We are pleased to present our latest analysis on local flexibility markets, looking at the business case of participating in UKPN’s recent tenders. Local flexibility markets are offering contracted, stackable revenues for flexible energy assets and an opportunity to boost project economics.
Key takeaways from the analysis include:
- With the UK’s energy network becoming increasingly decarbonised and decentralised, Local flexibility markets (LFMs) have been increasingly used by DNOs to procure flexibility services at the local distribution network, as part of the transition from DNOs to DSOs. Contracted volumes grew from ~250 MW to over 1 GW in 2020, with further increase in procurement target of up to 3 GW in 2021
- For batteries, a 7-year winter LFM contract from UKPN’s Secure Service can boost battery gross margins relative to energy trading only. The increase in project IRR is significant at ~8% for a 1 MW battery as the asset is able to fully capitalise on the LFM contract, whereas a 10 MW asset sees a relatively smaller increase in IRR at ~3% due to a limit in contract size
- For gas recips, securing a 7-year winter LFM contract from UKPN’s Secure Service increases yearly margins by 13% and 8% for 1 MW and 10 MW assets respectively. Both assets see an increase in project IRRs by ~2% with the revenue stacking with a LFM contract
- Whilst LFM contracts provide lucrative additional revenues to the flex business cases, three main challenges remain:
- Limitations on contract size and the highly locational nature of the LFM requirements
- Uncertainties over revenue stackability and locational benefits being reformed under Network Access and Forward Looking Charges Review, and
- Limited visibility on future service requirements. These issues would need to be addressed to provide better investment signals for the LFMs. UKPN already publish 7 years ahead and are looking to increase visibility. Also, work at the Open Networks project with other DNOs and ESOs aims to tackle the other challenges
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