New battery financing models are powered by technology

Sumit Joshi, Head of DER Solutions, Origami

Our energy system is undergoing change, driven by the growth of inflexible and intermittent renewables and the move from large, central, carbon-intensive generation. As traditional flexible energy sources such as coal fired power stations are retired, valuable opportunities are available to flexible distributed energy resources (DERs).

One of the most flexible DERs is battery storage. Batteries offer the potential for a fast response to system needs, an unrivalled ability to react to price changes and are readily scalable. For investors, energy storage presents valuable opportunities. Once installed, there are relatively low operating costs with the opportunity to access new revenue sources.

Energy storage can be located ‘behind the meter’ to:

  • act as a source of back-up power
  • alleviate connection constraints
  • balance load and peak shave
  • reduce non-commodity costs
  • smooth generation output when co-located with renewables
  • generate revenues from grid services or
  • be used in the wholesale market and balancing mechanism.

Energy storage can also be used in ‘front of the meter’ and be either distribution or transmission connected, providing grid services and generating value from arbitrage.

As part of a wider portfolio of assets, the flexibility of battery storage can also reduce imbalance risk.

The key question today is, how can energy storage, with these numerous benefits, offer revenue certainty without the security offered by subsidies and long-term contracts?

The end of revenue certainty

Historically, renewable energy assets, as well as early stage battery projects, were deployed with significant revenue certainty, characterised by long-term subsidy contracts or, in the case of batteries, multi-year capacity market and ancillary service contracts. The low duration and low revenue risks in these projects resulted in financing that was characterised by non-recourse debt finance with appropriate gearing.

These days are gone. The financing landscape for energy storage has changed significantly. Today’s markets mean potentially putting equity at stake.

Energy storage does not benefit from subsidies, there are no long-term contracts with large guaranteed revenue streams (contracts in months rather than years) and there has been a reduction in battery capacity derating factors. Battery developers now need to look at merchant business models where the focus is acting on market price fluctuations in the prompt wholesale markets and Balancing Mechanism.

Several factors must be considered to determine when to charge or discharge and when to access these markets. These include charge and discharge rates, round trip efficiency, cost of cycling the battery, opportunity costs, operational and grid constraints, and variable network charges.

The complexity of weighing up these factors and of trading in different markets is driving a need for using technology to optimally generate value from batteries.

Using technology to monetise batteries

Battery owners and operators can use technology to actively seek the most valuable pools of revenue and determine the most optimum way of monetising and managing their energy assets. Technology, such as advanced analytics and machine learning, can be used to develop forecasts for asset availability and behaviour, to design bidding parameters in various ancillary services markets and forecast balancing mechanism market prices.

With advances in technology, intelligent, automated control enables operators to continually and efficiently dip into those valuable pools of revenue for an asset or group of assets. Advanced analytics and forecasting can enable more accurate, more reliable decision-making and the ability to automate when and how to use an asset, including providing faster responses to value opportunities. The system should also model and simulate expected prices in the different submarkets and quantify and measure associated risks and opportunities. After assets have been committed to specific submarkets, technology can also be used to ascertain the most cost-effective way of meeting the relevant commitments.

Using this active approach to managing assets with the help of technology, it is still feasible to deploy battery assets with limited revenue certainty, short-term contracts and high-duration risk.

Two of the UK’s largest energy storage projects, both developed recently, owe their financial viability to the application of intelligent technology. A 9MW behind-the-meter battery at London’s Port of Tilbury and a 10MW front-of-the-meter battery in Brentwood, Essex will be monetised through an intelligent technology platform.

Ultimately, it may well be computers that are proposing value strategies and executing them, with minimal intervention by human managers.

The potential for energy storage is growing, even though the long-term subsidies have declined. Asset owners, operators and investors must look to develop and monetise high quality asset deployment by utilising automated, real-time optimisation technology that enables them to build future-proof, sustainable business models.