While it is commonly agreed upon that drivers for energy storage are strong and clearly point to a huge growth of the industry by 2020 and beyond, the path to market still appears unclear, especially for utility-scale storage. However with today’s compensation levels and the evolution of rules, ancillary services represent an interesting early business opportunity for storage in Europe.

Ancillary services are energy and power products managed by the grid operator in order to resolve the imbalances between real time load and generation. In this article, we mostly deal with “energy centric” ancillary services, meaning we do not consider compensations for available capacity in MW. Rather, our focus is on energy in MWh effectively activated (“generated” for upward balancing or “consumed”, for downward balancing); as we are in the field of real time and ancillary services, the decision for “activation” is taken after the gate closure of the intra-day market, usually 1 hour to 15 minutes before real time.

On the figure below, we reported the relative market depth of ancillary services, i.e. the ratio between the activated energy upward/downward and the total energy produced over the year 2010 in 5 Western European countries. The relative ancillary services market depth of each country can be qualitatively explained by the evolution of the national generation portfolio of each country.
In Italy, which has the highest proportion of energy activated both upwards and downwards, renewable energy sources, especially PV, have mushroomed in the past few years and months and are geographically concentrated. This strengthens the already existing congestions between North and South.
Spain and Great Britain rank respectively second and third according to the same metric. The share of wind and solar power, that already composed 18% of the energy generation mix in 2010, can explain the situation in Spain. Great Britain is an island, and thus can only be supported marginally by neighboring countries for grid balancing. This fact can be interpreted as one likely cause for the high level of energy activated for ancillary services.
In the case of Germany, it is likely that the growing penetration of renewables and the nuclear phase out will have a strong influence on the amount of energy effectively activated to provide ancillary services. Consequently, it is likely that the depth of the German ancillary services market will increase from its 2010 value.

This short development shows that Western European ancillary services market constitute a relatively large volume (in MWh) for the early developments of the storage industry to address. This first approach needs to be enhanced by financial regulatory, as well as competitive considerations, in order to build a business case for storage assets.

On the financial side, compensation levels need to be added to this analysis: compensations both for the energy activation mentioned above, and for capacity which is also paid for in most countries, need to be coupled with the volume accessible on the markets to assess their real attractiveness. Compensation levels and structure are different across European countries: the local compensation schemes of each country need to be assessed in order to build appropriate business model for storage assets providing ancillary services. But the markets could evolve with the emergence of cross-border markets: the Association for the Cooperation of European Regulators (ACER), created in March 2011, aims, among other ambitious goals, at creating a cross border balancing market. This long-term evolution will have a strong impact on the market rules for ancillary services in Europe.

Ancillary services could represent an interesting initial market for storage assets in Europe. Granted, the regulatory framework needs to be clarified first in order to investigate how storage assets could take part in such markets. Indeed, ancillary services are usually provided by conventional generation, and the potential participation of storage assets depends strongly on local regulations.
Positive regulatory advances have, nevertheless, been observed: for example, the reduction of the minimal bidding size requirements decided in some countries will have a direct impact on facilitating the participation of storage in these ancillary services markets.

For more information on Clean Horizon’s work applied to energy storage and business cases relying on ancillary services, please visit us at www.cleanhorizon.com/reports and login for more content.