2nd October 2023

We've made a number of improvements to the model which make revenue figures for post-2035 lower in v2.1

We have improved on the FES build-out capacities to ensure less loss of load, particularly post-2035. This has brought the post-2035 battery revenue numbers down.

These changes are in:

1. How we calculate the short-run marginal cost of assets in the generation stack.

• We have variation in the short-run marginal cost within a single generator type to reflect differences in cost (driven by efficiency, for example). Eg., the lowest efficiency of the ‘low-efficiency CCGT’ has a higher cost than the most efficient of the ‘low-efficiency CCGT’. This mimics plant-level behaviour in the generation stack, without needing to model each individual plant on the system.
• A linear fit between each point of the supply stack provides this variation. We have changed how we calculate this fit, by taking the fit from the 'start' of each generator type - rather than the 'end'. The result is, that the cheapest plant within a generator type is now slightly higher and the jump between wind and gas now better reflects reality.
• The impact is that power prices are higher as we have boosted each short-run marginal cost up a type.

2. The future load factors of wind now have a higher minimum, a lower maximum, and a lower standard deviation.

• With more wind farms being built in wider geographic locations around the UK, the turbines getting bigger, and further out to sea, ‘capture rates’ or load factors will increase. While we had this increase in wind load factor in previous versions of the forecast, we still experienced occasional very low periods of wind, as well as periods at 100% load factor.
• We changed the wind forecast so there will be fewer periods with very low wind and fewer periods with 100% load factor, while maintaining the (increasing) average annual load factors. This better reflects the anticipated behaviour.
• The impact is we get fewer periods of very high prices, particularly in the early 2040’s, when very low wind periods were driving scarcity. And, the periods of high prices that we do have are shorter in duration - a few hours instead of 6 hours or more. This makes battery revenues lower in this period.

• BM prices are set by demand elasticity around wholesale prices. In times of scarcity, offer prices are particularly high. With fewer periods of very low wind resulting in fewer periods of scarcity, less money is made by offering up availability in the Balancing Mechanism in v2.1 of the model. Thus, in the merchant-only strategy, the revenues from BM trading are now less, and more in line with BM revenues in the ancillary+merchant strategy.
  • This has the effect of bringing merchant revenues and merchant+ancillary revenues closer together, particularly post 2035.

3. Impact of AR5 has reduced offshore wind buildout between 2028 and 2035

• We have delayed the offshore wind buildout to reflect the results of the recent AR5 auction, in which no offshore wind bid in for any Contracts for Difference.
• The impact is less wind generation between 2028 and 2033, with the pipeline finally catching up in 2035. This means slightly higher power prices during these years, with slightly increased battery revenues (but impact is minor).

4. Increased levels of Demand Side Response in the model

• With increasing levels of smart charging of electric vehicles and more domestic consumers participating in flexibility turn down services particularly, we have revised up the amount of demand side response in the capacity stack across the forecast horizon to 14GW by 2035 and 25GW in 2050. We have also decreased the prices of it from £3000/MWh, £1000/MWh and £500/MWh to £1500/MWh, £500/MWh and £250/MWh (for high, mid and low price DSR).
• Demand side response acts as a competitor to battery storage, and sits near the top of the generation stack. This has meant that there are fewer periods with loss of load and subsequent very high prices - and battery revenues are lower compared to v2.0, especially post-2035.