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Apricum’s Energy Storage Briefing – Sample Report

Regional focus: Europe

Biannual report: Volume 1, 2017

Best regards,

Florian Mayr

Partner, Head of Energy Storage

[email protected]

Apricum’s Energy Storage Briefing provides up-to-date

insights and actionable advice for storage in Europe.

Welcome to Apricum’s Energy Storage Briefing –

sample report. Supplementing our tailored strategy

and transaction advisory services, we are pleased to

offer an energy storage intelligence subscription with a

biannual briefing at its heart.

The report provides you with comprehensive analyses

of the business opportunities for energy storage in

Europe. It focuses on the two major markets, the UK

and Germany, but also covers key developments in

France, Italy and other countries relevant for storage.

With this sample report we would like to give you a

flavor of the scope and depth of the analyses provided

and demonstrate how it differs from other market

intelligence. As experienced strategy consultants, we

are well versed in extracting the “so what” for our

clients and providing recommendations based on

substantiated data and coherent reasoning – in

contrast to providing just another stack of data leaving

you alone to make sense of the figures.

2

Apricum, as the premier advisory firm for clean energy,

is poised to support you in identifying the true

opportunities and challenges for making money with

energy storage in the ever-changing European market.

Through the extensive insights gained in our day-to-

day advisory work in the energy storage industry, we

are well positioned to provide accurate and actionable

advice.

I hope this sample report sufficiently illustrates the

value we can add for you and your company.

We are ready to discuss how we can further help you

in realizing business in Europe and beyond.

Introduction

Apricum’s European Energy Storage Briefing is different to

what you have seen so far.

What it is…

• An answer to the one and only

question: How can I make money with

energy storage today and in the near

future?

• A deep, comprehensive analysis of the

European business opportunities for

energy storage, focusing on the under-

lying drivers instead of the “symptoms”

• A precise synthesis of the relevant

aspects for an energy storage player

…and what it is NOT

• Another high-level compilation of

generally available use cases that could

be attractive for energy storage (or not)

• Another massive data dump, including

detailed, quantitative forecasts for future

demand that creates a false feeling of

predictability

• Fragmented pieces of analyses that

leave it to the reader to “connect the

dots”

3

✔

✔

✔

✔ ✖

✖

✖

✖

Another descriptive market overview A valuable guide for business decisions

Overview Europe

UK

Overview UK

EFR

FFR

PV self-consumption

C&I grid fee reduction

Secondary use cases

Germany

…similar detail to UK section

Rest of Europe

France

Italy

4

General report structure.

• Detailed country analyses for UK & Germany:

• Major schemes/primary use cases1

• Selected secondary use cases1

See next slide for details

• Analysis of key developments in the rest of

Europe

• Varying focus markets depending on actual

events

• Status: Which use cases in Europe are

emerging, established or not yet viable?

• Outlook: Demand for which use cases in

Europe is growing, stable or even shrinking?

• Key developments across countries

1) Primary use case provides dominant share of expected revenue, secondary use cases are additional revenue streams (benefit stacking)

For the two dominant storage markets in Europe, Apricum

provides a structured assessment of the national schemes.

5

• Description of scheme1: Operation, counterparties, revenues streams, pricing

mechanism and project time frame

• Apricum’s assessment of attractiveness for energy storage today and in the near future

based on:

• Regulatory framework: Recent regulatory activities and impact on energy storage

• Economic viability: Revenues, cost and assessment

• Drivers for energy storage demand: Description, impact, outlook

• Energy storage installations: Existing and announced capacities, accumulated and

split into segments and projects, detailed description of representative “lighthouse

projects”, upcoming tenders

Detailed country analyses for UK and Germany

Detailed analyses of relevant aspects, synthesis of key “so what” takeaways

1) Country-specific set of regulations governing a use case

Overview Europe

UK

Overview UK

EFR

FFR

PV self-consumption


Secondary use cases

Germany

Rest of Europe

Annex

6

Example contents of report.

Sample detail for the UK section will be

presented in the following pages

Energy storage expected to gain traction in the UK, based

on recent tenders and upcoming regulatory changes.

7

Summary UK

Source: Apricum analysis; 1) Enhanced Frequency Response; 2) Commercial & Industrial; 3) Contracted or

announced; 4) Incl. C&I and residential; 5) Excl. C&I and residential; 6) 31 July, 2017

Energy storage projects/systems (in MW) Schemes:

• Already commissioned large-scale energy storage

systems are mostly trial/pilot projects for various use

cases, e.g., by distribution network operators

• 201 MW of EFR1 frequency response projects

announced, partially applying benefit stacking

• Additional ~350 MW were awarded capacity market

contracts from 2020 onwards which serve as a secondary

revenue stream, e.g., on top of frequency response

• Distributed behind-the-meter systems are used for C&I2

grid fee reduction and residential PV self-consumption.

