There are currently 16 large-scale operational batteries in the NEM with a combined capacity of 1.4GW. Starting in 2017 with Hornsdale Power Reserve, it has taken approximately seven years for utility-scale batteries to grow from mere 0.1GW to 1.4GW.
With increased volatility in the electricity markets and a push to replace retiring coal generators, batteries are having a breakout moment. There are an additional 5.3 GW of batteries under construction and expected to come online in the next two years. That is, operational batteries are about to triple and what’s more scale involved is in the GW and so this will be meaningful within the overall electricity market. This article aims to provide a few pointers for investors to keep an eye on.
Source: AEMO
Source: AEMO
Frequency control and Ancillary Services (FCAS)
For most utility scale national electricity market connected batteries, revenues consist of two components:
Arbitrage revenue. That is charging when electricity prices are low (typically at lunchtime, when solar is at its peak) and discharging when electricity prices are high (typically in the evening peak); and
Frequency control and ancillary services (FCAS). This is providing frequency stabilisation and standby (i.e., contingency) generation and load to help the grid maintain frequency and balance demand and supply in real time.
Currently batteries compete with traditional FCAS providers (hydro and gas/coal) to provide FCAS. As batteries are more flexible than traditional fossil fuel generators, batteries have been able to capture FCAS market share over time. As seen in the chart below, batteries now provide more than 50% of FCAS in the NEM. This market share is expected to grow as more batteries come online.
Source: AEMO Quarterly Energy Dynamics
Source: AEMO Quarterly Energy Dynamics
The FCAS market is overall a small market (1-2GW across all 10 markets) compared to the energy market (20-40 GW). There are two types of FCAS in the NEM:
Regulation FCAS is the correction of the generation/load balance in response to minor deviations in load or generation. This market is managed by AEMO and market participants respond to a signal from AEMO to increase output (if grid frequency is falling because demand exceeds supply) or to decrease output (if grid frequency is rising because supply exceeds demand). The future demand for regulation FCAS is directly correlated with the renewable penetration in the grid. As there is more variability in supply, the demand for regulation services will increase.
Contingency FCAS (known as system stabilisation in other markets) refers to the correction in generation/load balance following a major contingency event such as the loss of a generation unit, loss of a major industrial load or transmission outage. AEMO sizes contingency FCAS procurement to match the largest single points of failure (i.e., largest generation unit, largest interstate transmission line and largest load). That is, the minimum amount of contingency raise will be sized to ensure there is sufficient additional supply (or demand) available to match an outage at the largest generator/load/transmission load. The future demand for contingency FCAS will be dependent on how this changes.
While predicting the rate of growth of FCAS demand is a bit of a dark art – we can be very confident that over the next couple of years:
There will be many more operating batteries than the size of the total FCAS market; and
Batteries are growing much faster than FCAS demand.
Simplistically, this means FCAS prices are like to fall and that FCAS revenues inevitably must become a smaller share of battery revenues – that is, batteries must rely more on arbitrage revenue.
Source: AEMO Quarterly Energy Dynamics
Charging Implications
The second question we are often asked is whether this flood of batteries is likely to bid up electricity prices during the middle of the solar day. The ‘hopium’ from utility scale solar plant owners is that batteries are the cure for the disease of negative prices – see duck curve on the next page.
Source: NEM Review
Batteries definitely can profit from negative prices. For example, in Q1 2024 alone, charging at negative price intervals contributed to $3.5 million of additional revenue for batteries.
But this isn’t the same as saying batteries will force daytime prices back up.
We view this as an incremental demand vs incremental supply question. That is, charging by batteries definitely adds incremental demand to the middle of the solar day. However, for prices to rise, incremental demand needs to exceed incremental supply. In this context, in the absence of coal plant closures, the biggest driver of incremental supply will be additional rooftop and utility scale solar. Rooftop is running at 2-3GW per year. While this sounds OK, relative to the scale of batteries, it is important to recognise that rooftop solar generates electricity for four to six hours during the day – while most batteries being built today only have two hours of duration. Thus, you would actually need to build twice as many batteries as solar to see a net daytime demand increase.
This isn’t happening yet.
For solar plant owners hoping for the end of negative prices, there are two things they need, coal plant closures (which is much more effective in reducing daytime generation) and/or lower LGC prices (which reduces the incentive to bid negative).
Discharging Into the Peak
As seen in the demand duck curve charts above, the evening peak price spike is actually quite short. That is, it only lasts for an hour or two (and sometimes much less). The market share of batteries as an evening peak supplier is immaterial at the moment. Most of the evening peak demand is supplied by coal, hydro and gas (see incredibly thin green slice in chart below).
Source: NEM Review
However, the future of NEM with new batteries would look like the Californian grid which has approximately 10 GW of utility scale batteries. In a matter of three years, batteries have transitioned from being non-existent in the Californian grid to becoming a major supplier of peak hour energy. During the course, there have also been instances where batteries became the largest source of peak supply to one of the world’s largest grids.
Source: The New York Times
Batteries in the NEM will follow suit, evening peak supply share would increase as more batteries come online. As most new batteries have at least two hours of duration, there will be immense competition to dispatch during the relatively short peak price window. We expect to see peak flattening, with competition between batteries seeing the peak price spread over a longer period (but probably at a lower level). This will incentivise the construction of longer duration batteries – for example four hours.
In summary, the next few years are going to be a period of rapid change for batteries, and key trends to watch are:
The past few years aren’t going to be a good guide of what the next few years brings;
There will be transition from FCAS to arbitrage as the key source of revenue/profit; and
Batteries are going to switch from profiting from prices set by legacy generation, to having material impacts on the pattern of electricity prices.
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