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Energy Storage in the UK: Analysis and Summary

Overview

This report, published by Cornwall Insight and supported by DLA Piper, examines the opportunities and challenges for energy storage in Great Britain (GB) as part of the transition to net zero. Energy storage is crucial for managing intermittency from renewable sources, with short-duration storage currently dominant, but future growth will focus on longer-duration solutions. Revenue streams include wholesale power arbitrage, Balancing Mechanism (BM), frequency response, and Capacity Market (CM). Key challenges include grid access delays, supply chain constraints, and market saturation, while opportunities arise from pathfinder programs, co-location, and policy reforms.

Main Revenue Streams and Market Dynamics

• Shorter Duration (0.5-1hr): Primarily used for frequency response services, which are becoming saturated, reducing revenue potential.
• Longer Duration (2-4hr+): Increasingly active in wholesale power arbitrage and CM, offering better revenue stacks due to de-rating factors. Market saturation in ancillary services is pushing assets toward arbitrage and BM to mitigate revenue uncertainty.
• Optimization: Sophisticated trading strategies are essential for stacking multiple revenue streams, but this requires expertise, leading to reliance on optimizers.

Major Challenges

• Grid Constraints: Delays in grid connection (up to 2030 for new assets) and locational limitations hinder deployment, especially in constrained areas.
• Supply Chain Issues: Shortages in raw materials (e.g., lithium, cobalt), manufacturing capacity, and labor skills are critical. Geopolitical risks and ESG concerns, such as human rights abuses in supply chains, require careful mitigation.
• Market Saturation: Over-supply of energy storage projects could reduce revenues in ancillary markets. Uncertainty in future renewable build-out affects revenue projections, impacting investor confidence.

Key Opportunities

• Longer-Duration Storage: Significant growth potential for inter-day and seasonal storage, with incentives needed (e.g., cap-and-floor regimes or LTESAs similar to Australia). Technologies like compressed air energy storage (CAES) and flow batteries are being developed.
• Co-location: Deploying storage with renewable generation can speed up grid access and reduce costs, though price cannibalisation and optimisation challenges exist.
• Policy and Market Development: Pathfinder programs and REMA reforms aim to improve revenue certainty; for instance, stability services and new market mechanisms could enhance opportunities for long-duration storage.

Future Outlook and Key Considerations

• Shift in Asset Focus: Investment is moving from short-duration to 2-4hr storage to capitalize on arbitrage opportunities, funded increasingly by equity due to lender concerns over revenue certainty.
• Investment Risks and Strategies: Investors must address supply chain resilience, grid access timelines, and ESG factors. Long warranties and advanced performance software are vital for reducing technology risk. ESG litigation risks are on the rise, influencing due diligence.
• Conclusion: The GB energy storage market is poised for growth despite challenges, but success hinges on navigating market dynamics, policy changes, and operational efficiencies. Investors should prioritize projects with clear revenue stacks and robust risk management.

Cornwall Insight and DLA Piper recommend engaging with their services for deeper insights into energy storage strategies.