Several players active, but early stage market and so far

not economically viable on its own. Addressing social

housing and whole communities via city councils may

evolve as a typical strategy Outlook

• UK energy storage market expected to grow, following the

success of the recent EFR and capacity market tenders and

the current regulatory activities

• Energy storage will gain further relevance for frequency

response based on requirements of short response time

• Multiple storage players are currently entering the UK market

for distributed systems

Regulatory setting

• Individual revenue schemes (esp. EFR) are well

suited for or even tailored to storage applications

• Overall coherent approach to storage still missing

• Regulatory initiatives, including recent “Call for

Evidence”, and a new strategy for balancing services

(SNAPS) are expected to improve the framework

Announced /expected

Installed

~600

~75

Announced3

Exchange rate6:

1 GBP: 1.32 USD

Trial/demonstrator (~15)

Other (~60)4

Other (~65)5

EFR Capacity Market Auction

(353) (201)

Growth

• ~40 MW installed in last 6 months

• ~25 MW specific project announcements

in last 6 months (in addition to general

targets with unclear level of commitment)

UK elections had delayed “Call for Evidence” process, but

intended regulatory changes have now been published.

8

Regulatory framework for energy storage (1/4)

“Call for Evidence” on smart, flexible energy system by regulator Ofgem and BEIS1:

• Sought opinions from the industry which will be taken into account in upcoming regulatory changes

• Published in November 2016 after delay due to Brexit referendum, and ~150 storage-related responses were received

before the deadline in January

• Comments by Ofgem and BEIS on the industry input including intended regulatory changes were originally expected by

June and have finally been published2 on July 24 after a delay caused by the UK general elections

• Key approaches to reduce barriers for storage and to optimize its benefits include:

• Network operators are expected and will be incentivized3 to increase transparency on where connecting storage is

feasible and beneficial, e.g., by providing heat maps that take into account the local grid infrastructure, network fees

and substation utilization, thus avoiding a large number of “trial” applications for connections which will not be realized

• Additionally, a better queue management shall be implemented by the network operators, likely prioritizing applications

for connecting storage if the storage system is also beneficial for other parties that apply for grid connection

(e.g., because it provides relief to the grid instead of additional utilization). This would imply to connect the system

earlier even if other applications had been handed in before

• Storage shall be classified as a sub-class of generation assets, incl. specification of the requirements for planning con-

sent by governmental institutions, and a modified generation license for storage shall be introduced by Summer 2018

• Storage shall not face specific network (demand residual) and balancing charges with details soon to be announced as

part of the “Targeted Charging Review”4 process. Flexible connection contracts and fee structures may be introduced

that take into account the actual use cases and use patterns for the specification of connection/grid fees, potentially

implying lower costs for specific energy storage installations. Furthermore, final consumption levies will not apply to

holders of the new generation license for storage

Source: Apricum analysis, BEIS, National Grid, news reports; 1) Department for Business, Energy & Industrial Strategy; 2) “Upgrading Our

Energy System – Smart Systems and Flexibility Plan”; 3) Via existing “Incentive on Connections Engagement” process; 4) Cf. TCR consultation

dated 13 March 2017

Recent

regulatory

activities

Continued on next slide

National Grid plans to substantially modify balancing service

products, combining different types of frequency response.

9


• Key approaches under discussion to reduce barriers for storage and to optimize its benefits include (continued):

• Additional guidance by Ofgem announced for later this year on how to co-locate storage with renewables without

putting renewables support at risk

• Legal certainty on the classification of storage as a non-intermittent generation type which implies lower grid fees (so

far, typically treated as non-intermittent, but no formal definition in place yet) expected after further industry guidance

expected by the end of 2017

• Regulatory position on ownership and operation of storage by network operators will be clarified by Ofgem in the near

future and new reporting arrangements for DNOs owning generators (normally “small generators” <50 MW) will be

included. Focus is on ensuring proper “unbundling”, i.e., on requirements for not distorting the market which typically

involves operation of the asset by a third party

• Plans for future policy that optimizes system and consumer benefits from self-consumption and grid export, potentially

via “time-of-export” tariffs for new and existing generators

National Grid System Needs and Product Strategy (SNAPS):

• Lays out National Grid’s plan to substantially modify the suite of balancing service products according to system needs

and transparency requirements

• Currently under industry consultation with responses received by July 18 and expected to be published soon

• Further details on the new strategy are expected by end of September

• Energy storage mainly affected by changes to frequency response services planned to be finalized by March 2018:

• Introduction of a single product comprising EFR, FFR and potentially dedicated inertia

• Flexibility to bid several parameters (response time, duration, etc.) independently of each other and more freely than

with the current EFR and FFR schemes

Source: Apricum analysis, BEIS, National Grid, news reports

Recent

regulatory

activities

Continued on next slide

(Continued)

Changes to grid fees will decrease revenues for storage

systems that are used to reduce peak demand charges.

