Are the high GB power prices so far in 2021 a boon or bane for battery storage and corporate PPAs?
Published August 2021
In this article by Everoze Partner Nithin Rajavelu, he looks closely into what has been going on with the wholesale energy market pricing and what this mean for battery storage.
I looked back over the hourly pricing of my domestic tariff a few days ago and nearly fell off my chair! What has been going on with the GB wholesale energy market in the last few months and what does this mean for battery storage and corporate PPAs?
2021 has had an unusual start to the year, for many reasons, not least energy prices. If you’re on a flexible energy tariff like I am and you’ve been keeping an eye on the wholesale electricity prices recently, you’ll know that the day-ahead price has been on a rising trend these last few months. If it continues at this rate, I’ll be regretting not fixing my electricity tariff last Winter!
Other than a few days here and there, the daily average wholesale price has been above £70 per MWh since May 2021, with daily prices soaring to between £85-100 during July 2021. High prices in the day-ahead market are not at all unusual, but the prices remaining consistently high over a number of months is rather unprecedented for the GB electricity market.
Why is this happening and will we see more of this in the future?
Market analysts point to several underlying drivers to the rising energy prices this year: (i) extended period of cold weather coupled with low wind generation in the early part of the year, (ii) Covid-19 and lock-down changing consumer behaviour and driving up demand, (iii) nuclear generation being offline for maintenance earlier this year, (iv) GB electricity market being decoupled from the European markets post-Brexit resulting in interconnectors setting the price as marginal capacity, and (v) depleting gas reserves across GB and Europe pushing up gas prices which in turn drives up electricity prices.
You might be wondering like I am, “OK, but is this a one-off event driven by the unique combination of circumstances at this time, or will we see more of this in future years as we continue to decarbonise the grid?”
Some analysts suggest prices would come back down for next year and beyond, but not until gas reserves build back up. Others suggest the higher volatility in generation as the grid is decarbonised means high marginal cost generation like interconnectors and gas peaking plants will continue to set power prices.
I won’t argue the relative merits of these underlying drivers – I will leave that to the market specialists. But one thing is clear; the rising prices have a profound impact on battery storage in GB, as well as strengthening the case for corporate PPAs with renewable generation.
What does this mean for battery storage?
Batteries performing arbitrage will likely have benefitted in the short-term from high energy prices. This is not cut-and-dry as high prices don’t automatically mean higher arbitrage revenues. It’s the price spread that matters – i.e., the sell price minus the buy price net of any variable costs and losses.
The off-peak prices have also been high generally, so the average net price spread has not increased proportional to the peak-time price increase. Nevertheless, there have been several days with spreads of over £50 per MWh which is lucrative for battery storage.
We at Everoze are seeing large-scale, longer duration storage projects being progressed through development – these projects are well positioned to capture value from price spread in the future. A tempered view focusing on high price spreads is key to maximising value, especially once dynamic containment or other ancillary markets start to become saturated.
What does this mean for corporate PPAs?
Industrial and commercial (I&C) consumers on variable tariffs will have been exposed to the rising wholesale prices. Also, I&Cs negotiating their supply agreements in the summer will likely see higher energy prices for the next year or two as suppliers hedge this risk in their price quotes.
Corporate consumers fortunate enough to lock in their energy price via a PPA with a renewable generator in the last couple of years will not have been exposed to the rise in wholesale prices this year. As organisations look to PPA solutions to demonstrate additionality as part of delivering their Net Zero commitments, rising electricity prices is likely to bring more attention to having price certainty over the long term. Combining battery storage to a corporate PPA has the added benefit of firming-up volumes and help with hedging against price volatility.
So, will I be changing my tariff?
I doubt it, I’m too keen to see what unfolds and being exposed to the real highs and lows in the energy market helps me better understand some of what our clients are seeing. But I will watch battery storage revenues with even more interest over the next six months and keep an ear open for an increase in corporate PPA signings and the pricing structures used.