Storage revenues set to recover
Increasing use of battery storage is critical to allow the flexibility needed by energy grids to deepen the penetration of renewables. In the past year, however, providers have seen revenue streams shrink.
Paula Travesso, Principal at Gore Street Capital, notes that lower returns have stemmed the tide of new market entrants. She expects revenue to recover in 2025 and 2026, as the grid operator seeks more flexible assets to expand renewables in the mix.
“But there are so many drivers to energy storage revenue – gas prices, power prices, extreme weather conditions, installed capacity, supply and demand – that it’s really hard to pinpoint when exactly those prices will shift,” she warns.
“There are so many drivers to energy storage revenue that it’s really hard to pinpoint when exactly those prices will shift.”
Paula Travesso, Principal, Gore Street Capital
For Gore Street, portfolio diversification across global markets has been critical to help it traverse these issues. “What we want to do is have uncorrelated exposure to those different grids in different revenue streams,” she says.
Rule changes shift the dial for providers
One welcome shift was made by the National Grid electricity system operator (ESO) earlier this year. It has increased the max contract length for a BESS asset in the Balancing Mechanism (BM) from 15 minutes to 30 minutes, which allows access to a larger proportion of the BM market.
Peter Kavanagh, Investment Director at Harmony Energy Income Trust, has already seen a major boost to portfolio activity through the Balancing Mechanism as a result.
He says the shift has overcome ESO engineers’ lack of time to call multiple battery assets, which had led to non-battery assets being used instead. “These rule changes, enabling them to call batteries and utilize them in merit order, will be huge for our space this year and going into next,” he predicts.
“These rule changes will be huge for our space this year and going into next.”
Peter Kavanagh, Investment Director at Harmony Energy Income Trust
Kavanagh is keen to see a further change, in the form of a zonal planning system that would accelerate the permission process for projects sited near to electricity stations.
The availability of grid connections is still a common barrier, not just in the UK but globally. Richard Cave-Bigley, Director for Solar & Battery at SSE, believes finance is a big constraint too, given the market risk that developers face.
“The question on grid has to be, do the good projects from credible developers with good financing have the earlier grid connections? These are the projects that can deliver cost-effectively,” he points out.
“The question on grid has to be, do the good projects from credible developers with good financing have the earlier grid connections?”
Richard Cave-Bigley, Director, Solar & Battery, SSE
EU markets push forward on batteries
The Inflation Reduction Act has boosted opportunities for storage providers in the U.S. market. However, panelists see growing prospects in other territories too.
Where European markets were relatively “pedestrian” in their approach, the war in Ukraine has triggered new urgency, says Peter McCusker, SVP & EMEA President at Fluence.
“We see some markets that have really brought fresh energy and conviction to their energy transition, pushing forward more ambitiously on renewables,” he says, citing Germany as an example.
McCusker also sees opportunities for storage to meet the increasing appetite for electricity of data centers and AI. Fluence is working with Google to displace diesel as a back-up source for its Belgian data center.
Travesso points to Japan and certain EU markets as grids with potential where Gore Street Capital is seeking long-term growth. She notes: “We do look at the fundamentals and where we expect to have some sort of market depth. It depends on the regulated market, and whether the grid operator enables you to have a number of revenue streams.”
Two hours is the duration sweet spot
The duration of battery storage capacity has been extending, but providers still have to weigh the potential returns against higher capital outlay.
This decision depends on the life cycle of the asset and whether it is designed to serve ancillary services or Balancing Mechanism trading, says Kavanagh. Harmony is currently focusing on two-hour batteries, which are increasingly competitively priced compared to one-hour assets.
“Across different markets, you have different requirements. Italy, for example, is talking about eight-hour systems, which will be subsidized,” he says. “But for the next four to five years, I see two hours as a sweet spot in the GB market.”
“For the next four to five years, I see two-hour duration as a sweet spot in the GB market.”
Peter Kavanagh, Investment Director at Harmony Energy Income Trust
The panelists also agree that lithium ion is set to remain the dominant technology in the field, albeit with continuous performance enhancements.
“It’s not a static technology,” says McCusker. “There’s a huge number of improvements coming through that will make lithium ion more competitive and bring more value to customers and to grids.”
“There’s a huge number of improvements coming through that will make lithium ion more competitive.”
Paul McCusker, SVP & EMEA President, Fluence