10


• Energy storage mainly affected by changes to frequency response services planned to be finalized by March 2018 (ctd.):

• High transparency on the criteria by which bids are selected – value functions for the bidding parameters will be

published and will allow to optimize the bids and understand at hindsight why projects were selected

Recently implemented or planned regulatory changes related to grid fees:

• “Benefits” (revenues or grid fee exemptions) for generators and storage systems connected to the distribution network are

going to be reduced. This refers especially to payments for compensating electricity consumption during times of peak de-

mand (“triads”1) and thus for effectively offsetting transmission network fees (which are determined by this peak demand)

• Also for behind-the-meter storage, the value generated based on transmission network fees may be limited in the future:

Currently, the fees strongly depend on electricity consumption during “triads” and are rising, but Ofgem indicates that this

strong dependency on peak demand – and thus the potential value add by time-shifting demand via storage – is under

discussion (however, no specific plans yet)

• Distribution network fees substantially differ between different times of the day/week (“red”, “amber” and “green”

timebands) for specific C&I2 customer groups, providing the opportunity to reduce fees by time-shifting consumption via

storage: Since April 2017, a larger group of C&I customers falls under this fee structure, but the difference between the

fees (and therefore the potential benefit of storage) has been reduced effective from April 2018

Further ongoing activities:

• National Grid has established an energy storage working group to interact with the industry, sitting within the “Power

responsive” stakeholder forum that primarily focuses on demand response

• UK emissions reduction plan for the upcoming years which may impact demand for renewable energy and storage has

been delayed, but is expected to be still published in 2017

• “Faraday Challenge”: GBP 246M public support over four years for companies investing into battery technology R&D –

funding provided via a new “Battery Institute” with a key focus on electric mobility

Source: Apricum analysis, BEIS, National Grid, news reports; 1) A winter season’s three half-hourly periods (at least 10 days apart from each

other) with highest electricity demand; 2) Commercial & Industrial

Recent

regulatory

activities

(Continued)

UK regulatory environment for energy storage currently

considered neutral to positive with key changes underway.

11


Source: Apricum analysis, BEIS, National Grid,

news reports; 1) Enhanced Frequency Response

Overall assessment of current regulatory framework:

• Individual revenue schemes are well suited for or even tailored to storage applications (especially, EFR scheme1)

and ongoing regulatory initiatives work towards further improving the framework, but for now, the UK regulatory

framework still lacks a coherent approach to energy storage. Implications of Brexit on future regulatory deviations

from EU standards are not yet foreseeable

• Developments positive for energy storage:

• Existing market barriers are currently addressed at different levels, including a far-reaching and promising

approach by the responsible ministry in the context of the recent Call for Evidence

• A new strategy by the System Operator National Grid regarding its balancing products is currently under

development as part of the overall System Needs and Product Strategy (SNAPS) and massive changes of the

frequency response products are expected, aiming at higher simplicity and transparency which will be beneficial

for energy storage deployments

• Procedures to derive regulatory changes for individual revenue schemes often imply formalized and transparent

public processes that also ensure participation of stakeholders

• Developments negative for energy storage:

• Regulator currently tends to reduce/limit the substantial dependency of grid fees on consumption during peak-

hours vs. off-peak hours, thus reducing/limiting the value of time shifting consumption via energy storage

• Regulator currently values large-scale generation assets connected to the transmission network higher than

before – therefore, payments to generation and storage assets connected to the distribution network are

reduced and this specific revenue stream is made less attractive

Negative environment for storage,

inhibiting market growth

Neutral environ-

ment for storage

Positive environment for storage,

fostering market growth

12

Status of UK energy storage schemes/applications (1/2)

Source: Apricum analysis; 1) See annex for detailed description of legend; 2) Additional benefits: Higher degree of self-sufficiency, potential

aggregation for ancillary services, profiting from time-of-use pricing

Scheme /

application

Use case Short description Status1 Recent developments

EFR Ancillary

services

• Frequency regulation

• Irregular pay-as-bid tenders

for 4-yr contract duration

• Batteries best suited to

adhere to response time <1s

Today:

6 months ago:

• 201 MW tender completed in August 2016

• Several winning projects additionally

participated in capacity market auction for

delivery from 2020 onwards

FFR Ancillary

services

• Frequency regulation

• Monthly tenders with high

flexibility of parameters and

contract duration of up to 2yr

Today:

6 months ago:

• Recent auction prices significantly higher

than those in EFR tender

• Limited battery contributions so far, but

participation possible via several aggre-

gators as well as by large-scale systems

PV self-

consumption

PV

self-con-

sumption

• Increasing PV self-

consumption by charging at

daytime and discharging in

the evenings2

Today:

6 months ago:

• Multiple new players entering the UK

market, e.g., E.ON, Daimler, Solarwatt

• Decreasing generation tariff, but stable

export tariff

• Continuous rollout of smart meters

Established Emerging Currently not feasible Primary use case:

Growing

market

Stable

market

Declining

market Outlook:

Significant

changes in

last 6 months

Relevant UK use cases fall into the categories of ancillary

services, PV self-consumption and peaker replacement.

