Dynamic Containment – a look into the crystal ball

After the excitement of January, which saw Day-ahead prices of £1,500/MWh and BM prices of £4,000/MWh, it feels strange to go back to writing about the comparatively mundane topic of Dynamic Containment (DC). However, its perhaps easy to forget that current prices of £17/MW/hr (resulting in battery revenues of £140+/kW/yr) are just as exceptional and are going to be vastly more important to the returns from battery systems this year than value obtained through trading -something almost no one was saying would be the case in 2021 a few years ago, when frequency response was old news.

The market is clearly in a phase of transition so the most important questions for investors and developers are: how long are these prices likely to last, and what will things look like afterwards?

What is Dynamic Containment?

Dynamic Containment is a new, fast-acting, dynamic post-fault frequency response service, the first of National Grid ESO’s (NGESO) new suite of frequency products. It is designed to stabilise grid frequency in case of large generation or consumption drop-outs, such as the interconnector trip on 28th Jan.

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Anyone who has been around the market for a while will know that trying to predict frequency response prices has bitten people badly in the past – we only need to look back to the crash of FFR rates in 2018 and the current rates observed in DC. However, improved transparency from NGESO and the dominance of lithium-ion storage now makes it a little easier to understand the market and predict where things are heading (famous last words…).

So, let’s look back at the recent past and the three main frequency response markets to understand the dynamics at play.

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As expected, supply and demand volumes are the driving factor for prices, illustrating a competitive and functioning market. Price discovery varies by market based on the frequency of procurement – the monthly dynamic FFR market takes much longer to settle at a new price than the daily DC market, which found its cap within a few days. DC is more valuable to NGESO than Dynamic FFR meaning those who can have left FFR to provide DC. In turn this has reduced the competitive pressure in the FFR market and raised prices for the monthly tenders. Essentially, the additional 500MW requirement which arrived with DC implementation has massively unbalanced the market in favour of providers.

This means that for forecasting the price forwards in the near term, the most significant elements are: NGESO’s requirement for frequency response volumes, the volumes of storage competing for these services, and the relative price caps NGESO sets for each service.

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On the demand side, luckily NGESO have published their forecast requirement for DC for the entirety of 2021, along with dynamic FFR requirement through to July 2021. Interestingly this shows a significantly higher requirement in the summer, which is perhaps to be expected given lower system inertia at this time.

Forecasting supply is a little more tricky. We know no other technology than storage looks able to meet the increased technical requirements of DC (namely speed and response) at scale and therefore we can use the pipeline of storage being developed over the next few years. Given the favourable investment environment and current sky-high DC prices, we can expect most of these to be bought forward to completion (this could see 500MW+ of storage being built this year!) and all of this capacity should be able to immediately enter the DC market. We expect a portion of dynamic FFR participants to continue to switch across to the higher value DC service. There are also some long-term FFR contracts coming to a close, along with EFR contracts doing the same towards the end of 2021.

Putting all of this together, and we start to get a picture of what things might look like in 2021.

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As we can see, this current market oversupply looks likely to remain in place until at least Q4 2021. It is actually incredibly hard to create scenarios that brings this point forward, given the higher requirement across summer and capacity not expected to enter the market until the autumn. This leads to the current high prices being maintained until late 2021 (as long as the price cap remains the same). When market saturation does occur, we would expect DC prices to quickly fall towards those available in the weekly and monthly FFR markets, and track these downwards from that point on at a rate similar to what has been observed historically.

Other things which could affect the value in 2021 (likely in a positive way) would be the introduction of high response DC and moving to EFA block procurement, albeit neither of these is certain to happen this year.

2022, by contrast, is a whole lot more complicated. The biggest factor at play here is the possible introduction of the remaining two new frequency response services: Dynamic Moderation and Dynamic Regulation. Initially scheduled to be introduced by March 2022, we now expect this point could be delayed towards the end of 2022. This then brings a few questions which right now are difficult to answer: will this see additional volume as with DC? What price will NGESO be willing to pay for these services? What assets will even end up being able to provide the high utilisation regulation service? If these products are introduced along the published timescales, we would expect to see a similar distruption of the market as seen with the introduction of DC with high prices in the short-term, albeit perhaps one resolved quicker as there will be more storage online to meet the requirement.

Other big questions are: what state do the 200MW of EFR batteries emerge from their contracts? Will they be able to jump immediately into providing these new services? And finally, will we see another bumper year of newly built batteries as we expect in 2021?

To keep things simple, if we assume the new products won’t be introduced for much or all of 2022 then as long as dynamic FFR volumes are maintained this should lead to similar market dynamics being at play in 2022. All in all, this could see 100MW or so swing the market significantly one way or the other, depending on whether the higher summer requirement sees the supply imbalance returning and prices moving towards the cap again.

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Frequency response prices have shown previously they have the potential to fall as low as £3/MW/hr in a saturated market, given the operational costs of providing frequency response are so low for batteries (a bit of efficiency losses and degradation). This time however arbitrage markets will provide significant opportunity cost – given the improved access to and consistent value demonstrated by trading and the Balancing Mechanism in particular. Batteries no longer have to accept rock bottom  revenues and become price makers in the frequency response market.

Beyond 2022, this optionality is going to be the main factor driving frequency response prices, as we expect storage capacity to start to significantly exceed the requirement for frequency response services. This will see prices starting to reflect the value available in these other markets, especially with EFA block (or even half-hourly) procurement. At this point, we would really hope to see price caps on frequency response prices removed or lifted to enable the market to function efficiently – otherwise next time prices of £1,000/MWh occur in the day-ahead expect to see much more volume exiting the market to chase this value. An example of a market functioning across multiple revenue streams can be found in Australia, where system operator AEMO manages procurement of both frequency response and energy, with price caps of $15,000. This sees prices vary significantly on a half-hourly (or even 5-minutely) basis in response to the requirements of the grid and value from arbitrage in the spot market.

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So, in summary: we can expect 2021 to be a very good year for storage assets capable of providing Dynamic Containment, but if anyone is telling you we will see the same in 2022 treat this with a huge pinch of salt. Be sure to engage system integrators and optimisers early to ensure assets are ready to go into DC on day 1. And ultimately, optimisers having the ability to seamlessly trade across 5+ potential markets whilst managing state of charge and warranty constraints will be vital to maximising battery returns.