The Case For Battery Storage- A UK View

A report by partners at LCP LLP, a UK based advisory firm, picks on battery storage as an investment opportunity. Its an interesting pointer to the possible future in the UK and also in India at some stage, although the Indian case would be a possibility after some major reforms and deregulation. But as a way to understand the case for battery storage and generating a business model around that, the report is still relevant we believe.

The report starts off with the peg that in GB (Great Britain), wind power was curtailed on 75 percent of the days in 2020. Adding up to almost 3.6 TWh of energy in total, mostly due to grid  constraints. That is the starting point for a case for batteries. The authors touch upon each of the four main revenue streams in the grid scale battery storage business, namely, arbitrage, balancing, capacity provision and frequency response, to point out the opportunities and challenges. Keep in mind that in a market like India, the case for battery storage at scale is yet weak, primarily due to cost concerns, and the fact that other key conditions, be it curtailment, significant demand spikes that demand more generation capacity, or even a variable power pricing market, do not yet exist. Though between planned reforms like the Electricity Amendment act, the higher share of renewable energy planned by 2030 (well over 40 percent) and expected increase in per capita power consumption, all these conditions should exist in some form on the other  by 2025 and beyond.

Back to the report. The authors make no secret of the fact that there are many levers which affect a battery project’s potential, each of which come with large degrees of uncertainty. Competition from other flexible assets, policy and regulatory change, deployment of new storage technologies, uptake of electric vehicles, consumer behaviour, locations of new build assets, timescales of network reinforcements, and efficiency of trading – each of these levers can swing a battery project’s potential from black to red.

On the first of Battery opportunities, arbitrage pricing, the report points out that while quite simple in principle, (charging when prices are low and discharging (selling) when prices are high) other factors also play a role. For instance, high levels of cycling (charging and discharge cycles) can impact battery life. Thus a strategy involving high amounts of cycling may yield higher profits but will also reduce the expected lifetime of the battery. Trading in the day ahead market for power, especially when the probability of merchant costs going even negative is high due to renewable capacity could also drive spreads higher.

Balancing the market, something we have seen large battery installations monetising especially the famous Hornsdale battery in Australia, is the other key option. Balancing can offer a route for batteries to capitalise on their flexibility and secure additional revenue. Here a battery owner would be contracted to be available through a bid or offer accepted. The Balancing market option is used by grid operators to both meet supply shocks to the system like we say in Mumbai in October last year (or the grid collapse in Pakistan earlier this week), or even out supply and demand. Units with longer response times and larger available capacities tend to be procured earlier (pumped storage being one example), while assets capable of responding more quickly (such as batteries) see a greater proportion of acceptances closer to delivery. Higher flexibility and acceptances closer to delivery could mean better prices. However the authors warn that the balancing market could be a shallow opportunity, as forecasting tools improve, something grid operators are stressing on, and acting on everywhere as RE share grows.

The third area, the capacity market refers to a system that ensures security of electricity supply by providing a payment for reliable sources of capacity. Each technology is assigned a de-rating factor which is calculated based on the technology’s contribution to system security. But a future in which stress events will be longer in duration but less frequent (due to better forecasting)  will result in short-duration storage providing less value to the system in securing electricity supply. Further, as more batteries connect to the system, the marginal contribution of an
additional battery (which determines the de-rating) will fall. This is because the batteries will be restricted during the same longer stress events. So longer and larger batteries might be preferred, with long term agreements through the capacity market providing the revenue certainty that’s needed to help secure finance for the project.

Finally, you have the opportunity in dynamic frequency response. An additional benefit of procuring an ancillary service contract at a strong enough rate is that the asset is being paid for its availability, and so is paid to be held out of the other markets, while the likelihood of actually being needed is relatively low. This means that the cycling rate is reduced significantly. This increases the life of the asset, providing even more value to the asset owner. However, in developing markets, one has to wonder if grid operators will ever find paying this ‘insurance’ for grid stability worthwhile. Pricing will be critical. In any case, value will decrease as more batteries are added to the grid.

Thus, the case is made that a significant investment into battery storage will require commitments to possibly large batteries, and ability to generate multiple revenue streams, to make it a strong ROI option.

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