As the New Year starts everyone is asking us the same question: ‘How can I maximise value in the battery energy storage market in 2019?’
Before I turn to 2019, I think it is worth mentioning how the battery market has changed since Kiwi Power worked with UKPN in 2014, maximising revenue from the Leighton Buzzard battery the UK’s first grid-scale battery. The market is beginning to better understand batteries, in particular, the work involved to install them, as well as their capabilities and limitations.
In my recent discussions, I was noting how the first batteries would be considered to be over-engineered with the installation/construction process now radically streamlined. I expect this evolution to accelerate as batteries are pushed more and more to their limits, and technological advances increase. Particularly of interest is how this push is leading to a demand for greater understanding as to what batteries are capable of, and their technological limitations. In turn, this is driving a need for greater clarity around battery data when monitoring degradation, the number of cycles, availability and state of charge.
So, to 2019. Kiwi Power's expectation is that batteries will continue the strong growth we have seen since their introduction, continuing as a significant growth area not only in the UK but globally. We estimate that there will be an additional 400–600MW of installed/developed to ‘spade ready’ batteries across the UK this year. These figures are based on approaches to Kiwi Power from developers, as well as analysis of:
By November 2019 (in time to capture the Triad) Kiwi Power expects 1.2–1.5GW of batteries to have been installed in the UK.
As you’d expect battery development is predominantly driven by a strong business case to build the battery. It is worth noting that operational expenditure is increasingly becoming considered as part of the case. Operational costs predominantly focus not only on the battery’s round trip efficiency, and the cost of purchasing power to charge, but the battery degradation caused by the run schedule. I’ll expand later as to why this is growing in importance.
Although some of the revenues which can be generated from a battery have fallen across 2018, in particular, Firm Frequency Response (FFR) prices, we believe this has now bottomed out as the frequency market shifts to a shorter time-frame and liquidity in these markets grow. My conversations with a variety of participants in the battery market have led us to believe there is increasing comfort with this move to a merchant risk model.
What is a merchant risk model, and why are we moving towards it? Firstly, merchant risk in terms of batteries is the shift to revenue that can only be secured in the short term (weeks), where previously a long-term price, which provides revenue certainty (years), could be secured. The move to a merchant risk model impacts a battery project’s ability to access certain types of finance which require long term price certainty to achieve a pre-agreed internal rate of return. As noted, when frequency market moves to a shorter timeframe, batteries will be exposed to greater price fluctuations from week to week. In addition, the pause in the Capacity Market, and the pending dissolution of Triads has removed two of the longer-term revenue streams available, further increasing merchant risk. To understand more about merchant risk in the power market I recommend reading:
So why am I expecting such robust growth in the market despite these headwinds? Because investors are not only becoming more comfortable with this exposure to merchant risk but embracing it as it allows them to take advantage of a battery’s greatest asset: its flexibility!
Flexibility in the power markets is becoming more valued, with the growth of intermittent generation, and is taking centre stage. Batteries operating using a merchant risk model are ready and available to take advantage of multiple revenue streams as they become economically lucrative, be it faster frequency response services (fast acting reserve), trading or accessing the Balancing Mechanism. At Kiwi Power we do the heavy lifting for our client, optimising run schedules to maximise revenue. This starts from the early design stages of a project when we talk you through the different ways to set up your battery so that you can best access the various revenue streams.
This then brings us back to operational expenditure and why this is now an increasing focus. Any project exposed to merchant risk needs to consider operational expenditure as not only are prices increasingly volatile in the short term, but the run schedule will need to be managed to ensure battery degradation is not jeopardised. Previously, Long Term FFR contracts had a low cycle rate and accounted for the majority of operational costs within the contract. Our approach is always to understand the full operational cost of providing any service.
Investors are also increasingly comfortable with merchant risk as a result of the falling cost of battery systems, another trend we expect to continue during 2019. In 2018 we saw prices reducing, this downward pressure is expected to increase in 2019, perhaps even resulting in a price war? I believe this pressure to be coming from East Asia with the huge growth of Electric Vehicles along with their huge over capacity for battery manufacturing. Recommended reading on energy storage costs:
The reduction in cost has not only created the environment for greater risk appetite but a willingness of investors to cycle batteries deeper and more often as part of their run schedule to achieve higher returns.
As run schedules evolve to better optimise battery revenue, we have seen investors increasingly become interested in battery usage data to understand how their battery is being used, and the impact on long-term performance. Kiwi Power provide this data through our Kiwi Live web portal which integrates control technology, performance analytics, and market access, to deliver the full potential of battery systems, meeting the requirement to better understand a battery’s operational capability.
Overall, we see 2019 as continuing to be a period of strong growth for batteries with higher risk revenue models making Kiwi Power’s experience and expertise all the more valuable. Looking forward to 2019!