Drax Group plc – Written evidence (LES0013)

Please find enclosed, the Drax Group plc (Drax) response to the Call for Evidence on Long-duration Energy Storage.

Drax recognises the critical role Long-duration Energy Storage has in supporting the future of the UK energy grid, as well as achieving Net Zero targets. Drax currently owns and operates the UK’s second largest pumped storage hydro (PSH) facility at Cruachan, and we are actively looking at improving the capacity and flexible operation of the site. This expansion project would increase total site capacity to over 1GW and provide multiple ancillary benefits to the system. This would vastly increase the site’s capability to absorb excess renewable generation and provide energy back to the system in times of high demand and/or low generation, as well as enable the site to greatly increase the amount of system support services it provides to the grid.

The National Grid ESO Future Energy Scenarios identify Large Scale and Long-duration Energy Storage (LLES) as a critical technology group, with significant increases required by 2030 to support intermittent renewable technology deployment. Drax is committed to supporting this objective through the development of our Cruachan Expansion project, which recently received development consent from the Scottish government.

However, as we have outlined in our response below, the most significant barrier to LLES implementation is the lack of revenue certainty in the markets where it will compete; this includes wholesale, balancing, ancillary services, and the capacity market. It is Drax’s view that to enable investment in LLES, a revenue stabilisation mechanism, such as a ‘Cap and Floor’ Mechanism, must be introduced alongside improvements to the current system planning to drive a more holistic and whole system view of what grid infrastructure is needed. Together this will enable investment in LLES that realises the potential to the level necessary to support the widescale deployment of intermittent renewables. The UK Government has committed to “developing appropriate policy to enable investment by 2024” which will facilitate the support required to meet these objectives. However, we remain concerned by the pace of this policy development which, if not forthcoming, risks; delaying the deployment of these critical technologies; could potentially impact the UK’s energy security; harm net zero decarbonisation objectives, and; increase costs to consumers.

We welcome the opportunity to discuss any points raised in this Call for Evidence response in further detail with the government.

Requirement for Storage and Flexibility

The National Grid ESO Future Energy Scenarios (FES) 2023 report outlined the requirement to significantly increase Large-Scale and Long-Duration Electricity Storage (LLES) deployment in the UK.

It states that this would facilitate the widescale rollout of intermittent renewable technologies, as it decreases the need to rely on fossil fuelled generation in times of low wind or solar generation, creating a lower carbon emissions intensity across the entire grid. By 2030, up to 13GW of new electricity storage could be required to deploy to the system to meet the challenges posed by intermittent renewables and the need to electrify sectors of the economy to decarbonise (e.g., transport).

It has been recognised by the UK Government that there are significant financial and market barriers to the deployment of LLES technologies and the FES scenarios are clear that “immediate action on deployment is required for CCUS, hydrogen, and long duration storage technologies”.

Pumped Storage Hydro

Pumped Storage Hydro (PSH) is a critical storage technology which utilises water reservoirs to store excess electricity in the form of gravitational potential energy. Existing UK PSH capacity of 3.6GW provides the bulk of the UK’s electricity storage capacity (currently around 4GW in total), as well as providing a significant amount of power system flexibility, and has many decades of effective operational life remaining. As a technology, it can absorb significant amounts of excess electricity generation (primarily driven by intermittent renewables operation) and can deliver vast amounts of capacity back to the electricity system in times of low generation and/or high demand. Alongside this, PSH can also provide a range of vital system support services, such as inertia, which are critical for the safe and secure operation of the UK’s power grid.

In terms of system and grid support, PSH provides a considerable number of versatile benefits. It alleviates the need for fossil fuels to bridge capacity when there is a shortfall in intermittent renewable generation and provides flexible demand on the system at times of low consumer demand, reducing the need for curtailment of renewable technologies. Renewable curtailment occurs when the electricity grid is unable to handle the volume of power being generated, either due to lack of demand or due to other technical constraints on the system. In 2020 and 2021, curtailment of wind generation cost UK consumers £806m[1]. LLES, and in particular PSH, can significantly reduce the need to curtail wind generation, which otherwise will significantly increase as the capacity of wind generation on the system increases.

PSH is also able to provide a range of ancillary services to the system, such as inertia, voltage flexibility and restoration which can ease demand on generation in constrained grid areas, reducing the need for investment in transmission networks. Whilst we recognise that the benefits of LLES can be provided individually by different technologies, PSH has the ability to provide multiple benefits from a single project. This means that these combined benefits can be delivered for a lower overall cost. However, currently there is no route-to-market that attributes value to these combined benefits.

In addition, PSH provides power price stability by reducing peak prices as it provides additional power back to the system (reducing reliance on costlier alternatives). It can also level-out peaks and troughs in prices and can mitigate the risk of prices going very low (or even negative) by providing an outlet for excess renewables in times of high generation and/or low demand, thereby reducing subsidy payments required under the Contracts for Difference (CfD) mechanism.

Drax’s Cruachan Expansion

Drax’s primary LLES project is the expansion of our existing PSH facility at Cruachan, Scotland. The Cruachan Expansion project would look to construct an additional power station (Cruachan 2) to complement the existing power station (Cruachan 1). This would increase the pumping and generation capacity of Cruachan by up to 600MW, resulting in over 1GW of capacity across the site (enough power for over 2 million homes). The result would be a vastly improved capability to absorb excess renewable generation and provide energy back to the system in times of high demand and/or low generation, as well as enabling the site to greatly increase the amount of system support services it provides to the grid. The expected run-time of Cruachan 1 and Cruachan 2 combined under full load would be in the region of 9-10 hours and Cruachan 2 is expected to operate at a round trip efficiency of 85%.

