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Huge opportunity for behind the meter storage if arbitrage model takes off

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Image: Eelpower.

Behind the meter (BTM) storage in the UK’s commercial and industrial (C&I) sector could offer a 10GW market for battery energy storage under the right regulation and business models incorporating increased energy arbitrage.

The headline figure was proposed by Duncan Dale, vice president for customers and new products at ‎Statkraft, at last week’s Energy Storage and Connected Systems event, hosted by the Renewable Energy Association (REA).

With the shrinking market for firm frequency response (FFR) services, previously the most lucrative market for frequency response, Dale said opportunities for BTM energy storage are being sought elsewhere with eyes turning to the role of energy arbitrage.

“FFR is highly contestable, it’s a small market and the prices are now falling and they've fallen quite dramatically already. The value is going to move from being almost entirely FFR which people are doing now to a mix of energy arbitrage and FFR.

“The energy arbitrage value will increase and it's largely down to the demise of baseload...you've got to have flexibility on the system and the system needs to become more responsive,” he said.

Speaking alongside Dale on a panel was Matt Allen, founder and chief executive of C&I battery firm Become Energy, who agreed saying there was “loads and loads and loads” of BTM opportunity despite recent upheaval in the revenue stacking proposition.

“The last six months it's almost been like herding cats [with] what's happening with the frequency income piece and then all of a sudden the capacity market derating factors, so it's been balancing many of these continually moving pieces.

“The wholesale arbitrage piece we always expected to come into the mix a little bit further down the road but we've had to bring it in to the equation now - I think the entire industry has...but overall the business case is stacking up.”

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L-R: Chair Ray Noble, with Duncan Dale, Sam Harden from innogy, Matt Allen, Adam Piper from insurers Willis Towers Watson, and Centrica's Steven Clarke.

Lack of opportunity in front of the meter

The growing potential in BTM storage comes as front of the meter grid scale storage opportunity fades in the wake of diminishing revenues from the frequency response market and the significant changes to de-rating for short duration batteries.

Ulrika Wising, head of battery storage at ‎Macquarie Group, said: “We don't see much of grid scale opportunity today. We strongly believe it's going to come back but at the moment I don't see lots of opportunities out there because of what has happened to FFR as well as de-rating in the capacity market.

“On the other hand we do see a lot of interest in behind the meter battery storage. Scale is difficult to say...but we have at least probably about 200MW [pipeline] at the moment so lots of interest.”

Wising was commenting on the market during a finance panel, where she was joined by Ben Irons, executive director of ‎Aurora Energy Research, who agreed that arbitrage will offer considerable opportunities for BTM storage once it is more established as a revenue source.

“We all recognise FFR is falling like a stone, the big value driver here for this investment class to work is if the arbitrage trading model comes up. A project majoring in arbitrage and minoring in capacity and frequency and whatever else is probably going to generate an IRR of 5-10%; no one's going to touch it with those types of returns.

“So the question becomes how long do we have to wait for that arbitrage and trading revenue to improve, and certainly it is going to improve as more renewables that come on to the system, the more volatility [which] we see as one driver.”

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L-R: Chair Albert Cheung, BNEF, with Ben Irons, Ulrika Wising, Siemens Financial Services' Bridgit-Hartland Johnson, Mark Turell of Capitas Finance and Doreen Abeysundra from Fresco Advisory.

Building trust to manage risk

However, this uncertain future for BTM revenues is likely to offer too much risk in the short term for potential C&I consumers, putting the pressure on firms to deliver a trusted offer and innovative business model.

Become Energy recently reformulated its model so that all income savings from its commercial batteries is placed in a central pot to be split between the company and its customer, as Allen explained.

“For a lot of energy consumers there's a real risk commercially in [storage] industry presenting unrealistic forecasts. The whole industry needs to ensure that what is being presented to customers is realistic. But there is an element of trust that the customer has to go through.

“I think the reconfiguration of this with all incoming savings going into one bucket creates a better alignment for both investor and customer where you're in it together whereas previously they have the risk of mis-selling,” he said.

“If it can be pitched to the customers in the right way and we get some stability behind the framework and some long term pricing it could be massive,” Dale concluded.

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