Investors in grid connected battery systems 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. 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 distribution network operator that save cost on its infrastructure; the potential to arbitrage high and low wholesale prices, by providing fast-response services to the transmission system operator; 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 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 a double-edged sword if it also provokes an upheaval of the many embedded benefits the early investors 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, 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.
Andy Houston, senior principal at Poyry, says: “Investors know these markets have no track record, and 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.”
Better battery performance and decreased capex over time are likely outcomes from early projects. Projects struggle to raise finance if it looks like they’ll be undercut in later years, especially if early investors want to exit in three to six years’ time. 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.
Colin McNaught, managing consultant at Ricardo, says: “Prices for electric vehicle battery systems are now expected to be well below €200/kWh in 2020; we can see how the efforts made by car battery developers are now translating directly into benefits for static battery systems.”
So should project developers be worried their projects will be succeeded by cheaper, better ones? There are good prospects for battery cell costs to come down: larger production facilities and growing global demand are creating economies of scale. In parallel, better production techniques and more effective battery design and chemistry are nearing the production line. But the cells are only one component of a distribution connected battery – the power control system, inverter, buildings, land and other auxiliary plant can account for a major part of the total project.
Getting good market arrangements in place will be key. To some degree, Ofgem is already on the case with its considerations of Smart Networks, but changes could take a long time – there is no clear strategy or 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 transmission network use of system (TNUoS) charges for both charging and discharging.
Contractual guarantees of revenue are crucial for financiers. But are some developers being greedy in hoping for more than the four years on offer from National Grid in the enhanced frequency response tender round? We think there will 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 among the pigeons in going ahead on a merchant basis, but only time will tell.
Phil Hare, Poyry Management Consulting