13

Status of UK energy storage schemes/applications (2/2)

Source: Apricum analysis; 1) See annex for detailed description of legend; 2) Commercial & Industrial; 2) Demand side response

Scheme /

application

Use case Short description Status1 Recent developments

C&I grid fee

reduction

Peaker

replace-

ment

• Behind-the-meter energy

storage installations used to

reduce transmission and

distribution grid fees for C&I2

customers

• High electricity consumption

during specific time periods

leads to high fees – which

can be reduced by time-shif-

ting consumption via storage

Today:

6 months ago:

• Ofgem has realized and announced

regulatory changes that limit the rise of

relevant grid fees related to periods of peak

demand or even reduce them (e.g., triads)

• Since April 2017, a larger group of C&I

customers is required to be half-hourly

metered which is a prerequisite for time-

dependent grid fees to apply and therefore

for potential benefits of energy storage

Capacity market Peaker

replace-

ment

• Generators or DSR3 are

awarded capacity contracts

requiring delivery in case of

system stress events

• Contracts up to 15yr possible

when financing new assets

Today:

6 months ago:

(expected market

growth only as

secondary use case)

• ~500 MW of battery storage were awarded

15-yr contracts in an auction last December

(4 years ahead of delivery)

• Ofgem plans to list EFR as “relevant

balancing service” in Capacity Market

regulation, ensuring compatibility of the two

revenue streams

Established Emerging Currently not feasible Primary use case:

Growing

market

Stable

market

Declining

market Outlook:

Significant

changes in

last 6 months

Relevant UK use cases fall into the categories of ancillary

services, PV self-consumption and peaker replacement.

201 MW EFR projects and ~350 MW additional T-4 capacity

market projects form majority of announced installations.

14

Key energy storage installations/projects1 (excerpt from full list)

Source: Apricum analysis; 1) Only listing individual projects >500 kW; 2) Announced, commissioned; 3) Also participated in EFR auction 2016,

but no contract awarded; 4) UK Power Reserve names voltage regulation, peak shaving, triads, STOR, real & reactive power dispatch and

arbitrage all as other schemes/applications to be potentially addressed

Project/

segment

Status2 Capacity Scheme/

application

Key players involved Comments

Batwind Announced 1 MW /

1 MWh

Pilot project addres-

sing arbitrage, cap-

turing of excess wind

power, and reduction

of balancing costs

Statoil, ORE Catapult,

Scottish public bodies

On-shore co-location with Hywind

floating off-shore wind park (Scotland)

Pelham

Storage Announced ~48 MW Capacity market3 Statera Energy

15yr contract in T-4 (2016) capacity

market auction, delivery from 2020

Langley

Storage Announced ~48 MW Capacity market

Statera Energy



Norton

Storage Announced ~48 MW Capacity market

Statera Energy



UK Power

Reserve:

12 projects

Announced

12 projects

with a total of

120 MW

Capacity market4 UK Power Reserve 15yr contract in T-4 (2016) capacity


CES

Somerset

Commissioned

02/2017 500 kWh

FFR, arbitrage

(co-located with PV)

Camborne Energy

Storage, aggregator

Open Energi

Co-located with 500 kWp PV,

Tesla Powerpacks

Noriker

Power

Staunch

Commissioned

03/2017 20 MW

Capacity market,

FFR

Hazel Capital,

METKA EGN (EPC)

LG Chem batteries, 2yr FFR contract

(2.6 M GBP/yr)

Significant changes in last 6 months

EXCERPT FROM FULL LIST

Regular FFR and capacity market tenders upcoming – EFR

will be integrated into single frequency response product.

15

Tenders

Scheme /

application

Last tender Next tender Tendering authority Competitive position of energy storage

EFR 201 MW in 08/2016 Plans for single

combined FR1 product

in 2018 rather than a

second EFR tender

National Grid Full capacity in last tender assigned to

energy storage

Source: Apricum analysis; 1) Frequency Response; 2) Less attractive than EFR due to shorter contract durations;

3) Prequalification submissions July 24 – September 29 Weak Strong

Scheme /

application

Last tender Interval /

next tender

Tendering authority Competitive position of energy storage

FFR July 2017 Monthly (plans for

single combined FR1

product in 2018)

National Grid Currently low share of storage

projects2, but expected to increase

Capacity market:

Four years

ahead (T-4)

December 2016 Annual /

February 6, 20183

National Grid Success strongly depends on strategy

for benefit stacking and bidding – high

total capacity renders auction less

competitive

Capacity market:

One year ahead

(T-1)

February 2017 Annual /

January 30, 20183

National Grid 1-year contract makes auction less

attractive than T-4 auctions allowing for

15 yr contracts for new assets – but

well suited for bridging the gap

Monthly/annual tenders

Tenders at irregular intervals

Overview Europe

UK

Overview UK

EFR

FFR

PV self-consumption


Secondary use cases

Germany

Rest of Europe

Annex

16


17

EFR scheme: Overview

Apricum assessment

Enhanced Frequency Response (EFR) service for stabili-

zing grid frequency was auctioned for the first time in 2016.

