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PÖYRY POINT OF VIEW BLOG / 5 Apr 2016

Rise of the Batteries: Part 2 - Market Challenges

Investors in grid connected battery systems, and developing energy technologies generally, need visibility over future revenues. The renewable energy sector, for example, secured long term, government backed, incentives and the result is obvious from the growth of UK renewable capacity and investment by pension funds.

This article was originally written for Utility Week.

For battery systems there is no equivalent.  Income has to be built from multiple revenue streams that have short term contracts and uncertain payment levels. For example, local services for the DNO that save cost on its infrastructure, the potential to arbitrage high and low wholesale prices, by providing fast response  services to the TSO (e.g. National Grid’s EFR) or offering other grid support services, as well as the possibility of being a flexible demand responder.

Being generally distribution connected, battery projects are also eligible for various embedded benefits, and as time goes on, these are becoming more visible. But these are far from guaranteed for the project’s lifetime. While project developers argue that batteries deserve special treatment, overhauling the rules could be something of a double-edged sword if it also provokes an upheaval of the many embedded benefits that the early investors in distribution connected batteries currently enjoy.

Until recently, the perceived wisdom was that battery projects needed multiple income streams to show a reasonable return, but even with current costs, there is the potential to make modest returns by cherry picking the most attractive services.  And here is the conundrum – what services and income provide the best choice for the developer over the lifetime of the battery? If the choice is right, even allowing for the fact that some services are mutually exclusive, the return could be very exciting indeed. 

This does not come without risk, however.  Fully understanding the complex factors that affect value of response or flexibility in different timescales and their interplay will be crucial.  The current boundaries and definitions of different flexible generation “products” seem very fluid, with much in the hands of National Grid.

Investors know that these markets have no track record, and that they are bound to have a great deal of interdependency, spilling from one to another.  Developers should be worried that the potential for being undercut, however it happens, is very real.  On the other hand, first movers could hold a lot of cards - Andy Houston, Senior Principal at Pöyry

Better battery performance and decreased capex over time are likely outcomes of learning from early projects.  In our experience, projects will struggle to raise finance if it looks like they’ll be undercut in later years, especially if early investors want to exit in 3-6 year time horizons.  If capex needs to be paid down in such a short time period, we can expect to see some high Fast Response prices between now and 2025.

Prices for EV battery systems are now expected to be well below Euro200/kWh in 2020, we can see how the efforts made by car battery developers are now translating directly into benefits for static battery systems - Colin McNaught Managing Consultant at Ricardo

So should project developers be worried that their projects will be succeeded by cheaper better ones?  There is no doubt that there are good prospects for battery cells to come down: larger production facilities and growing global demand are creating a virtuous circle of economies of scale. In parallel to this, better production techniques and more effective battery design and chemistry are nearing the production line.  But the cells are only one of many components comprising a distribution‑connected battery.  The Power Control System, Inverter, Buildings, Land and other auxiliary plant can currently account for a major proportion of the total project.  Some developers are looking to go beyond a containerised system to better optimise the auxiliary equipment already, but it is already clear that battery system providers will need to look beyond just the cell pack costs.

There will be a great deal of value in optimising the battery operations – the industry has a long way to go to get the best out of them over their lifetime - Anthony Price, Director at Swanbarton

So getting good market arrangements in place will be key to successfully deploying batteries.  To some degree, Ofgem is already on the case through its considerations of Smart Networks, but such changes could take a long time – there is no clear strategy and defined position for the role of batteries in network operation.

Several storage developers are now arguing for a change in licences and market rules that would enable the full economic potential to be realised. It certainly does seem odd that any storage facility has to pay TNUoS charges for both charging and discharging.  So future market rules may provide investors in battery systems some of the clarity previously enjoyed by the renewables sector.

Storage developers have been asking for some degree of certainty in project revenues – longer contracts for some ancillary services would help to bring the cost of financing closer to that of other energy projects with fixed future income streams - Anthony Price, Director at Swanbarton

Having suitable contractual guarantees of revenues in place is a crucial requirement for financiers. But are some developers being greedy in hoping for anything more than the four years on offer from National Grid in the EFR tender round? We think there is going to be some excitement in planning what happens at the end of the first contract period, as more batteries enter the market. AES’s Kilroot battery may have set the cat amongst the pigeons in going ahead on a merchant basis but only time will tell.

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