We anticipate the capital cost of the Cruachan 2 project to be in the region of £500m - £600m, secured via private finance (subject to a favourable market and policy framework). These cost estimates are indicative at this stage of project development.

The Cruachan Expansion would not only increase the significant system support and storage services already provided to the UK’s power system, but also the many economic benefits it brings to the local rural community in which it operates. The station already provides a multitude of skilled and high-quality jobs to the Argyll and Bute area which supports the wider local economy and the proposed expansion would contribute more than 160 new highly skilled green engineering and construction jobs during the 6-7 year construction period in the region, delivering an estimated £61-73m GVA. The wider indirect and induced employment that the Cruachan Expansion project could provide across Scotland is estimated to be in excess of 500 jobs with a GVA of around £260m across the same construction period, and 1,130 jobs and almost £500m of GVA UK wide.

PSH is typically a long-lived technology; Cruachan 1 entered into commercial service in 1966 and is still well within its operational lifetime. It is reasonable to assume Cruachan 2 would have an asset life in excess of 50 years.

Barriers to Deployment and Reforms Needed

LLES projects, including PSH, are inherently front-loaded capex investment projects with long term operational lives and typically have long construction periods. The lack of both short and long-term revenue certainty in the markets where LLES technologies will participate is a significant barrier to investment, with developers unable to accurately forecast revenues, significantly increasing the risk (and therefore cost of capital) in investing in these projects. Therefore, as recognised by the UK government, investment in these capital-intensive LLES projects will require a revenue stabilisation mechanism.

The current policy framework does not sufficiently incentivise investments in LLES due to this market uncertainty. Whilst effective in other areas, the Capacity Market (CM) and CfD mechanisms are not suitable to support storage and flexible technologies in general. The current CM doesn’t reward LLES for delivering significant carbon savings as a generation technology and does not support the operational characteristics of storage technologies. Additionally, the current CM design gives a portion of revenue certainty 4-years out (through the T-4 auctions) but that does not accommodate the long build-time typical of PSH projects (c.5-7 years). The CfD, while capable of supporting low-carbon technologies, incentivises projects to generate to the maximum of their capability, which is not well suited to the desirable operational characteristics of storage and flexible technologies which should adjust their operational output to reflect system-need. In addition, both CM and CfD do not recognise the significant contribution LLES can make with ancillary benefits like inertia and reducing the need to curtail intermittent renewables.

Drax is therefore of the view that a Cap and Floor mechanism is best suited to support the deployment of LLES technologies. This mechanism would provide certainty of a minimum level of return (the ‘floor’ price) which would reduce investment risk and thus enable investment in such projects at an overall lower cost-of-capital. If LLES projects do not receive this minimum level of return, through participating in the different markets and revenue streams available to storage technologies, then these revenues are topped-up by consumers. To prevent the over-reward of projects supported by a Cap and Floor a ‘cap’ price is also set. This returns some revenues earned over the cap back to consumers, and provides developers and consumers with an appropriate risk and reward share. The Cap and Floor mechanism is currently used to support investment in interconnector projects and, with some design adjustments, could easily be adopted to support LLES projects such as PSH.

Additionally, to further facilitate LLES technologies, current system planning and operation needs to evolve into a more integrated whole-system view. This would help identify critical system needs and locational flexible capacity requirements, as well as provide better signals for investments. If delivered on time, the Centralised Strategic Network Plan (CSNP) and other planned FSO activities should provide this holistic system view. It is Drax’s view that these system requirements should be the priority focus in relevant policy decisions to translate the potential of LLES into clear investment and operational signals for developers alongside the implementation of a Cap and Floor mechanism. Drax would encourage National Grid ESO to use more flexible and low-carbon resources in system balancing and critical system support services. For this to happen, there may need to be more flexibility for the ESO with regards to the services and products it can introduce and utilise.

It is Critical to Move at Pace to Achieve Net-Zero

We recognise there is a need for the UK to increase LLES deployment to facilitate the widescale rollout of intermittent renewable technologies and are committed to supporting this objective via our own large-scale project. In order to meet the 2035 net-zero power system objective and address the rising balancing costs, constraint, and curtailment issues during the transitional period, it is critical that LLES capacity can take final investment decisions as soon as possible given the long lead times for most LLES projects. The quick development of policy to support these objectives is therefore critical to ensure that LLES can properly support this transition and we encourage the UK government to act quickly in this area.

Subject to a favourable market and policy framework being in place, Drax’s Cruachan Expansion project would have a construction and commissioning period up to 7 years, which not only contributes to the investor delay on return but also constitutes a delay in LLES operational capacity for the whole grid. As mentioned, the introduction of a Cap and Floor revenue stabilisation mechanism would mitigate the shortfall in affordable private finance currently available to cover the capital costs of LLES projects. The longer we delay the investment in LLES, the longer we delay realising the full benefits of intermittent renewables in achieving Net Zero ambitions, as they will continue to need to be supplemented with carbon intensive fuels.

Irrespective of any reforms implemented to the wholesale market as an outcome of REMA, we believe there remains merit in implementing a Cap and Floor regime for particular LLES projects. It is essential that any decisions taken as part of REMA or any proposals within the next REMA consultation do not delay or postpone any policy considerations that are already being progressed as part of the LLES policy development process and other relevant incentives. That said, it would be useful for REMA to explore longer-term enduring market design issues that would enable a more efficient operation of flexible technologies, including LLES. This could include enhancements to the CM, as well as more flexible and transparent BM and ancillary services market.

If the UK is to deploy the level of storage and flexibility as outlined in the FES by 2030, creating the framework to enable the deployment of these technologies must be implemented imminently. In the absence of an explicit support mechanism for LLES, it is likely that very few (if any) LLES projects will deploy to the system by 2030.

11 September 2023