EFR scheme

Description of scheme

Source: Apricum analysis; 1) System operator of the transmission network; 2) Latest service start date March 01, 2018

Description of Apricum assessment

Status: Established primary use case

(No significant changes in last 6 months)

Outlook: Stable market


Installations: No installations commissioned yet, but

201 MW of storage successfully tendered in 20162

Regulatory framework: Framework of EFR tender well

established and a good fit with key properties of storage

(e.g., response time < 1s and allowing for benefit stacking),

but regulatory discussions and risks regarding specific

revenue streams which are suited for benefit stacking

Economic viability: Economic viability indicated by success

of tender and by analysis of revenue and costs, but strongly

dependent on projections for use after end of contract

Drivers: Further reduction of grid inertia due to increasing

share of renewables and shut-down of coal power plants

leads to further demand for projects with similar parameters,

expected to be contracted as part of a combined frequency

response product from 2018 onwards

Operation: Energy charged or discharged

(symmetric service) automatically in case of

frequency deviations to stabilize the grid within

National Grid’s1 license obligation of 49.5–50.5 Hz

Revenue stream: Fixed payments per MW/hr,

reduced by potential penalties for non-availability

Pricing mechanism: First and most recent auction of

201 MW was based on pay-as-bid principle and

completed in August 2016 with average price of

GBP 9.44 per MW/hr. No second EFR tender

planned, but launch of a combined frequency

response product which also covers similar

parameters expected for 2018

Counterparties: Auctions conducted and payments

provided by National Grid

Project time frame: Contracts provided for up to four

years starting with commercial operation

EFR installations have to respond to grid frequency

changes within a response time of less than 1s.

18

EFR scheme: Description

EFR scheme

Source: Apricum analysis, National Grid; 1) E.g., Low Carbon excluded 330 hr per year from EFR

Triggering of service Obligations and options

• Service must automatically be provided when system

frequencies exceed specified thresholds (“deadband”)

and pre-defined output profile must be followed (see

figure below). System must be able to reach 100% of

power output within 1 second (for 0.5 Hz deviation)

• Details on service obligation:

• Duration: 100% of capacity must be provided for

15 min when needed – new obligations only after

frequency has returned to deadband for full 30 min

settlement period

• Penalties: Second-by-second Service Performance

Measure (SPM) averaged over each settlement period

(30 min), deviations of more than 5% trigger reduction

of payments. Substantial failures to deliver (perfor-

mance <50%) may result in cancellation of contract

• Charging and discharging between service intervals

must adhere to prescribed ranges of ramp rates

• Options for service providers / tender participants:

• Deadband: Two options to take into account different

requirements for charging/discharging between ser-

vice intervals: Wide deadband (0.05 Hz) and narrow

deadband (0.015 Hz). Latter more expensive, but still

the only option successful in last tender

• Benefit stacking: Participation in the capacity market

allowed and high flexibility to exclude time windows

from the bid for alternative services1, but no additional

services during EFR service windows

Output (in MW) Max. positive

delivery

Deadband: No

response required

Max. negative

delivery

Frequency

deviation

Service envelope

with required output

EFR bids were ranging between 7 and 64 GBP/MW/hr with

a final clearing price of ~12 GBP/MW/hr.

19

Results of first EFR tender

Source: Apricum analysis, National Grid; 1) Each bar represents one bid (varying capacity)

0

10

20

30

40

50

60

70

Deadband 0.05 Hz, no contract awarded Deadband 0.015 Hz, no contract awarded Deadband 0.015 Hz, successful bid

Max. winning price

of 11.97 GBP

Bid price (in GBP/MW per service hour)

# of bid1

Note, that not all bids below the maximum winning

price were successful:

• Multiple alternative (and mutually exclusive) bids

handed in for variations of the same project

• Preference by National Grid for narrow

deadband option

Avg. price

of 9.44 GBP

EFR scheme

Overall assessment of current regulatory framework:

• EFR regulatory framework is well suited for storage: Maximum delivery obligation of sufficiently short 15 min, option to exclude time

windows for benefit stacking, explicit possibility to combine with capacity market and existing service option with larger deadband

• Recent and indicated regulatory changes reduce attractiveness of some secondary use cases, but initiatives discussed as part of the

recent “Call for Evidence” and National Grid’s “System Needs and Products Strategy”1 are expected to have a positive impact on feasibility

of storage installations

EFR regulatory framework well suited for storage, but

attractiveness of some secondary use cases declining.

