Battery storage operators will struggle to make a profit if they rely only on shifting power from off peak to peak times, despite the dramatic fall in the cost of lithium-ion cells. A more sophisticated trading strategy is needed in order to convince investors in the long term viability of these assets, according to a recent Engerati webinar.
The obvious value of a battery is in its ability to charge when power demand and prices are low, and then discharge at the peak. But most batteries need a peak/off peak spread of £15-20/MWh in order to cover marginal cost and degradation, says Dr Ben Irons, co-founder of Habitat Energy, a trading and optimisation service for battery storage and other flexible assets. The calculation is based on the replacement cost of the battery cell, which degrades over a period of about ten years, divided by the number of cycles that can be achieved in that time.
It’s a moving target, Irons says, which depends on many conditions and projections that are as yet unproven. But his message is the same regardless of the details behind his estimate: batteries are ‘not a very attractive business case’ if used only to shift power through time.
A project developer entering a new market needs to understand the generation mix, the share of renewable energy and the level of competition from other flexibility providers. The tightness of the system and the proportion of intermittent supply sources will determine price volatility, which is essential for batteries to make a profit. How much money batteries make depends on how well the asset can be optimised, charging at the lower and discharging at the high. But price data is not always available before the commitment to a trade needs to be made. “The problem is you don’t see the data as it unfolds. You need to time the discharge exactly right – you need to hit that peak. It’s about getting the peak right and knowing when it’s going to be – that’s where the forecasting is important,” Irons says.
Batteries should operate in multiple markets, adding complexity but also opportunity. Day-ahead, intraday, balancing and ancillary services markets all present arbitrage possibilities, and if an in-the-money position can be unwound financially it not only saves depreciation of the cell but also frees up the asset for another purpose. This more sophisticated trading technique can account for as much as half the revenue potential of a battery, Irons says.
Simply time shifting is not “sweating the asset”. “You’ve bought this very expensive asset and you’re not cycling it hard enough if you’re just cycling once a day. The pure time shift model is not investable,” Irons says.
“Investors are looking for 10-12% returns on an unlevered post tax basis. Anything less than that isn’t going to justify the long term risk.”
As degradation is a major factor in battery profitability, preserving the life of the cell through careful operation management can also make a significant difference. Habitat energy works in partnership with the Oxford University battery laboratory to study how degradation is heavily influenced by the way batteries are used. If you can extend battery life beyond the warranty period it can significantly improve investment returns, Irons says.
Co-locating storage with solar assets has many potential benefits, but quantifying the revenue potential requires complex questions to be answered. Despite the complexities, the financial outcome is positive especially when the battery can share the grid connection and inverter costs with the solar installation. “Whatever you think you can earn for a stand-alone storage project, we think there are benefits to come from co-location,” Irons says.
Although the battery will only be able to access the grid when the solar plant is not using the connection, the solar load factor is only about 10%, and when the solar panel is in use the power price is likely to be low anyway. Sharing costs in this way can increase investment returns by 5 or more percentage points, Irons says.
Habitat Energy will operate one of the UK’s largest battery sites, Arlington Energy’s 40MW Greenfield Road battery asset, due to be completed next month. Habitat will provide optimisation services using its algorithmic trading platform ‘PowerIQ’, overseen by its team of asset optimisers, and the battery will be registered as a balancing mechanism unit.
Habitat Energy will also manage a 50MW Oxford battery project with Pivot Power due for completion next year.