GridBeyond talks battery optimisation

How important is AI-based software for maximising the value of a battery asset in an increasingly demanding flexibility market?

The power sector is generally regarded as conservative and slow to adopt new technologies. But the increased complexity of the grid resulting from increasing levels of distributed assets including renewables and batteries is resulting in rapidly changing value in electricity markets. To ensure an efficient and cost-effective response to these market dynamics, the system is trading in shorter and shorter time periods. This has prompted the need for more sophisticated tools to monitor and manage networks.

AI’s application has proven promising so far, but innovation and adoption remain limited. That presents a tremendous opportunity in driving measurable improvements in the value that can be achieved from batteries, renewables, distributed energy assets and demand-side management.

In the past, decisions on where best to sell power had been largely a choice between frequency response and power market arbitrage. The revenue stack for batteries is moving away from long-term grid service contracts towards close-to-real time optimisation across multiple energy, balancing and ancillary markets. This adds both complexity and uncertainty to the stability of future revenues. Now with an increasing number of market opportunities it is important to ensure you are in the market that delivers the best value for your asset.

Optimisation technologies mean every connected asset, whether its utility-scale renewables generation, battery storage or industrial load, can be utilised to help balance the grid in a coordinated system. Its application can result in expanded access to energy services, encourage innovation and ensure a safe, resilient and affordable clean energy system for the future.

At GridBeyond we have invested extensively in market leading AI software capability and forecasting tools, to ensure we can provide the best solution to our customers, ensuring each MW is placed in the right market at the right time, to achieve the best value across any size of spread.

How important is a floor price?

Within an optimisation contract a floor price can provide a way of securing income for flexible assets, such as batteries, in a market where long-term contracts are increasingly unavailable.

The floor essentially acts to limit downside risk and can help support an investment case for a new build asset and brings in an element of bank debt to a storage asset. But investors should think carefully about the effectiveness of a floor price when structuring optimisation agreements as they can also act to strip out value from the annual income of an asset and reduce the focus on maximising revenue for the asset.

Each optimiser has different commercial approaches to monetising revenues, so it is difficult to directly compare without looking at their approach to protecting downside risk and preventing the floor from triggering. But generally, for a battery project, the floor level is well below the financial potential an asset could deliver. If you strip out the value of fees to cover the cost of the floors this could reach 7%-8% of total project revenues. Meaning a more conservative trading strategy as the focus is to prevent the floors triggering rather than maximising the assets income. This means the financial gain from lower cost of borrowing via lenders by having a floor in place is eroded by the higher fees and less aggressive trading strategy.

A real positive in the last month has been that, after many years of low T-1 and T-4 auctions, the Capacity Market has also now become a meaningful financial revenue to battery assets. In GridBeyond’s view, while the very high prices seen in the latest auctions are likely to be a blip, future auctions will provide the bankability required to enable new build without the need for a secondary floor price. Please see our ‘White Paper’ on the Capacity Markets.

What about the landscape for batteries in other markets?

In the majority of markets utilities, regulators, investors and businesses are pursuing various approaches to building up the flexible capacity needed to meet demand, with all the indicators pointing to the continuing expansion of battery storage sector. BNEF forecasts that 1,095GW of storage will be in place globally by 2040.

In the UK, National Grid Electricity System Operator is soon to launch a new suite of faster-acting frequency response services that can better manage frequency changes on a low inertia, high renewables system and will likely prove favourable to batteries.

In Australia, the federal government recently announced up to AU$215.4 million (£118.4 million) which will support investment in new dispatchable generation and deliver affordable and reliable electricity. This includes AU$49.3 million (£27.7 million) for battery and micro-grid projects. In October 2021 the Australian power markets moved to five-minute settlement, a move that will likely to be favourable to flexible generators and batteries.

In the USA, FERC Order 755 mandated a separate compensation structure for fast-acting resources such as batteries. This incentivised the use of battery storage systems to provide frequency regulation. In addition, last year FERC issued Order No. 841, which requires regional system operators to remove barriers to participation for energy storage resources in the wholesale electricity markets.