By Steph Unsworth, Senior Research Associate
Maintaining a stable and safe I-SEM becomes more challenging as a greater share of generation comes from renewables on the path to 2030 targets. To combat this, the system operators introduced the DS3 (Delivering a Secure, Sustainable Electricity System) programme to incentivise the buildout of additional ancillary services. There are 14 DS3 System Services, of which 12 have so far been procured, including the provision of frequency response, ramping, reactive power, inertia, and voltage control. The frequency response services FFR, POR, SOR, TOR1, and TOR2, the so-called ‘Fast Five’ services, currently form the bulk of battery storage revenues.
DS3 availability payments are made based on available volume, administratively set scalars, and administratively set tariffs. A new market-based approach is required, as this regulated approach is not EU guideline-compliant. However, this arrangement will persist until April 2026 under current plans, so understanding the payment structure and how it may change is vital for existing assets or projects planning to come online in the next couple of years.
Let’s break down each of these DS3 payment components:
Available volume: DS3 capacity is procured through a gate process, occurring every six months since May 2018. Once you receive a contract through a gate process, you can keep hold of that contract until the end of regulated arrangements with no need to reapply. You simply need to state your availability (or lack thereof) six hours prior to the settlement period.
Scalars: There are various different scalars covering product, location, and performance. However, the largest scalar is the Temporal Scarcity Scalar (TSS), which tracks the level of System Non-Synchronous Penetration (SNSP), as per the table below. This means that DS3 payments are higher when it’s windier, to incentivise availability during periods when system stability issues are more likely.
| SNSP (%) | TSS for FFR | TSS for POR-TOR2 |
|---|---|---|
| 0-50 | 0 | 1 |
| 50-60 | 1 | 1 |
| 60-70 | 4.7 | 4.7 |
| >70 | 6.3 | 6.3 |
Tariffs: These are administratively set and have only been revised once since the DS3 programme’s start, when the Fast Five tariffs were reduced by 10% in 2021.
It’s easy to see how DS3 expenditure can get out of hand for the system operators as more capacity is procured and renewable penetration increases. Therefore, there’s an expenditure cap of €235m per tariff year, but this was breached by over €57m in the 2022/23 tariff year. As a result, the system operators stepped in to reduce spending with a DS3 System Services Tariffs Consultation on 28 March 2024. The options they presented were:
- A reduction to the TSS values
- A reduction in tariffs for the reserve services
- Ceasing procurement of certain system services
- Some combination of these options
Now, six months later, we have our answer: a reduction to the TSS values, effective from 1 October 2024. The new values are:
| SNSP (%) | TSS for FFR | TSS for POR-TOR2 |
|---|---|---|
| 0-50 | 0 | 1 |
| 50-60 | 1 | 1 |
| 60-70 | 2.25 | 2.25 |
| >70 | 4 | 4 |
This may seem alarming, but Aurora completed some analysis in May 2024, when these reductions were first proposed, and this is most definitely not the worst outcome there could have been.
The final SEM Committee decision is similar to the originally proposed TSS reduction option 2. Aurora’s analysis shows this reduction would reduce the IRR for a new-build one-hour battery entering the market in 2025 by 860 basis points. Although this sounds concerning, this still leaves the IRR at a healthy 13.6%, maintaining the profitability of new assets. Meanwhile, a full removal of the TSS would have moved the IRR into the uninvestable area, which would not have been good news for any project currently under construction.
I see this as a relatively positive outcome, as the tariff reductions required to avoid overspend would have been far more drastic, and ceasing procurement would have been catastrophic for any project hoping to enter the market after gate 11. However, battery owners are not out of the woods yet, as a further overspend of €65.9m is expected over 2025 and 2026, a fact the SEM Committee is all too aware of. Hence, further consultations are on the horizon, and the threat of further cuts in October 2025 remains. These threats are not insignificant, with market access issues still remaining for battery storage in the I-SEM, which results in DS3 being the main source of revenue for storage. Therefore, if expenditure breaches are to be avoided without scaring off investors, market access for battery storage needs to be addressed sooner rather than later to provide a new source of revenue to recoup any losses from DS3 cuts.
To reach out about Ireland I-SEM, contact Rebecca.Cabrera@auroraer.com
