The balancing mechanism is the most attractive market for batteries, delegates heard at the Energy Storage Summit in London.
Battery operators may trade in and out of positions in the day-ahead and intra-day markets, but ultimately a battery would look to close its position and then "cash out" in the balancing mechanism, the director of Habitat Energy, Ben Irons, said.
Habitat optimises battery revenues using algorithmic trading strategies, although with human oversight, Irons said. It tends to "Niv chase" rather than submitting bids or offers in the balancing market. This means that it deliberately goes out of balance and aims to be on the right side of the balancing price, which will be high when the net imbalance volume (Niv) is positive and low or even negative when the Niv is negative.
The advantage of Niv chasing is an operator can generate or consume exactly as much as desired, rather than submitting bids and offers to the balancing mechanism that may not be picked up, Irons said.
Some operators worry about the effects of market saturation on merchant battery revenues, as has already been seen in markets for ancillary services like frequency response.
But while the balancing mechanism is a smaller market than the day-ahead or intra-day markets, there is still space for "many gigawatts" of storage capacity before it saturates, particularly as battery durations are so low, Irons said.
It is difficult to hedge battery revenues, as there is no forward market for storage. This increases the cost of financing projects. Battery projects need an unlevered internal rate of return of 10-12pc to be investable. This would require a battery with one-hour duration to achieve revenues of £40,000-50,000/MW annually, Irons said.
Habitat recommends around 1,000 cycles a year for a one-hour duration battery. This may not be covered in typical warranties, meaning battery operators have to negotiate with manufacturers to allow them to pursue optimal strategies.
Battery cells will degrade over time, possibly by 40pc over a 20-25 year lifetime. Degradation will be quicker if batteries are fully discharged during cycles, which operators must take into account when optimising them.
Co-locating with batteries provides a good opportunity for solar projects to make the most of their grid connection, Irons said.
As solar has only a 10pc load factor in the UK, 90pc of the time the grid connection is "just sitting there".
Solar developers typically install more capacity than their grid connection, because they so rarely generate at full capacity. Co-locating with a battery could allow a solar plant to add 25-75pc of additional "overcapacity," Irons said. But co-locating would still add to costs, because it requires a two-way grid-connection.
