N-Ergy’s story demonstrates how energy companies – especially small ones – operate at the mercy of rapid and unpredictable changes in both technology and regulation, and must be agile and flexible if they are to survive and prosper.
Founded in 2014, it originally specialised in anaerobic digesters, producing biogas from the breakdown of organic material and using it to generate power. But the removal of UK government incentives for anaerobics last year forced a change in direction, says Keith Robertshaw, N-Ergy’s business development director. “We had to look at other areas for the business, and the capacity market has been very active, driven by green energy.”
The new focus is on short-term operating reserve (Stor) – an arrangement by which generating companies agree to provide extra capacity on short notice to cover an unexpected shortfall in power on the UK National Grid. N-Ergy adopted a project delivery partner approach, which has achieved significant savings compared with the normal original equipment manufacturer (OEM)-led approach. “Traditionally, the OEM is used in this role, but they don’t always have the project management and risk experience. We can save 10% or more on the project. Out of a total cost of, say, £60 million, that’s significant,” Robertshaw says. The company’s power solutions division acts as a consultancy on Stor projects, and the maintenance solutions division supports existing gas and biogas generators and other related equipment.
The new focus has also led to substantial growth, with the workforce growing sevenfold and revenues forecast to triple over the last year.
We had to look at other areas for the business, and the capacity market has been very active, driven by green energy
Keith Robertshaw, N-Ergy
Market risk is typically outside the scope of N-Ergy’s involvement – by the time the firm comes on board, the developer will already have decided that the planned project is commercially viable – but it is able to assess the risks associated with building and maintaining the project, including commercial risks and health and safety, and uses a proprietary model to scale the contingency fund for each project.
But this could change in future, Robertshaw says. The company is looking at getting involved in more projects at the development stage. “We want to get further up the food chain … we could develop the projects and pass them on to others, or help with struggling projects,” he speculates, though this would be demanding in capital terms for the company.
N-Ergy has now installed some 400 megawatts (MW) of Stor capacity, with more under way, including one project planned to cover 160MW at eight locations in the UK. The company is interested in battery storage, Robertshaw says, but a combination of slow technological progress and an unfavourable regulatory environment make pure-battery storage projects unattractive in the UK at present.
“I think battery storage will be big in the future,” Robertshaw says, “but at the moment the government is driving this with legislation.” However, a recent change in the tariff paid to storage operators has actually hurt the economics of battery storage, he adds. In late 2017, a “diversity factor” derating rule was added, which reduced the £10/kilowatt hour tariff for capacity depending on the duration of supply, with the intention of encouraging capacity that could deliver for hours at a stretch.
Now, only long-duration capacity earns the full tariff – “and that kind of battery is very expensive and massive”, Robertshaw points out. As a result, pure-battery storage that used to be employed for fast frequency response is often no longer economical. “There’s very little involving batteries at the moment. The diversity issue has slowed the market down – there are no new schemes,” he says.
However, the economics are more promising around hybrid installations – battery plus gas generation or battery plus solar produce better returns than either pure battery or pure solar, and activity is picking up in the sector as a result, Robertshaw says.
The 2019–20 generation capacity auctions in the UK, held in February this year, provide another example of the unpredictability of N-Ergy’s market. “The latest capacity auctions have been one of the biggest issues recently,” says Robertshaw, noting that payouts were far below what had been expected. Many entities with their own generators, such as schools and hospitals, turned to the capacity market expecting a unit price of around £40/KW. The actual clearing price was just £6/KW, which was a shock and will discourage many from entering the market again at the next auction, he believes. “I think that was a temporary blip, but a lot of people have probably realised that £6 is just not lucrative.”
He adds that better battery technology would be one of the most important potential changes to N-Ergy’s business model – the other would be “changes in the way we use energy”, including a shift to greater energy efficiency, a more decentralised generation model with more islanded power generation schemes, and a shift away from the use of mains gas or grid electricity to heat homes in favour of local generation coupled with technologies such as heat-efficient housing and heat pumps.
“Energy policy needs to be focused on this small scale,” he says. “There are huge gains to be made in energy efficiency.”