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10 November 2017

Frequency Containment Reserve (FCR) market view

FCR market background
Frequency Containment Reserve (FCR), also known as Primary Reserve or Primärregelleistung (PRL) is the most flexible control power product procured by EU Transmission System Operators (TSOs).  It automatically regulates positive and negative frequency deviations in the electricity grid, with providers required to reach their full contracted response within 30 seconds of a trigger event.

Currently, 8 TSOs from 6 countries (Germany, France, Netherlands, Belgium, Austria and Switzerland) jointly procure FCR services. This voluntary initiative by TSOs, introduced in coordination with national regulators, is a step towards a single European control power market, the future Guidelines on Electricity Balancing and the Clean Energy for All Europeans package.  With a total demand of about 1,400 MW, it corresponds to almost half of total demand in continental Europe. The extension to France was completed in early 2017, and expansion to Denmark is planned for the near future. The annual value of the FCR market is currently around 150-200 million EUR.

In Germany, the largest market in Europe, the primary reserve market consisted of only five players in 2007, but by 2016 this had increased to 22 players. [1] A number of technologies are ’pre-qualified’ to provide FCR, including: hydro; pump storage; coal; lignite; gas; oil and nuclear. However, the different prequalified technologies participate in the FCR market to a different extent, and exact participation rates are not known due to bids from providers being anonymized.

FCR market reform 
In Summer 2017, the 8 participating TSOs (50Hertz, Amprion, APG, Elia, RTE, Swissgrid, TenneT and TransnetBW) as well as Denmark’s TSO (Energinet) published a joint response to a consultation on reform of the FCR market, specifying their preferred reform options, due for implementation in 2018. These are summarized below.

These changes are likely to herald a significant change in the dynamics of the FCR market. In particular, the move to four hour delivery windows will give FCR providers far greater flexibility to participate compared to the current arrangements.  This is because under the proposed arrangements, an FCR provider no longer has to commit to operating continuously for an entire week.  This additional flexibility and ability to co-optimize FCR and wholesale market bidding using more sophisticated trading strategies will enable providers to be more competitive in the FCR market.

Development of battery capacity
In addition, falling costs of batteries could result in battery technologies dominating the FCR market, potentially in less than a decade.  In Germany, for example, it is estimated that, by the end of 2017, 187MW of PCR will be provided by battery energy storage systems if all projects that have been announced are successful. [2] This would represent a market share of approximately 31%.

Since batteries have high capital and fixed costs and very low variable operational costs, combined with a diverse and changing set of alternative revenue streams outside of FCR, bidding by batteries in the FCR market could become volatile and therefore also lead to significant volatility in future FCR prices.

Baringa analysis of FCR market – scenario modelling 
Baringa conducts detailed, forward-looking modelling of the FCR market based on the interactions between the FCR and wholesale markets. This reflects the fact that the bulk of FCR services are currently provided by conventional generation capacity that also participates in the wholesale energy market.  We model a range of scenarios designed to explore different market, policy and regulation conditions in the participating countries, and consider the potential effects of FCR market reform and roll-out of battery storage on bidding behaviour and prices in the FCR market. 

Baringa’s fundamental scenario framework, which feeds into our analysis of wholesale and FCR markets, is based on the following scenarios.


We reflect changes in auction design and consequent effect on behaviour of market participants in our model.

Bidding by providers of PRL accounts for the costs of provision, and namely the ‘opportunity cost’ of provision that reflects gross margins obtained by generators in the wholesale market. 

Finally, our modelling considers different potential paths for battery roll-out in the FCR market and the effect of battery capacity on future FCR pricing where batteries start to account for the bulk of PRL provision. Analysis of bidding behaviour also takes into account the opportunity cost to batteries of providing FCR and the alternative revenue sources that are available to them, as well as the need to remunerate their investment and fixed cost.  

Detailed modelling enables analysis of variation in potential future FCR pricing, as well as how different technologies fare in the FCR market under different scenario assumptions.

Figure 1 Illustrative FCR price projections and market shares by technology

In particular, the modelling framework allows for analysis of the price-setting process and the role of different technologies in that process. While batteries are not expected to play a significant role in price-setting initially due to their low marginal cost of operation, as roll-out of battery capacity proceeds, they are likely to become prominent in setting FCR prices. This means that analysis of alternative use cases and revenue streams for batteries is paramount in considering the potential future scenarios for FCR prices.

Baringa analysis of FCR market – sensitivity modelling 
In addition to the fundamental scenarios that underlie Baringa’s modelling of wholesale and FCR markets, the following sensitivities help to characterise some of the key uncertainties when looking at the potential future paths of FCR prices:

  • Potential delay in implementation of planned market reform
  • Changes to battery cost assumptions
  • Alternative scenarios for battery capacity roll-out in FCR market
  • Changes to assumptions on the bidding behaviour of energy storage
  • Changes to assumptions on the bidding behaviour of Combined Heat and Power (CHP) assets.

[1] Fleer, Zurmühlen, Meyer, Badeda, Stenzel, Hake, and Sauer (2017),  Price development and bidding strategies for battery energy storage systems on the primary control reserve market,  11th International Renewable Energy Storage Conference, IRES 2017, 14-16 March 2017, Düsseldorf, Germany.
[2] Fleer, Zurmühlen, Meyer, Badeda, Stenzel, Hake, and Sauer (2017),  Price development and bidding strategies for battery energy storage systems on the primary control reserve market,  11th International Renewable Energy Storage Conference, IRES 2017, 14-16 March 2017, Düsseldorf, Germany.