EFR scheme: Regulatory framework

• No changes to specific EFR regulation since last tender. Next tender not yet announced, but intentions1 that a “blended”

product will be launched in March 2018 which addresses all different types of frequency response, including EFR

• Ongoing discussions to make connection and grid fees for storage installations more flexible (to reflect the actual use

case/pattern) as part of the recent “Call for Evidence”, independently of EFR

• Regulatory activities related to opportunities via benefit stacking:

• Ofgem plans to list EFR as “relevant balancing service” in Capacity Market (CM) regulation, ensuring that both use

cases can be addressed simultaneously without risk of penalties for non-delivery

• Ofgem reduces payments foreseen for generators connected to the distribution network (“embedded benefits”) from

1 April 2018 onwards2, especially regarding high revenues for offsetting transmission network fees by discharging

during periods of peak demand (“triads”) – first formal indications in July had already lead to six companies

(10 projects) withdrawing EFR bids tailored to benefit stacking

• From April 20183, distribution network fees will depend less on time of use (on “red”, “amber” and “green” timebands),

thus reducing potential value-add by generators and energy storage systems and impacting economic viability of

potential EFR projects which depend on benefit stacking

Source: Apricum analysis; 1) SNAPS report of June 2017; 2) Open letter by Ofgem dated December 2, 2016 and final decision made public on

June 20, 2017; 3) Modification DCP228

EFR scheme

Recent

regulatory

activities

20

EFR projects depend on benefit stacking and sufficient

revenue after end of four-year contract duration.

21

EFR scheme: High-level assessment of economic viability

1

Overall assessment:

• Total annualized (discounted) costs5 over a project lifetime of 10 years amount to 104 GBP/kW/yr

• Average revenue in the first 4 years amounts to 83 GBP/kW excluding and 105 GBP/kW including capacity market payments

► Economic viability for average EFR project only given when capacity market is taken into account. Furthermore, similar

revenue streams must open up at the end of the 4-year EFR contract despite declining battery costs to ensure overall

profitability.

Source: Apricum analysis; 1) Successful bids in first tender with 7.00–11.97 GBP/MW/hr; 2) Clearing price of T-4 auction for delivery from 2020/21; 3) Based on

usable energy; 4) Assuming that lost inertia will be replaced by EFR systems so that future grid frequency deviations resemble historic data; 5) Assuming a

WACC of 10% p.a.

2

Observed average auction price of 9.44 GBP/MW/hr1 (i.e., ~83 GBP/kW/yr for projects that do no apply benefit stacking

based on excluding likely triad time windows from EFR service)

EFR scheme

Additional capacity market payments of 22.5 GBP/kW/yr2 if participating in capacity market (majority of projects)

1

2

System cost estimate of ~750 GBP/kWh3, based on a power-to-energy ratio of 1 kW to 0.7 kWh and an EPC cost assumed

to be 15% of AC system cost

Revenue

Cost

Use of existing grid connection

3 Annual O&M costs of 1.6% of initial CAPEX

4 Net electricity charging costs of 11 GBP/kW/yr based on analysis of historic frequency data4 and an EFR deadband

of 0.015 Hz

Future opportunities depend on an arising need for

additional assets to guarantee frequency stability.

22

EFR scheme: Drivers and outlook

Source: Apricum analysis; 1) See annex for detailed description of legend; 2) Minimum system inertia expected to drop from ~100 GJ in

2016/17 to ~75 GJ in 2025/26; 3) Phase out to be completed by 2025, potentially already 2022; 4) National Grid Summer Outlook Report 2017

Driver for energy

storage

Contributing

factor(s)

Impact on demand for energy storage and

on its value

Outlook1

Need for

frequency

stability of the

grid

Overall Higher risk of future substantial frequency

deviations due to lower system inertia

implies need for mitigation and triggers

more EFR capacity to be tendered

Decreasing system inertia due to

decommissioning of coal plants and new

RE installations leads to stable demand2 for

additional projects with <1s response time

Phase-out of coal

power plants

Less active capacity with high inertia,

implying lower frequency stability

Decommissioning of further coal plants3

and thus decreasing system inertia

Increasing share of

variable renewable

energy

Less active capacity of conventional

generators with high inertia, implies lower

frequency stability

Decreasing annual RE installations

expected, therefore decreasing demand for

new storage: Annual wind installations in

2018/19 similar to 2017 (~4GW) and PV

installations in 2017–2019 (~400 MW/yr)

lower than National Grid’s 2017 projection

of ~1.8 GW4

EFR scheme

Significant changes in last 6 months (green positive, red negative) Growing

market

Stable

market

Declining

market Outlook:

Apricum assessment: Stable market

• Additional frequency response capacity with response time <1s expected to be tendered as a result of further reduction of

system inertia (in the course of continuous coal power plant phase out and despite expected slow-down in annual installations of

variable PV)

• Energy storage expected to remain the prevailing technology for frequency response with requirement of short response times

EDF Energy Renewables will build largest EFR facility right

below maximum eligible capacity of 50 MW.

