In recent times contingency FCAS has become a very lucrative revenue stream for participants in the NEM able to offer services into the various contingency markets.
Will Victoria’s big battery win big or lose its shirt?
Going toe-to-toe with the US election for media attention, this week saw the announcement of another huge battery storage project for Australia. Imaginatively dubbed the Victorian ‘Big Battery’, the project, which is to be located near Geelong in Victoria on Australia’s south-east coast, has received a huge amount of media coverage and has generated much discussion. This is for good reason. It’s another huge step towards a zero-carbon energy system in Australia and represents the latest in a series of audacious plays by the new breed of energy heavyweights, businesses like France’s Neoen and Elon Musk’s Tesla.
The new battery is expected to provide 450MWh of nameplate storage capacity, have a maximum charge/discharge rate of 300MW and be online by summer 2021/2022. It follows the smaller but hugely successful Hornsdale Reserve over the border in South Australia and, based on the publicly available information, seems to be aiming to make money from three main revenue streams.
- A System Integrity Protection Scheme (SIPS) contract with AEMO (the Australian Energy Market Operator).
- Playing the wholesale energy market in Victoria.
- Delivering ancillary services to support the grid, particularly contingency and regulation FCAS (Frequency Control Ancillary Services).
From what we understand, the SIPS deal involves the battery reserving 250MW of its 300MW capacity for AEMO during the summer months. The remaining 50MW will be available for Neoen to play the markets with, as will the full 300MW outside of summer.
With this limited information we thought it would be interesting to take a look at how much money the new battery might make. Rather than speculating on future energy markets and contingency FCAS events we’ve simply wound the clock back to the start of 2018. Essentially, we’ve modelled how the battery might have performed had it been energised at the same time as the Hornsdale Reserve.
Our model allows the battery to bid into all six contingency FCAS markets (three raise and three lower) and to charge or discharge against the energy spot price for arbitrage benefit. We’ve compared the hypothetical earnings with and without the SIPS contract. With SIPS enabled only 50MW of capacity is available for trading from November to March. With SIPS turned off all 300MW is available and we’ve further assumed all 450MWh of nameplate storage capacity can be accessed. Earnings by month and value stream are charted below up until the end of October 2020.
FCAS is clearly a big money maker and is responsible for about 80% of the overall revenue. The three raise services are consistently the most lucrative but volatility is seen in how their value varies over time. In the first year most revenue comes from the five-minute service in the cooler months. Revenue drops substantially in the second year then picks up dramatically in the summer of 2020, but shifted into the six-second service. Much of the 2020 revenue can be traced back to a few days in late January and early February. High temperatures and extreme demand were experienced across Australia’s south-east leading to problems throughout the grid and FCAS prices going through the roof.
In comparison, the revenue from wholesale energy arbitrage is more consistent. While it seems to vary a lot over the years much of this is driven by FCAS. In this model when the FCAS price is high the battery preferentially chases FCAS rather than wholesale energy arbitrage. However, there is a clear trend for January to be much more lucrative than the other months. For the most part the weather in Victoria is fairly mild but there are usually a few days of the year where the temperature breaches 40C, often in January. These days cause the energy spot price to hit its $14.5k/MWh cap (recently raised to $15k/MWh) whereupon an agile asset like a battery can make a lot of money.
With many of the most lucrative events occurring over summer the SIPS contract has a big impact on our modelled battery’s commercial performance. Enabling SIPS over the timeframe modelled here would have cost around $30 million a year, or about 40% of the total revenue. Assuming a capex cost of, say, $300 million (costs haven’t been disclosed by Neoen) this increases the simple payback from about 3.7 years to about 6.1 years (note we’re just talking market trading value here). Considering the SIPS contract has been quoted at $12.5 million a year this seems like a pretty good deal for AEMO and Victorian energy consumers, or to look at it another way perhaps a significant concession by Neoen?
Conventional wisdom suggests that the historically important revenue stream of FCAS will dry up. More high-performance assets are beginning to offer themselves into the market and the landscape is changing. Indeed, we can already see the FCAS revenue changing and dropping over the three years modelled here. It’s also a volatile market driven by a handful of events making it a reasonably high risk strategy. That said, the rewards remain very large for now and a few more fortunes will likely be made before the dust settles. An asset like Victoria’s big battery is better placed to capitalise on FCAS than most, and could even be big enough to dominate the market, but not being able to trade at full capacity over the summer seems to be a pretty significant handicap.
Wholesale energy arbitrage is similarly volatile but perhaps more dependable. Hot days will continue to happen in Melbourne replete with their energy spot price spikes. What is less clear is how the upcoming move from thirty-minute to five-minute settlement in the NEM will change things. Agile assets like batteries should stand to make more money in a faster-moving market but it will be interesting to see how the change affects bidding behaviour. At least some of the current volatility can be attributed to how people are bidding rather than the physical situation.
As with FCAS, the Victorian big battery’s energy arbitrage opportunities are seriously hampered by the SIPS contract, reducing its trading capacity over summer, particularly in January. But this is not the whole story. One of the goals of SIPS is to increase the amount of energy Victoria can import from New South Wales. Perhaps those hot-day price spikes will become a thing of the past, or will be ameliorated at least. It’s certainly going to be fascinating to see what happens when summer 2021/22 rolls around and this thing gets energised.