An inflection point is coming in the battery storage landscape, one that will have considerable implications for the way asset owners and investors maximise their internal rate of return. Thomas Jennings, Head of Optimisation at Kiwi Power explains the big switch.
Battery storage is growing apace, underpinned by demand for flexibility as a result of the UK’s ever-increasing renewable generation capacity. Since the first storage investment in 2012, the market has grown rapidly with over 10.5GW (over three Hinkley Cs) of capacity planned at the beginning of 2020.
The potential value streams open to storage assets are constantly evolving, today we have 15 different markets available.
This diversification of value streams adds complexity to any battery storage investment case and, as elsewhere, asset management plans need to be dynamic if they are to leverage short term gains. Only in May, National Grid introduced a new service that storage assets could play into – Optional Downward Flexibility Management – in response to changing energy consumption demands as a result of COVID-19.
A changing state of play
That said, while storage assets have access to several markets, most current revenue strategies rely heavily on a longer-term view based on just one or two value streams within the ancillary services market – understandably, because this is where the value currently sits. However, all of that is about to change, the question is when.
As more storage projects come online and begin to participate in the ancillary services market, the price will inevitably fall. As this happens, other shorter-term value stream opportunities that are not currently being leveraged due to their relative value and risk profile, will become increasingly attractive. At this point in time, shorter-term opportunities may begin to win out over a longer-term view.
That switch is coming soon. No asset manager knows exactly when, although sustained market growth suggests that it could happen as soon as the end of the year, or early in 2021. The race is on amongst traders and analysts alike to be the first to say: “I called it” after taking that initial leap. However, leap too soon and the storage asset misses out on generating maximum value, leap too late and the asset misses out on getting in at the peak of the market.
Right market, right time
To make the most of the opportunity, storage asset managers will need to ensure that they are always in the right market at the right time, otherwise known as co-optimisation. The premise is straightforward. Co-optimisation takes a short-term view of the market – a month ahead at most – to decide which markets could perform best for that asset. Rather than locking your asset into one market area, you keep a blend of markets open and available.
This isn’t about timing the market. Co-optimisation is a proven technique that blends deep industry expertise with a savvy algorithm that makes up to 17,500 decisions per asset a year to maximise revenue at each half hourly interval. Each decision is based on a mix of weather forecasts, market data and trends, and other insights, ultimately allowing the owner to position the asset in the market where it will gain the best possible internal rate of return.
As we edge towards and over the tipping point, markets will become less predictable; co-optimisation will mean the difference of tens of thousands of pounds. The co-optimisation model that we have developed at Kiwi Power, expects to make around 40% more revenue from an asset than if it were allowed to just sit in one or two markets. This will serve as a huge boost for existing assets and could also serve to bring forward new projects that teeter on the edge of being investable.
Confidence up, risk down
At the heart of it, co-optimisation is not just for extracting the greatest value from an asset, it is a prudent approach to managing risk. As a by-product of being open to all the markets available, diversification becomes a key benefit of co-optimisation, significantly reducing the over-exposure than occurs when assets only operate in a couple of markets. With that being the case, co-optimised portfolios are largely protected from potential price shocks which substantially reduces investment risk.
Equally, co-optimisation can tailor its market recommendations to specific risk profiles. This will be particularly valuable as the switch begins; there will be some asset owners who will be comfortable taking a little more risk, for more reward, while others will pursue a more cautious approach. Co-optimisation can account for both, uplifting investor confidence in the asset’s internal rate of return, even in times of volatility when the value fluxes rapidly between markets.
As co-optimisation becomes the gold standard, investors will increasingly seek it out to give them greater confidence in the internal rates of return offered. Equally, its use will undoubtedly enhance the attractiveness of the sector reducing risk and improving project confidence: We can expect to see more projects brought forward, further accelerating the global transition to a low carbon economy.
The market has a short amount of time before this increased diversification of value streams begins to take effect. Right now, it makes sense for assets to sit across one or two markets, however the industry is on the clock, even if we are not entirely sure what the deadline is yet. Asset owners and investors can use this time to prepare. If the revenue strategy is not geared towards co-optimisation, there is a short window of time in which this can be implemented, ready for the inevitable day when gaining the best internal rate of return will become that bit more complex.