Centrica Sees Solar-Battery Arbitrage in Future: Q&A

By Bryony Collins, Bloomberg New Energy Finance editorial team. This article first appeared on the Bloomberg Terminal and is available to BNEF clients on the web.

Centrica Plc has an “imperative to change” and is repurposing its business structure with a greater emphasis on the consumer and providing grid services, in response to the ongoing shift in the energy landscape, said Mark Futyan, merchant power director in the company’s business solutions division.

“The energy landscape is shifting from an old world with one-way flow from big central generation down the wires to passive consumers, into one where it’s very much bi-directional”, Futyan told BNEF in the following interview. The London-based utility wants to help customers “take control of their energy and be in the driving seat.”

Centrica is installing batteries at a holiday resort in Cornwall with solar panels onsite, to trial the concept of energy arbitrage – where the batteries are charged during times of plentiful solar generation and are subsequently discharged when power prices are higher, to reduce the customer spend on grid-supplied power.

Batteries are currently most effective and economical in providing frequency regulation to the electricity grid, but as battery costs continue to decrease, “they will reach the point where they can be cost-effective for energy arbitrage.”

The potential to “undercut conventional generation” with solar panels and energy storage is an exciting opportunity that “could really turn the whole energy landscape on its head,” Futyan added. He said that the current cost of batteries would need to fall by about a half in order to make energy arbitrage worthwhile.

Q: Centrica has shifted its focus toward electricity retail and services and away from power generation. Do you see growth potential in this market, taking into account that Centrica lost 750,000 customers last year in the U.K. and operational income decreased? How do you see the market developing?
A: These are reasons why we have an imperative to change. Some challenges faced by Centrica are reflections of the changing market. So that’s why we’ve created these new businesses – one is connected homes that serves residential customers, and then on the business side – Centrica Business Solutions, [which helps] commercial and industrial customers add value rather than just providing them with a commodity.

The energy landscape is shifting from an old world with one-way flow from big central generation down the wires to passive consumers, into one where it’s very much bi-directional. Customers are taking great control of their own energy and there is increasing digitization.

This whole shift in our business model, away from wholesale and into customer-facing businesses will set us up to succeed in that new world. We were one of the first companies to try and do this.

Two and a half years on, since we embarked on that strategy, a lot of our competitors are doing the same thing. In the recent E.ON, RWE division deal – E.ON is trying to create a model that looks very much like Centrica’s. It’s the same with what Enel is doing, and the ways that Engie has invested in distributed energy infrastructure. They are trying to build that same customer-focused business for behind-the-meter solutions as we have.

It is a necessary change in direction backed up by the nature of the market. We want to help our customers take control of their energy and be in the driving seat. That’s the transition we’re seeing in the outside world, and we want to help our customers be at the forefront of that.

Q: Tell us about the 3-megawatt battery storage project that Centrica has installed in Gateshead, northeast England.
A: Gateshead council own this smaller project and they employed us to put the battery in place for them, and we optimize it and manage the revenue generation.

There are two parts to our business – one is where we invest for ourselves. For example we own the 50-megawatt Roosecote battery project in Cumbria. But we have another half of the business that solves problems for our customers, and provides ways to help them be more self-sufficient in energy.

The 3-megawatt battery went operational in September 2017.

The Roosecote project also uses lithium-ion batteries, but on a much larger scale at a dedicated site connected to the distribution network, which helps to manage U.K. power frequency and keep it in balance. This project is in the later stages of commissioning, and should come into operation this coming winter.

Q: How was this project contracted?
A: National Grid ran an enhanced frequency response tender where they offered 4-year contracts, and we participated in that with our Roosecote project. We held out when the price cleared much lower than we had expected, because we expected a better commercial offering from bidding into the month-to-month market for fast frequency response. We make the business case work for Roosecote by combining that with revenue from the capacity market contract. We partly have a capacity agreement that we won last year, and we will top it up with month-ahead fast frequency contracts once the project is operational.

Q: As the cost of batteries decreases, how do you see your business proposition for residential and commercial applications changing?
A: The price of batteries is falling, but [it’s important to consider not just the battery units themselves, but all the infrastructure that goes around them]. That includes transformers, inverters and the casing – and that part isn’t falling in cost as fast.

At the moment, batteries are most effective at providing grid frequency regulation. But they will reach the point where they can be cost-effective for energy arbitrage – charging up when power prices are cheap overnight and then discharging when energy is of a higher value in the day.

When the price of batteries gets that low, suddenly the opportunity vastly increases. We will start to see pick up in grid-scale applications and at large customer sites. And then later on in residential.

Energy arbitrage is going on today with batteries in applications where the customer has a particularly increased connection charge or some other particular concern, but you’ve not seen the mass market for that application.

One of the most exciting opportunities is where you can combine solar with batteries, because as solar costs also come down, you reach the point where you have dispatchable energy that is zero-carbon, and could potentially undercut conventional generation. That could really turn the whole energy landscape on its head.

We have a pilot project in Cornwall at a holiday resort, which has solar panels onsite, and we’re installing a battery there to try and get that exact solution where everything balances out and the customer can become self-sufficient in their energy needs. We can prove the concept and as prices come down, that can become a reality and be widespread. [To be economical] you have to make sufficient energy savings on not buying grid-supplied energy, and this pays back the high cost of capital spent on the battery.

Q: What size of battery cost reduction would be necessary to make energy arbitrage worthwhile?
A: We’d need to see costs fall by about a half, which is possible. If we see the gains in battery cost reduction that we’ve seen in the past, we could well achieve that reality where batteries turn from a small market serving the grid, into a mass market for system balancing.


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