The Australian Frequency Control Ancillary Services (FCAS) market is currently undergoing significant growth, driven largely by the increasing participation of battery energy storage systems (BESS) and demand response (DR) technologies, particularly with the introduction of Very Fast FCAS (VF FCAS) services. These markets, which require rapid response times of one second or less, were launched in late 2023 to accommodate the evolving needs of a grid increasingly dominated by renewable energy.
Projections for the FCAS market in the coming years remain optimistic as the energy market continues to experience volatility from increased renewable penetration, outages from aging generation infrastructure, geo-political events affecting resource prices and ongoing climate events. The confluence of these direct impacts to the energy market market underscore a long-term stable FCAS market to respond to the resultant volatility.
The price for services such as the one-second contingency raise (R1S) and lower (L1S) markets has remained robust, with average prices around $18/MWh in early 2024 and potentially increasing as demand grows.
By 2026, over 1 GW of batteries are expected to be available to participate in these markets, up from a handful of megawatts currently. This growth is driven by the need for fast-response services to maintain grid stability as coal generation phases out, and renewables—alongside batteries and DR—take on a larger role in grid management. While the dynamics of the FCAS market will likely evolve as more batteries enter the Australian energy market, these same dynamics will contribute to significant ongoing value for battery storage as described below.
Firstly, the forecast increase in battery participation is expected to stabilise the market for FCAS over the longer-term as more assets are available to provide these services. Nevertheless, given the significant and varied factors that the FCAS market is addressing, the view to moderating FCAS prices remains longer-term. Indeed, the demand for battery storage engagement in the energy market is expected to far outstrip supply thus driving a higher value pool for battery storage across the market.
Secondly, batteries will become a leading source for more sophisticated grid support as traditional thermal generation is no longer available to provide these services. Batteries excel at providing fast-response services, which are becoming more critical as coal generation is phased out and more variable renewable energy (such as solar and wind) comes online. This will enhance grid stability and transition reliance on traditional thermal generators for ancillary services to a reliance on batteries.
Thirdly, while batteries will likely continue to derive significant income from FCAS, but they are likely to increasingly focus on energy arbitrage (buying and selling electricity at different times to exploit price differences) and participation in other markets like the energy spot market and future capacity markets.
Finally, as experienced in similar global energy markets, the Energy Security Board has ministerial support for capacity market through implementation of a Physical Retailer Reliability Obligation. The market design elements are likely to transition towards a certificate market where liable entities (Retailers) would be required to hold sufficient qualifying capacity certificates to underwrite their share of actual peak electricity demand. In simple terms, the policy is seen as a simple transition of FCAS obligations to Retailers to procure these same capacity services via a regulated certificate market that will underscore long-term value for batteries. In addition, it is likely that this would trigger the introduction of even faster-response ancillary service categories as grid needs become more demanding and technologies capable of sub-second responses are deployed.
The phasing out of thermal generation from fossil fuels while creating volatility, also leaves open a significant market for FCAS over the long term. Battery storage delivers a technologically advanced delivery model for responding to FCAS requirements along with a host of other market services both now and well into the future. Batteries enable delivery of these services from the sites of commercial and industrial businesses – exactly where the market requires support and thus offering more efficient grid stabilisation. As a result, the role of batteries will continue to grow together with the value pool available for battery participation. Battery storage supported by enabling technology delivers an unrivalled opportunity to augment value from energy market services as well as a host of site-based services for Australian businesses.