Gone are the days of returns guaranteed through government support, regulatory support, or predictable market dynamics. Energy investments have become smaller and more commoditised, the system is more decentralised, and regulators are struggling to keep up. Increasingly, this is pushing companies into taking on merchant risk in an unpredictable market.
To survive, they need to either accept lower returns or move away from long-term investments in generation and infrastructure and adopt a start-up mindset that focuses on building capabilities to react quickly to changes and staying ahead of the competition. Nowhere is this clearer than in the development of flexibility, and battery storage in particular.
Facing up to the impossibility of long-term planning
The UK storage industry has expanded rapidly over the past two years. This growth primarily has come from revenues from frequency-response services procured by National Grid, combined with additional returns from TRIAD, the capacity market, and – in cases where assets are positioned behind the meter – savings on distribution network charges.
It is a precarious commercial model, with returns neither regular nor predictable. While an investment in storage lasts 10-15 years, prices from services procured by National Grid (which usually provide 60 percent or more of expected revenues) have only been guaranteed for 2–4 years. However, the real kicker is that storage developers are largely beholden to a single buyer of their services (National Grid) and that other available revenue streams are reliant on a changeable policy and regulatory environment.
This was brought into stark effect in 2017 when National Grid culled frequency-response services, announcing they would no longer procure the fast-acting response that storage is so effective at supplying. Furthermore, Ofgem’s crackdown on embedded benefits threatens both TRIAD revenues and the potential to leverage distribution network savings behind the meter. As a result, the commercial model that storage developers built their businesses around has to be reformulated, with major implications for where, when, and how storage assets should be rolled out. The focus has now moved to behind the meter where returns can be better controlled via large commercial end users.
Although this is not the first-time storage providers have had to significantly rewrite their commercial models, 10- to 15-year financial plans remain commonplace in order to attract external investment or push projects through internal decision-making channels. This sort of detailed financial modelling not only gives a false sense of security to investors, but also distracts from what should be the real focus: business planning and commercial assessment.
Adapting to uncertainty
It will continue to be possible to build a successful business around storage and other forms of flexibility, but the lifecycle of many profitable commercial strategies will be much shorter. Partly, this will be driven by the natural development of the market and customer preferences, but also because of external interventions of the type seen in 2017.
As James Basden, co-founder of BESS says, “You need to think on your feet and be prepared to adapt to the circumstances you’re faced with. We’ve realised that the most important thing is to develop capabilities that enable you to pivot in the market while maintaining a competitive advantage.”
If you are a large company with deep pockets and significant market power, it may be possible to shape the world before it shapes you. By taking a committed position and pursuing it aggressively, you can create the market that you wish to service before other competitors and external forces have a chance to set the direction for you.
This could be a reading of Shell’s bold move into the electric-vehicle charging space at the end of last year. If Shell can deliver on their ambitious words and install charging points across their current service stations, then they could become a primary influence on determining which way the market for electric-vehicle charging progresses.
However, if you are not one of the largest companies on the planet, this option may not be open to you. Instead, your focus needs to be on capabilities and mindset. Companies, whether large or small, established or newly formed, all need to adopt a start-up mentality that can pivot and adapt to changing market dynamics. For example, by placing new projects under continual commercial review, you can ensure new services do not quickly become redundant because the market has moved on.
Rather than trying to control the forces that shape the market, it is more important to build organisational capabilities that enable adaptation and provide a basis for staying ahead of the competition. Doing so will require strong market and competitor analytics. This is not just about volume of data, but having the right data, presented in an easy-to-understand format, that enables people at every level around the business to make better decisions faster and in a joined up way. Armed with the best information and the ability to move rapidly, a business will no longer treat change as a threat that needs to be mitigated, but as an opportunity that leads to competitive advantage.
Beyond batteries
Regardless of whether they are utilities providers, infrastructure investors, or looking to move into the low-carbon space, companies that used to invest in energy on the basis of quantifiable, long-term business cases are now realising that they need to take an alternative approach. Change is now a constant. To be successful requires breaking away from long-term planning – because the future you expect may never become a reality.