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Battery storage funding model 'still evolving' as trading strategies switch to hybrid approach

Habitat Energy, which recently landed a deal to optimise two Eelpower battery storage sites, discussed the evolution of trading strategies. Image: Eelpower

Habitat Energy, which recently landed a deal to optimise two Eelpower battery storage sites, discussed the evolution of trading strategies. Image: Eelpower

Battery storage participation in the Balancing Mechanism has “increased massively” while a hybrid approach to trading that sees assets dipping in and out of Dynamic Containment is becoming more common.

That’s according to speakers from LCP, Habitat Energy and Apricum, discussing the investment case for battery storage at an industry webinar yesterday (23 March).

While the cap of £17/MW/h in Dynamic Containment (DC) resulted in that being a more lucrative market for battery storage across the majority of 2021, from November onwards there was a shift towards a more hybrid trading approach.

“We’ve seen a relaxation of the caps in the DC market, we’ve also seen energy prices be extremely lucrative, so as a result we’re seeing assets flipping back and forth between the two markets,” Chris Matson, partner at LCP said.

This was echoed by Habitat Energy’s head of trading Chris McLeod, who said: “We’re now starting to see a lot more hybrid approaches going on where assets are out of DC for merchant one block, but then back in DC in the next block. That’s actually logistically quite challenging to manage from a trading perspective."

He said that while DC certainly provided the bulk of revenues last year, “there’s been ample opportunity over the course of 2021 where merchant trading has actually outweighed the value attainable through participating even in ancillary markets”.

This was seen throughout winter 2020, and in particular 2021, with this occurring when DC was procured as a 24/7 product.

However, that changed somewhat throughout the year, in particular from September onwards, with National Grid starting to procure at a four hour level in EFA blocks. That has made the opportunity cost consideration more straightforward as an asset won’t be out of DC for a whole day, but it has added to the complexity of trading those assets, McLeod said.

Habitat Energy is expecting more and more batteries to switch to merchant markets moving forward in periods where there isn’t high demand for DC as service.

“The price should coalesce to a risk adjusted merchant opportunity cost of what you could expect to obtain in the wholesale and balancing markets, but that also depends on providers being able to access those markets,” McLeod said.

He said that last year saw battery participation in the Balancing Mechanism "increase massively" as the number of BMU registered battery energy storage systems also increased.

Additionally, the Capacity Market has begun to come into play more for battery storage, which LCP went into some detail on in a recent report.

“Capacity Markets provide quite bankable revenues and we’re now seeing them fulfil their potential of providing a significant source of income for battery storage,” Matson said.

Looking forward, LCP expects the higher prices seen in recent Capacity Market auctions to remain as the system requires new capacity to keep up with the increases in demand and closure of the aging thermal fleet.

Looking ahead at how the investment case for battery storage may evolve, Charles Lesser, head of UK at Apricum, said that it’s likely there will be bigger equity deals and more UK institutional appetite for the sector.

“I think lending will become more diverse and more sophisticated, and that sophistication will manifest itself in mezzanine and more junior products, more sophisticated senior products, perhaps the involvement of hedging activities as well.”

The storage sector is no longer reliant on asset equity, Lesser said, with corporate equity now available and a variety of capital that wants to invest in the industry, from venture type capital to property capital and private equity capital.

Lesser said that there’s been quite a lot of change on the equity side, and correspondingly things are changing on the debt side too. However, what has not changed as much is the diversity of lenders, with the sector principally reliant on two lenders at the moment.

However, this is “absolutely going to change”, Lesser said, adding that it needs to change as with the scale of build out required, a small pool of lenders will rapidly hit their credit limits.

"The funding model is still evolving. I think we’ve got two competing models at the moment- fully merchant racing against the lenders and offtake floors," he said, adding that offtake terms can continue to improve as offtakers can have "far greater confidence in the emergency of the volatility they depend on".

He said that 2021 was a big year for evolution, and that this is likely to continue through 2022 and 2023.

“I think the obvious final conclusion is that more batteries are going to be built. I think the funding position for this industry is so different to where it was 15 months ago,” he finished.

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