Just a couple of years ago, battery storage owners in the UK were toasting bumper revenues as the still niche market was fast developing, its services in huge demand, and new types of revenue streams were opening up. Now, the situation could not be more different, with 2023 being the year that several factors all came into play – seemingly all at once – to leave revenues for operational battery assets in the GB energy market hovering around break-even levels.
Before delving into the drivers, it is worth first laying out the raw numbers of how far GB BESS revenues have fallen: average earnings for battery storage projects during the 2023 calendar year are assessed to have settled at around GBP 65k/MW/year, comprising wholesale market trading, frequency response, the capacity market, and money earned from National Grid’s balancing mechanism.
This figure falls way short of those enjoyed back in mid-2021, when market participants told Energy Rev that National Grid’s then-new dynamic containment service was driving revenues in the region of GBP 150k/MW/year.
Battery operators also continued to enjoy bumper revenues in the year or so after that, with the power price volatility that came about before and during the onset of the Ukraine War serving to increase intraday spreads, which is a major benefit to nowadays largely merchant strategies employed by these groups.
However, now the wholesale market has changed its complexion.
“Wholesale trading now represents the most significant portion of the battery revenue stack,” says Penso Power CEO Richard Thwaites. “We are seeing lower intraday spreads right now than would typically be the case at this time of year, potentially due to lower than expected European gas prices.”
The relative weakness in power prices across energy systems can be largely traced back to the quite remarkable situation whereby gas storage across the EU and the UK is forecast to be 54% full at the end of this winter.
This figure represents a significant turnaround from the doom-laden predictions for the current period back in February 2022 when Russia invaded Ukraine, bringing about the resulting sanctions on Russian petrochemicals and the mothballing and then detonation of the Nord Stream gas pipeline serving Germany.
It has naturally been achieved precisely because of an impetus to both increase storage capacity and gas supply in the intervening period due to energy security concerns, with the current mild winter also reducing demand for gas stocks across the continent.
Out of balance
It is not only wholesale trading that has suffered, with other key elements of the GB battery revenue stack also proving lacklustre in recent months.
Harmony Energy CEO, Peter Kavanagh, was keen to highlight the balancing mechanism as an underutilised area for storage assets when Energy Rev caught up with him earlier in February.
The framework, which the system operator uses to balance demand and supply in real-time across the network, is not delivering the expected levels of earnings following National Grid’s roll-out of new software to facilitate increased battery participation, according to Kavanagh.
“We hadn’t foreseen how long it would take National Grid to use batteries efficiently in the balancing mechanism. National Grid is working hard to adapt systems to facilitate a more efficient balancing mechanism, which will be in the interests of consumers and the environment. We need more focus on this area to ensure the progress continues throughout 2024,” he says.
The issue was a key topic in a trading update issued by the affiliated listed vehicle Harmony Energy Income Trust (HEIT) on February 2, which suggested that the so-called open balancing platform, which is being introduced to encourage greater use of battery storage in the balancing mechanism, is only being used sporadically. This is creating an issue for a company established with a strategy to operate extensively in both the wholesale market and balancing mechanism in order to drive revenues.
Related to this, HEIT will also be aiming to sell at least one of its operational projects over the course of 2024, building on the September 2023 disposal of the 99MW Rye Common project to Pulse Clean Energy.
Both sales, as well as other recent deals such as Sosteneo’s purchase of both the 249MW Sheaf and 99MW Richborough batteries from Pacific Green, provide illuminating data points on the state of the market.
Each of the closed transactions are understood to have traded at levels comfortably above NAV, and Kavanagh is confident this will still be achievable for HEIT’s upcoming sale despite recent revenue slumps and the enduring discount to NAV that all yieldco's are currently trading at.
“There is generally a significant disconnect between private and public markets…the stock market is very focused on the short-term, but the private market is long-term. The year 2022 was exceptional [for high revenues], so for the same reason people shouldn’t take 2023 [and its lower revenues] to base a long-term view on,” says Kavanagh.
Performance
In the world of infrastructure investment, with would-be acquirers likely to be looking to future performance more than past figures, that could be a persuasive argument.
That said, it might also be worth considering whether current revenues are actually all that terrible, in the event they persist. Given that break-even costs for UK battery projects are reckoned to be in the GBP 50k/MW/year region (although dependent on asset duration), all might not be so bad after all.
“Generally, the industry wants to see upwards of GBP 55k/MW/year, this is the bottom-end of investment grade opportunity…with an asset lifetime of 12-14 years, you can stretch this number further,” one UK-based battery storage developer recently told Energy Rev.
“The other point is around lending. Generally speaking, most of the finance world is interested in GBP 60k/MW upwards. With uncontracted assets like batteries, lenders are only really comfortable at this level,” they added.
Some of the choices made in asset design by many developers in recent years are widely believed to be providing some protection against the worst of the downsides.
A saturation of frequency response markets, once the lynchpin of battery revenue streams in the mid-to-late 2010s, was widely foreseen, leading developers away from the initial circa one-hour duration assets popular during that period and into two-hour or higher duration batteries.
HEIT, for one, has assembled its entire portfolio as two-hour duration projects, while another developer recently told Energy Rev that they had fixed a new project late last year at 3.3-hour duration as their calculations put that as the optimal asset type for current revenue conditions.
Thwaites has observed that one-hour batteries are now at the sharp-end of revenue contraction, due to their suitability for markets such as firm frequency response (FFR), the price for which last year hit its lowest level since 2019, but this was quite widely expected.
“We expected the relatively shallow ancillary service markets to be tapped out, we don’t see that as a surprise,” he says.
Meanwhile, Dan Taylor, co-founder at BESS developer Ion Ventures, agreed with that sentiment but also noted that the development market – even for shorter-duration assets – was proving flexible enough to create projects that could weather future ructions.
“If you look at a lot of planning applications from developers, they have future-proofed their sites as they’ve designed an excess number of plinths on which to install new containers to cover future duration increases,” says Taylor.