23

Example: 49 MW EFR project by EDF Energy Renewables

EFR scheme

Project context

Energy Storage System

Key parties involved:

Integrator:

Nidec ASI2

Project dev.:

EDF ER3

Ownership:

EDF ER

Ownership/financing:

• Likely financed via balance sheet

Key parameters:

Source: Apricum analysis, EDF; 1) Prices adjusted at beginning of each delivery year according to consumer prices index; 2) Power

management system provided by EDF Store & Forecast and power conversion technology by Nidec ASI; 3) In-house development likely

Storage technology:

Lithium-ion

Energy capacity Power capacity

34 MWh 49 MW

Timeline

• Final investment decision was taken in December 2016

• Estimated start date in December 2017

West Burton,

Nottinghamshire,

England

Additional use cases addressed (benefit stacking):

• Capacity market participation via T-4 auction for 15 years from Winter

2020/21 with 47.2 MW at clearing price of 22.5 GBP/kW/yr (2015/16

prices1

Relevance:

• Largest EFR project that won a contract (~25% of total tender volume)

• Only EDF project assigned with an EFR contract (remaining 21 EDF

bids were variants of this project at the same site – with lower capacity

or wider deadband)

Offtaker:

National Grid

Overview Europe

UK

Overview UK

EFR

FFR

PV self-consumption


Secondary use cases

Germany

Rest of Europe

Annex

24


(Complete set of slides for each scheme included in full report)

Overview Europe

UK

Overview UK

EFR

FFR

PV self-consumption


Secondary use cases

Germany

Rest of Europe

Annex

25


26

Capacity market: Overview

Apricum assessment

~500 MW of battery storage awarded with capacity market

contracts, improving viability of other revenue schemes.

Capacity market

Description of scheme

Operation: In case of System Stress Events, an

adjusted load following of up to the contracted

capacity has to be performed with a 4 hour prior

notice by National Grid (Capacity Market Warning)

Revenue stream: Monthly payments at fixed MW/yr

rate reduced by potential penalties for non-

availability and aggregated with potential over-

delivery payments

Pricing mechanism: Annual auctions based on

clearing price principle: Largest share via auctions

four years ahead of delivery period (“T-4”),

remaining capacity auctioned one year ahead of

delivery period (“T-1”)

Counterparties: Auctions conducted and payments

provided by National Grid, refinanced via supplier

charge dependent on demand on winter weekdays

between 4–7 pm

Project time frame: Contracts duration depends on

asset: Typically, one year for existing assets, three

years for refurbished assets and up to 15 years for

new assets

Source: Apricum analysis; 1) Latest service start date March 1, 2018; 2) See page on “Regulatory framework, drivers and outlook”

Description of Apricum assessment

Status: No viability as primary use case,

but established secondary use case


Outlook: Declining market

(More pessimistic view than 6 months ago

due to more specific “de-rating” plans)

Installations: 501 MW of new (to be built) battery storage

assigned with contracts in 12/2016 T-4 auction and 10 MW

assigned with contracts in 02/2017 year-ahead auction

Regulatory framework: Modifications of benefit stacking with

frequency response products expected (with respect to the

maximum capacity to be accounted for and how charging

reduction of storage assets may count to the capacity

market2). Plans to count only a share of the physical energy

storage capacity towards the Capacity Market contract,

depending on the maximum delivery duration

Economic viability: No stand-alone economic viability

Drivers: Need for additional generating capacity due to

phase-out of old assets and higher demand; high auction

clearing price due to lower share of existing assets

• Details on obligations:

• Pre-qualification: All licensed generating units must pre-

qualify for the capacity market, but are not obliged to

participate in the auction

• Prerequisite: Testing requirements of 30 min power delivery

• Delivery obligation: Adjusted load following of up to the con-

tracted capacity in case of System Stress Events3 with 4 hr

prior notice via “Capacity Market Warning” by National Grid

• “De-rating factor”: For each generating technology class, the

permissible capacity (for payments) is the available power

times a “de-rating factor” determined annually based on

average availability. Maximum duration of delivery has not

been taken into account yet, but will likely be considered

from 2018 onwards4 to the disadvantage of storage

• Penalties: Failure to deliver results in penalties which are

capped at 200% of monthly and 100% of annual income

• Options for service providers / tender participants:

• Benefit stacking: Participation in relevant balancing services

is explicitly allowed and the service obligation is reduced

when any of these services are provided: STOR, Fast

Reserve, FFR, Constraint Management Service, Frequency

Control by Demand Management and soon EFR

• Relevant auctions:

• Largest share of capacity is auctioned 4 years ahead of

delivery with a contract duration of 1 year (existing assets)

• Further capacity gets contracts of up to 3 years (refurbished

assets) or 15 years (new assets)

• Remaining capacity is auctioned short-term 1 year ahead of

delivery for National Grid to retain flexibility to adjust volume

• Pricing: Bidding prices for existing1 assets are capped so that

participation of refurbished/new assets is required for high

clearing prices such as the 22.5 GBP/kW in the latest T-4 auction

Duration of capacity market contracts is 1 year for existing

and up to 15 years for new assets.

