Battery degradation and the Capacity Market – oversize, repower or augment?
Published November 2023
Rules around Extended Performance Tests for BESS assets in the Capacity Market look like they are here to stay. In this blog, Everoze Partner Jamie Stewart describes the options available for project owners.
The Battery Energy Storage System (BESS) market in Great Britain (GB) is going through a period of rapid growth, driven by the need for system resilience and balancing-services that grid-scale batteries can provide. To date, BESS projects in GB have made most of their revenue from ancillary services, such as frequency response, but arbitrage (buying low and selling high) is also an important revenue stream – particularly with the volatility in the energy market over the last 18 months.
Although the high value revenue streams from ancillary services are attractive for BESS owners, the 15-year agreements offered in the Capacity Market (CM) can provide secure long-term revenues. This is appealing to risk averse project financiers who play a crucial role in getting BESS projects into the market by providing a low cost of capital.
However, there are obstacles to BESS projects participating in the CM. For example, a key issue is how batteries can continue to meet 15 year capacity agreements as they degrade with use – something which is expected and written into manufacturers’ warranties.
Battery degradation – why it happens
As any of us with a smart phone knows, the storage capacity of lithium-ion batteries reduces as they are used over time. The speed at which batteries degrade is dependent on the age of the battery, cell temperature, how often they are used (cycled), state of charge and depth of discharge. Battery manufacturers provide varying assurances around how quickly their batteries will lose capacity, on average batteries are expected degrade to around 60%-70% of their capacity within 10-20 years. At this point a battery is considered to be at the end of its useable life and will need to be safely disposed or recycled. Although degradation can be relatively well predicted, it means participants in 15 year CM agreements have to make decisions as to how they can meet their obligations in the later years.
What tests do batteries have to meet?
BESS projects participating in the CM must pass an Extended Performance Test, which ensures that capacity providers can deliver capacity for the relevant duration of the CM Contract at a level equal to or greater than their Adjusted Connection Capacity (~95% of the full project capacity and not the de-rated capacity which is typically much lower). This means that for a 50MW / 100 MWh BESS project with a 2 hour CM contract, the project will have to evidence an export of around 47.5 MW over 2 hours throughout the period of the CM contract. This test has to be passed at least once on a winter day every three years. For battery projects where degradation is inevitable, owners may have to come up with plans to ensure storage capacity in future years. If they don’t, they will face penalties or ultimately termination of their agreement.
Options for owners under existing CM rules
Options to ensure storage capacity over a long time period include over-sizing the installed battery capacity, installing additional batteries at a future date (augmentation), or replacing batteries part way through the contract period (repowering). However, this can require significant additional Capex and there can be uncertainty in the quantity of over-sizing or augmentation needed, as this depends on battery degradation, which in turn depends on how they are used.
If the technical options above aren’t considered feasible or desirable, other commercial options for BESS owners are available, such as trading capacity in the secondary market. Here, if an owner expects that their site will fail to meet it’s capacity obligation, they can transfer that obligation to another party. Another commercial approach would be to only procure shorter 1 year CM contracts, or register the project with a reduced capacity, but both of these options might limit revenues.
What the new rules might say?
In October 2023, the UK Government opened a new consultation on the CM. Stakeholder responses to a previous consultation, which closed in March 2023, raised concerns about the ability of battery assets to meet Extended Performance Tests and the impact that non-compliance could have on the sector. In the latest consultation, Government recognises the concerns that were raised, but proposes not to change the requirement for BESS assets to meet the full Adjusted Connection Capacity. They do however propose making changes to the rules to make it easier for BESS assets to augment or trade on the secondary market to meet their Extended Performance Test obligation.
It is yet to be seen what reforms will finally emerge from the latest UK Government consultation, but it seems more likely that rules around the Extended Performance Tests will not be significantly changed for BESS assets. Given this, it will continue to be important for BESS owners to develop a strategy for the long-term management of their asset. Here, considerations around site spacing, equipment integration and how long the sites might be offline when adding more or replacing batteries should be carefully considered in financial models and development plans.