By Gaurav Singh, Head of Infrastructure Finance.
I recently attended the Solar and Storage Live 2024 exhibition at the Birmingham NEC, where industry experts gathered to exhibit the latest trends in renewable energy. I have attended this event for the past 10 years or so. As one of the main events of the year, it often feels like a school reunion, bumping into many of the same faces that have been dabbling in different capacities within the renewables industry for so many years.
What really struck me this time however, was how the event has evolved from what was once dominated by utility-scale solar developers, to an event where probably half of the stands were promoting the manufacture and distribution of battery energy storage systems (BESS).
The technology is developing at pace, with software that is able to learn customer behaviour and adopt AI to ensure batteries are used optimally to maximise storage and usage.
In addition to technology, the rapid development of battery storage is underpinned by various other macro- factors:
1. Falling Capex for Battery Energy Storage
The cost of building new battery energy storage systems has dropped significantly. In 2022, a two-hour system would have cost over £800k/MW to build, but by 2024, that figure has decreased to £600k/MW—a 25% reduction in just two years. Lower capex is crucial because battery energy storage revenues have fallen by two-thirds during the same period.
2. Offsetting Lower Revenues
Despite falling revenues, the reduced capex makes many new projects bankable. A 20% swing in battery cost can improve the IRR by up to 4%, which is welcomed by investors looking to justify investing in BESS projects versus other asset classes.
3. Grid Constraints
The build-out of battery energy storage capacity in 2024 has been slower than expected. Grid constraints have led to delays in connecting systems. However, we are seeing the arrival of some larger-scale BESS projects in the UK. Projects like Ferrybridge, Blackhillock, and Thurrock (combined capacity of 650 MW) may come online by the end of 2024, potentially rescuing what has otherwise been a frustrating year for developers.
4. Augmentation of Existing Batteries
With falling capex, augmenting existing batteries becomes an attractive option. On average, batteries experience a 4.2% reduction in energy capacity after 365 cycles. Many commercial battery projects will go through two cycles a day. Within five years therefore, battery degradation could be as high as 40%! Augmentation could be a viable strategy to improve energy capacity.
5. Revenue Shifts
Battery revenues have evolved from being predominantly derived from frequency response markets to greater trading and Balancing Mechanism revenues. Balancing Mechanism revenues hit their highest-ever level in August 2024, accounting for 24% of fleet revenue. This shift reflects the changing dynamics of the energy market.
What does this mean for investors?
Whilst there is plenty of promise for the development of battery projects, bankability remains a challenge. There are various revenue streams for batteries, including wholesale trading, capacity market services, arbitrage, and grid and ancillary services. Whilst one may be successful in underpinning some of these revenues with long term offtake contracts, the absence of fixed price, predictable revenues makes it challenging for investors to secure long-term project finance. It isn’t any wonder therefore, that the Solar and Storage Live event saw participants pushing the build and sell model, and an almost non-existent “PPA model”, where the investor retains ownership and generates its return from future cashflows.
Conclusion
The UK’s focus on domestic battery installations appears to be a short-term solution to distributed energy generation. As costs continue to decrease and revenue models adapt, battery energy storage will play a pivotal role in achieving a greener, smarter, and more decentralised energy system.
Over the past few years, there are more BESS projects for sale than there are buyers in the market. This is driving a sharp decline in the ready-to-build (RTB) price of BESS projects, allowing investors to achieve higher gearing and thus, a higher levered return on investment needed to justify investing in batteries over more traditional renewable asset classes.
