London — Investment in long-duration battery storage is moving closer to viability in Europe as costs fall and rewards improve, London-based financial advisory and investment house Augusta & Co told S&P Global Platts July 30.
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Power price volatility in a COVID-19 world has pushed hedging to the top of the agenda for renewable asset owners, with storage offering a solution, Augusta's managing director Charlie Hodges said in an interview.
Meanwhile, heat storage technologies are gaining ground as large industrials see how much value they are losing by not engaging in energy efficiency in a world of rising carbon costs.
And while big corporate offtakers have plenty on their minds right now, there remain excellent shorter-term PPA hedges available if your price zone is chosen with care, Hodges said.
Battery cost curve
"Storage is becoming more interesting across energy, transport and heat -- our work is across Europe, but most of the battery digital storage interest is in the UK and Ireland at the moment," Hodges said.
Thanks to the automobile industry, lithium-ion battery costs are falling and, if the US is anything to go by, Europe will soon be seeing thermal peaking capacity replaced with wind, solar and digital battery storage.
"You get an investment tax credit in the US for some renewables, but essentially the technologies are now approaching ex-subsidy and we think it is a sign of things to come in Europe. Once you get a certain level of renewables on the system, you can justify a three-, four-, even a five-hour plus battery," Hodges said.
The prize for long duration storage in the UK "is to start eating some of the very lucrative lunch that pumped storage has been enjoying for the last 10 years in terms of spreads and dispatch and contact with grid operators that want to procure flexibility," he said.
The use of batteries, algorithms and dispatch technology will slowly start to break pumped storage's stronghold on peak lopping, a process that could potentially accelerate faster if the ESO was split out of National Grid and became a legally independent entity, Hodges said.
Not for everyone
Batteries can make money in seven or eight different ways -- but operation is complex and not for all investors, such as the pension fund investors that have treated heavily regulated and/or indexed wind farm assets as a form of bond substitute.
"It's for investors who understand what the technology can do and embrace merchant trading and active management. Furthermore, another consideration is whether to give away the trading function to a route-to-market provider or build that function up yourself," Hodges said.
Public yieldcos like Gresham and Gore Street, as well private market operators, have contracted out to third parties.
"The public yieldcos are all trading above NAV [net asset value], which validates the strategy. But if you look at how they've allocated those contracts, they are spread across several providers because nobody has got a long enough track record yet to claim the crown," Hodges said.
Statkraft, EDF, Limejump, Arenko and Habitat Energy all have slightly different business models and products for battery asset management.
"We've done quite a bit of work with Arenko Group, who sell automation software to battery operators. It makes the battery available 24/7, but also allows the battery to effectively price itself and trade market positions as you get closer to delivery. The battery becomes self-learning and self-trading," Hodges said.
This is what the system operator needs to help keep the system in balance, and Arenko is proving this with 30 to 40 instructions a day in the Balancing Market versus 30-40 starts a month for gas reciprocating engines.
"As longer duration battery assets become cheaper and their uses become more widely understood by grid operators, they will increasingly displace the role of peaking gas assets," Hodges said.
While investors can make decent returns from batteries, gaining import grid connections is a constraining factor on new development.
"It is quite easy to get an export supply license, but it is getting enough room in the substation to import what you need to charge the battery that has been the problem," Hodges said.
Planning rules are heading in the right direction with the recent lifting of the capacity cap, "but what really matters is location. You can also make money by offering your flexibility as a means for solving grid constraints. That means you want to be transmission connected, ideally in National Grid's backyard near substations and high-voltage connections, and there are not that many of those sites," he said.
Changing UK regulation has impacted storage via higher de-rating in the capacity market and reform of the Targeted Charging Review. This has hit behind-the-meter applications, making it less attractive for big industrials to fit storage to manage their consumption through peak periods.
"The reality is that unless the people who are trading merchant storage can share enough good stories, publicize how they are doing it, demonstrate that it is working -- we're not going to see a lot of growth in this market, because it is not well understood," Hodges said.
He remains optimistic, however. "The hemorrhaging of power prices in recent months has pushed hedging right up the agenda," he said.
Batteries offer a great hedge. "A renewable energy fund investor is looking at this asset class on a portfolio basis and saying 60%-70% of my return is tied to power prices. I need a component in my portfolio that allows me to make money in other ways by trading other services. That's helpful to storage."
Spain has recognized this with proposals to prioritize connection agreements with hybrid renewables-plus-storage sites.
"It's a fairly smart move given that they must have 50-60 GW of applications trying to get through. We're not quite there yet in Europe, but co-location is going to work because you're making money in four or five different ways opposed to one way. That gives you more optionality," Hodges said.
Heat storage, meanwhile, is "an exciting space with some big deals likely in the near-term," Hodges said.
Decarbonizing heat is a big challenge in the UK. "We're not good at combined heat and power or district heat, while concentrated solar power uses toxic molten salts is expensive and the salts degrade," he said.
"We are working with a client now that has a unique long-duration thermal storage technology and it's really interesting to see the customers this company is getting out of bed. These are long-standing businesses that are only now realizing there is a lot of value in saving energy by storing heat. Heat is a market that has a long way to go in terms of decarbonization, and storing heat offers revenue diversification and avoided costs," Hodges said.
Augusta has made its name brokering around 3 GW of corporate wind power purchase agreements in Nordic markets, and Hodges is positive on the imminence of further deals.
"You have to look closely at your pricing zone in the Nordics -- parts can be trading at Eur30/MWh while elsewhere the price is currently very low, driven mainly by reservoir hydro which has suffered from a record warm and wet winter and is still working off the oversupply of water. Additionally, locations in the north that are best for wind aren't always best for pricing, as that's often where the reservoirs or big river systems are. There's a real value in matching sources of demand with projects, and we've done that well in the last couple of years," he said.
In Sweden, investors are more willing to go merchant in the SE3 and SE4 southerly price zones, because pricing is more resilient there than further north in SE1 and SE2, he said.
"Right now there is a slowdown in Nordic wind. Regional planning opposition, perceived North-South grid constraints, reduced PPA appetite with many of the traditional PPA offtakers simply being full and a more challenging debt environment all contribute to this slow down. But the potential for growth is still there as the region has a long way to go and excellent wind resource. We are active across Sweden, Norway and Finland and generally see strong demand for merchant projects," he said.
Nordic forward prices on the Nasdaq exchange have recovered after the demand shock of COVID-19, with front-year 2021 and beyond power trading at near normal levels.
"We are bullish -- and we're doing several deals right now that are going to get over the line. There are more people looking for shorter-term hedges until the market recovers, so those very long PPAs we saw last year are going to be harder to find, but the best projects are going to continue to get good long-term hedges. That market is still open," Hodges said.