise be expected to have an asset life of 10+ years.
This is important because an artificially accelerated payback pushes up financing costs, which in turn pushes up EFR bid prices – and these prices must ultimately be paid by consumers. Our own Everoze modelling shows that amortising an asset over 5-6 years rather than 4 years would push bid prices down by pounds per MW, not pence. So it is no surprise that EFR contract length was the overriding concern as bidders scrambled to secure Funding Letters of Intent.
3. Competition works
Ok, I’ll be honest, my last point is more of a prediction than a lesson. And it’s this: some people are going to be really shocked by quite how low EFR prices go.
Six months ago, commentators clung to National Grid’s statement that EFR could be twice as valuable as firm frequency response (FFR). But as an indication of bid price, this was a red herring. Instead, what matters more is competitive dynamics: i.e. the intensity of the fight amongst developers to secure a four-year contract. And, the fact is, with 60 prequalified bidders, the fighting’s been pretty intense. Hence the frantic polishing of bid submissions right up to Deadline Day.
All of which means, I think, that the storage world has earned a bit of a break. So kick back guys, enjoy this brief respite: summer is here. Dig out your swimsuit, sunscreen, and perhaps our storage report for some chilled out beach-side reading.
And if, ice-cream in hand, questions begin to percolate – just get in touch.