Financing Net Zero: Unlocking battery storage revenues 

May, 2022 - Shoosmiths LLP

Shoosmiths recently sponsored Cornwall Insight’s Financing Net Zero webinar on ‘Unlocking battery storage revenues’. Here we provide a summary of the key takeaways from the webinar.


Battery storage is developing at pace as a critical element of global net zero ambitions. Strong wholesale volatility and record high ancillary service prices have supported revenues for storage across the past year, boosting the business case for the technology. There has also been record levels of storage capacity awarded on Capacity Market (CM) contracts and approval has been given to larger projects amid an ample pipeline view.


This webinar featured Shoosmiths Partner James Wood-Robertson; Cornwall Insight’s Joe Camish, Senior Analyst and Dan Atzori, Research Partner; alongside Julia Badeda, Head of Department, Hybrid Energy and Battery Storage Systems, ABO Wind AG; Aaron Lally, Managing Partner, VEST Energy; and Jonathan Hick, Investment Director, Triple Point.


Development of the market up to now

Within the last two years there has been a considerable increase in both investor confidence and interest in the battery storage market. Joe Camish, Senior Analyst at Cornwall Insight, identified the “significant volatility of the wholesale market” as a major driver of the recent “lucrative returns” from battery storage. Alongside “record wholesale volatility”, Aaron Lally, Managing Partner at VEST Energy, also identified “increased ancillary service procurement”, which has seen a fivefold increase over the last two years, and the integration of battery storage into the balancing system as key reasons for high market revenues.


Batteries have seen a recent transition from purely ancillary services to the “long term sustainable deep markets” stated Jonathan Hicks, Investment Director at Triple Point. The step change from ancillary to deep markets has given more certainty for developers and funders. This increased certainty and market confidence has resulted not only in record levels of storage capacity awarded CM contracts, but also a higher number of these projects have larger capacity (>50 MW) and longer battery duration (2 hours). Larger projects have also benefited from the economy of scale in helping to drive down the costs per project.


Current energy crisis and impact on battery storage

As discussed in the previous section, the current energy crisis that is driving wholesale volatility is also supporting investment in battery storage. James Wood-Robertson, Partner at Shoosmiths, states that the “factors driving those [wholesale] issues are all going to continue” in the same direction of travel, which is “only going to provide more data to support the business case” for battery storage.


The current energy crisis has also raised concerns around energy security and independence, with many countries striving to bring more renewable energy sources into the grid. Julia Badeda, Head of Department for Hybrid Energy and Battery Storage Systems at ABO Wind AG, points out that this will result in more “volatility in the grid from these fluctuating sources” and therefore “batteries will play a role” in providing crucial flexibility in the energy supply. However, Julia Badeda, ABO Wind also states that “energy independence is a chimera” with relation to battery storage, due to the requirements in battery production for many different raw materials sourced from a range of global locations. James Wood-Robertson, Shoosmiths mentions that the continuing sanctions on Russia will continue to impact “the supply of both energy and raw materials”, which will have knock-on costs in the construction and supply of battery storage projects. However, Aaron Lally, VEST Energy adds that, despite this, “the economics are still there to build [battery storage] sites” and battery storage projects are currently “still very profitable”.


Investment eco-system for battery storage

The attractive returns and confidence in investing in battery storage is now driving a “second wave of investors”, says Jonathan Hick, Triple Point. He adds that many investors “have taken comfort from the increasingly strong ecosystem for getting these [projects] built” and the strong “contractual frameworks” and “service agreements” available. New investors in the market are also bringing in a greater range of financing options with Jonathan Hick, Triple Point, identifying “not just more, but also different types of capital” entering the battery storage market. There are also more debt financing opportunities becoming available in the battery storage market, although it is still not at the level observed in other renewable energy markets.


James Wood-Robertson, Shoosmiths, suggests that one of the largest remaining investment challenges is the “change in mindset” required to go from a public finance structure, which is centred around “certainty and control”, to battery financing models, which are “fundamentally around flexibility and volatility”.


Barrier for battery storage at present

Whilst there are large opportunities for investment in and development of the battery storage market at present, there are still some barriers that remain. One of the major barriers to further implementation of battery storage is that batteries are not currently treated as a separate asset. Julia Badeda, ABO Wind, states that batteries need to be recognised as a “different kind of asset that doesn’t want to generate when everybody else is generating” to fully appreciate their potential. Other current barriers, mentioned by James Wood-Robertson, Shoosmiths, are the availability and timing of “planning and grid connections”, where “resources need to be in the right place to get the job done a lot quicker”.


Despite these barriers, the UK is currently ahead of many other countries and well positioned to further develop and invest in the battery storage market.


 



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