Show me the future: can storage bank on FCAS being bankable?

Previously we have examined the importance in FCAS prices for the revenue stream for batteries. With a growing interest in batteries in the market, this ‘Chart of the week’ takes a deeper look into the impact of bidding behaviour on the Regulation Raise price since 2012.

Figure 1 illustrates the monthly average of Regulation Raise price, the non-volatile Regulation Raise price (capped at $300 to remove specific high price events) against the average market prices across the four lowest bid stacks and average Regulation Raise enablement.

From January 2012 until September 2015, Regulation Raise prices were low, with the non-volatile component averaging around 1.9 $/MWh ($Dec 2020 real terms). A distinct increase in average Regulation Raise prices has been observed since then, with the non-volatile price averaging 24.1 $/MWh from the end of 2015 until December 2020 or 12 times the previous average. This increase in prices coincides with a step increase in the average prices in the lowest four bid stacks across the ancillary service market generators, which averaged over six times higher than previously across the same time frame.

In 2015, AEMO tightened requirements for the provision of FCAS to be sourced locally in South Australia and significant local capacity was withdrawn from the market when Northern Power station retired in May 2016. The remaining South Australian FCAS provided were able to capitalise on these restrictions during several events involving disruption of the Heywood interconnector and these can be observed in the spikes of the average monthly price. However, by comparing the non-volatile monthly average Regulation Raise price, it becomes more apparent that the underlying step change in price is heavily influenced by a change in bidding behaviour in the lowest four bid stacks.  Generators seeking compensation for additional causer pays costs resulting from disablement of automatic droop control may be a driver behind this change in bidding behaviour.

Since 2017, additional FCAS capacity has been introduced into the market, AEMO has relaxed the restrictions and, more recently, the generators have been forced to reinstate their governor mechanisms. Upward pressures on prices include increases in enablement (demand) and potential cost of providing these services with batteries making a greater presence in the market (at the expense of retiring coal plant).

This then raises the question: does the risk exist that this bidding behaviour will revert to historic levels for incoming storage investors, or are prices observed since 2016 expected to continue into the future?

For more insights and our view on FCAS pricing through the energy transition, our ‘FCAS price curves’ service provides granular price forecast for FCAS markets. Also join us for our upcoming free webinar ‘FCAS projections and insights’ webinar in June. We will be discussing recent price outcomes, their drivers, and what to expect going forward.