27

Capacity market: Detailed description

Source: Apricum analysis; 1) Not refurbished; 2) Demand side response; 3) Exact definition: Settlement period in which “System Operator

Instigated Demand Control Event” lasts at least 15 continuous minutes; 4) Capacity Market Consultation dated July 24, 2017

Capacity market

Capacity auctions and contracts Obligations and options

0

10

20

30

40

50

60

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

20

26

20

27

20

28

20

29

20

30

20

31

20

32

20

33

20

34

Contracted market capacity by auction (in GW)

T-1 2017 (Early auction, “EA”) T-4 2014 T-4 2015 T-4 2016 TA 2017 (DSR2 only)

Only refurbished or new assets (contracts for >1 yr)

Energy storage systems expected to receive contracts for

lower capacity to take into account limited delivery duration.

Need for new generation capacity:

• Projected demand is higher than projected generation

capacity so that increasing tender volumes (in MW) are

expected to limit loss of load to three hours per year

• Larger tender volumes imply that a higher number of

new assets receives Capacity Market contracts. Since

bids by existing assets are capped, new assets set the

clearing price and are called “price-makers”. A larger

number of new assets is expected to raise the clearing

price which is then applied to all contracts

• Expected “de-rating” of energy storage capacities is

expected to lower corresponding revenues

28

Capacity market: Regulatory framework, drivers and outlook

Source: Apricum analysis; 1) Ofgem’s plans and response to change proposals from the industry dated March 23, 2017; 2) Capacity Market

Consultation dated July 24, 2017

Drivers and outlook

Note: Capacity market currently only acts as secondary

use case. Therefore, the declining market outlook

corresponds to a decreasing revenue stream and a lesser

extent to which the capacity market supports economic

feasibility of projects that apply benefit stacking

Capacity market

§ Regulatory framework

Recent changes and discussions:

• Ofgem has published its intentions for modifying the

Capacity Market regulations1:

• So far, if one charges a system during the two

settlement periods prior to a Capacity Market

Warning (i.e., in times of high electricity demand) and

even continues charging up to the System Stress

Event, then the stop of charging may generate

additional capacity market revenue (“over-delivery

payment” from a demand response perspective).

Ofgem plans to inhibit this unwanted effect.

• Listing EFR as “relevant balancing service”, thus

eliminating risks in case of benefit stacking

• Ofgem plans to “de-rate” energy storage systems,

counting only a share of the physical capacity to-wards

the Capacity Market contract depending on the

maximum delivery duration – consultation ongoing2

Significant changes in last 6 months (green positive, red negative)

Growing

market

Stable

market

Declining

market Outlook:

Overview Europe

UK

Overview UK

EFR

FFR

PV self-consumption


Secondary use cases

Germany

Rest of Europe

Annex

29


(Complete set of slides for Germany and for relevant schemes

in selected other countries included in full report)

Overview Europe

UK

Overview UK

EFR

FFR

PV self-consumption


Secondary use cases

Germany

Rest of Europe

Annex

30


Definition of symbols related to use case status and

outlook.

31

Meaning Prerequisites Comments

Status: Established

primary use case

Significant capacities (MW) of non-pilot

installations in place, under construction or

awarded in a tender and additional

installations likely to follow

Installations seen as indicator for economic

viability1 (or attractiveness for other reasons) and

sufficient regulatory frameworks

Status: Emerging

primary use case

Potentially economically viable2 and/or

suitable regulatory framework and/or good

prospects based on expected tenders and

market developments

High-level calculation of economic viability is

provided and non-economic factors like preference

for self-sufficiency are taken into account

Status: Primary use

case currently not

feasible

None of the above applies Use case not feasible as a primary use case3, but

may be feasible for benefit stacking

Outlook:

Growing market

Strong drivers in place for increasing annual

storage installations or improving above

“traffic light” status

Depending on current status, outlook refers to one

or more of the following:

• Increasing/decreasing annual installation

numbers or overall tender capacities

• Upcoming changes in economic viability or

regulatory frameworks

Outlook:

Stable market

Drivers indicate relatively stable annual

storage installations or status

Outlook:

Declining market

Drivers indicate declining annual storage

installations or downgrading of status

Significant changes in

last 6 months

Significant changes in last 6 months

1) Potentially in combination with other use cases; 2) Deep dive assessment needed; 3) Primary use case: Providing dominant share of

expected revenue

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• Which opportunities for energy storage

currently exist in Europe?

• How robust is the regulatory and

economic basis?

• How can I participate – or is it too late

anyway?

• Which other companies are involved and

in what way?

• Which opportunities are about to emerge?

• What is driving the overall demand?

• What are the related regulatory and

economic developments?

32

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Apricum’s Energy Storage Briefing – summary

Your direct contact:

Florian Mayr

Partner, Head of Energy Storage

[email protected]

Apricum GmbH

Spittelmarkt 12 | 10117 Berlin | Germany

T. +49.30.308 77 62 - 0 | F. +49.30.308 77 62 - 25

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