Batteries as an infrastructure asset class: A new paradigm

• 
  

Published:12 Jul 2021, 

Laurent Segalen

Financier, renewable energy transactions

Battery storage is flexible, remarkable — and investable — but you need to know what you’re doing and know where the market opportunities and limits lie. Renewable and clean energy financier Laurent Segalen from Megawatt-X explains some of the things he’s seen as batteries have become an infrastructure asset in their own right. 

This is an extract of an article which appeared in Vol.27 of PV Tech Power, Solar Media's quarterly technical journal for the downstream solar industry. Every edition includes 'Storage & Smart Power,' a dedicated section contributed by the team at Energy-Storage.news. 

As we witness the relentless growth of renewables, operators and investors are wondering how to mitigate the increased intermittency of power generation. We are seeing more and more instances of negative prices, and also an increased volatility in daily power prices, especially in the zones with high renewable penetration and thin grids.

These zones include Australia, the US West Coast, and the EU periphery (Spain, Scandinavia, UK). Going forward, the burden of dealing with intermittency will fall back, either directly or indirectly, in the hands of investors. This is not great news for infrastructure investors who allocated equity and debt into the renewable industry for its fixed income revenue profile. Once long term capital-intensive solutions (such as interconnectors and pumped hydro) have been exhausted, it is clearly the time for batteries to become a key infrastructure component of the balancing mechanisms.

How then can batteries become a proper infrastructure play?

From an investment point of view, going long on flexibility when the market is shorting it, is the perfect move. The technological trends are also heading in the right direction, as the cost for stationary storage is falling precipitously, in the wake of the billions of USD investments in EV batteries. Within a few years, leading experts such as Benchmark Minerals and BNEF expect another 50% fall in the costs of battery cells.

The question of bankability: From tech to revenue model

From a financial point of view, li-ion batteries are now a fully bankable technology. World-class providers like Fluence and Tesla are delivering new products with up to 20,000 cycles and above 90% round-trip efficiencies. And lithium ferro phosphate (LFP), with its lower cost and reduced fire risk, seems now the chemistry of choice for stationary storage.

Now that the technology aspect has been sorted, how can the revenue model of stationary storage become bankable? Contrary to wind and solar, batteries don’t typically benefit from long-term secured revenues, such as power purchase agreements (PPAs).

Instead, investors in storage need to deal with several types of revenues (arbitrage, grid services, reserve) which are difficult to model. Even more important, capturing those new revenues relies on implementing ever-improving software that maximise the monetisation of the numerous market opportunities but can be often seen as “black boxes” by investors.

The software race is on. Against Tesla’s Autobidder, you see Fluence acquiring AMS to provide an integrated hardware + software solution. Those new software are incomparably more suited to optimise battery assets than human traders. For instance in Australia, the new market design has created five-minute bidding windows: the best human trader will post 15-20 trades a day, whereas the software will be able to bid 288 times (12 bids per hour x 24h).

A tale of two countries: Germany and the UK

Germany has the most liquid and competitive power market in the EU. It is also at the centre of the European Grid. 800 distribution system operators (DSOs) are daily managing the flexibility of the system. The arbitrage cases are widely publicised but overall not sufficient to sustain a “buy low-sell high” business case. The balancing market is dominated by coal plants which remain cheaper than batteries. And for network services, a German DSO will directly invest in batteries. So there are limited short-term opportunities for infrastructure investors.

The UK presents a radically different picture, with less access to the ultra-liquid Central European Grid, much less pumped hydro capacity than in Germany and fewer interconnectors. Hence, there are many more opportunities for batteries and the strong UK investment community has started to invest in them. 

Namely, the UK harbours two pioneering funds, Gresham House Energy Storage Fund and Gore Street Energy Storage Fund which are 100% dedicated to batteries. Infracapital, with the support of M&G is also very ambitious in
its plans for storage and e-mobility solutions provider Zenobe. We also have leading traders, such as Hartree, Goldman Sachs and soon Mercuria and Trafigura that are joining the fray. And of course the “master disruptor” Tesla is also present; Tesla obtained this year a UK electricity trading license and signed an agreement with Octopus to connect all its Powerwall into a gigantic virtual power plant (VPP), while Shell’s sonnen is doing the same.

So how do you build a revenue stack for battery storage in the UK? First, it is better to partner with a digital platform that can provide you access to the various arbitrage, balancing and flexibility markets: routes to market providers like Flexitricy, Habitat Energy, Kiwi Power and others are delivering such very innovative services.

Second, a growing list of asset optimisers with solid balance sheets like Shell’s Limejump are offering PPAs with long term price floors to battery asset owners in return for a share of the upside; this is catalysing the interest of debt lenders.

Cover image: Energy storage is like a digital Swiss Army Knife for the grid. Credit: Flickr/James Case

This is an extract of an article which appeared in Vol.27 of PV Tech Power, Solar Media's quarterly technical journal for the downstream solar industry. Every edition includes 'Storage & Smart Power,' a dedicated section contributed by the team at Energy-Storage.news. To learn more and to subscribe, visit the homepage here.