The U.K.'s December capacity market T-4 auction took place at the center of a perfect storm for energy storage.

Factors including 15-year contracted revenue, the ability to stack value streams with enhanced frequency response contracts, and requirements for only 30 minutes of committed capacity combined to drive a remarkable success for storage -- resulting in 500 megawatts of new-build energy storage clearing the auction.

In a new report, GTM Research modeled out the lifetime project economics of a hypothetical 10-megawatt, 30-minute storage system participating in the U.K. capacity market and found that the system could yield a 11.1 percent internal rate of return (IRR) between 2018 and 2034, relying primarily on contracted revenue streams and favorable energy arbitrage opportunities.

FIGURE: Forecasted Annual Energy Revenue, Cost and Arbitrage Opportunity (USD, not inflation-adjusted)

Source: GTM Research, Wood Mackenzie

The model uses proprietary data from GTM Research and Wood Mackenzie and accounts for capital costs, replacement costs, system degradation, energy costs and multiple revenue streams.

In the months that have passed since energy storage had its moment in the spotlight, however, the news has not been good. Most of the mechanisms that enabled energy storage to compete so effectively are either being examined for potential changes or have already been altered. Proposals to derate capacity payments for shorter-duration systems could dramatically alter project profitability.

The report models lifetime economics across 30-minute, 1-hour, 2-hour and 4-hour systems. A hypothetical long-duration 4-hour system fails to pencil out, with a projected IRR of -0.7 percent.

According to GTM Research, while storage costs primarily scale with megawatt-hours, U.K. capacity market revenue scales up only with megawatt capacity, meaning a 30-minute battery and a 4-hour battery would be recognized for having the same value under the current system. This essentially prevents long-duration battery systems from using capacity payments as a primary revenue stream, as the 4-hour requirement with no corresponding revenue recognition for higher energy potential prices them out of the market.

Given the likelihood of the auction mechanisms being altered, the U.K. capacity storage market is a boom market about to go bust.  

But even if market rules change, the 500 megawatts from December’s T-4 auction is an impressive capacity contracted over the next four years. If opportunities for energy storage in the U.K. change, these projects will become even more critical for the market -- demonstrating multiple use cases, establishing economics for arbitrage opportunities, and further proving energy storage’s value. All eyes will now be on the next T-4 auction to see if developers can adapt to potential changes and continue to drive the storage market forward.

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The report, Energy Storage in the U.K.'s Capacity Market, complete with model assumptions and analysis, is available as part of GTM Research's Energy Storage Service.