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Monetising battery storage in the UK and Europe in 2021: New opportunities and a new way of thinking

By Aaron Lally

Energy storage is poised to play a much bigger role this year in balancing electricity market volatility, accelerating the transition to renewable energy and providing economic benefits to those willing to invest, says Aaron Lally, managing partner at UK-based cleantech trading house VEST Energy. 

2021 will finally be the breakthrough year for battery storage in the UK after several years of false starts with investors sitting on the side-lines reluctant to sink in the required £20-25 million (US$27.4 million – US$34.24 million) for their first site. The battery storage trading environment is maturing and at VEST Energy – a cleantech trading house that uses technology to trade electricity and support renewable energy – we are seeing investors move from understanding the business case on paper to dipping their toes in the water and understanding the business case through building and operating their first battery sites.

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Increased confidence in the asset class has been driven by three main factors: more third-party trading counterparties entering the space and offering new and innovative products, increased volatility in the trading markets and the increased market size of frequency service contracts.

New third-party trading counterparties for battery storage are slowly improving the trading service and level of certainty around revenues received by battery storage asset owners. One of the main barriers to the business case to date is that most traders wait until the day before cycling (and normally in trading markets the day of cycling) to provide any level of certainty around revenues. This works for investors that are happy to take a high level of merchant risk but does not for those that wish to lock in revenues ahead of time to provide an increased level of revenue certainty. The market now has trading counterparties offering fixed or partially fixed trading revenues for up to 10 years out with revenues providing a 10-12% IRR able to be locked in ahead of time. These agreements are slowly replacing ‘floor prices’ which do not offer fully capital protection in the scenarios where the investor has to rely on the agreement.

Trading market volatility has increased remarkably during the winter periods in the UK. The first signs of market tightness were shown in March 2020 with prices moving above £2000/MWh and we continue to see market tightness materialise this winter with pricing regularly above £150/MWh alongside several CM warnings. Weather forecasts are now showing similar conditions to the ‘Beast from the East’ event in 2018 for January 2021 and if this pattern materialises, this would keep market volatility elevated.

By the end of this winter it is likely we will have the first 12 months of realised data since battery storage was available to the UK grid, on which investors can run a back test of trading revenues and show with a simple trading strategy they would have achieved their required IRR for a battery storage asset through solely trading the asset. With COVID-19 lockdowns suppressing volatility during last summer, this will be quite some achievement.

Frequency services operated by National Grid, particularly traditional FFR and more recently the new Dynamic services, have provided a large revenue boost for battery storage with assets in Dynamic Containment returning just under £150,000 per MW per year annualised. We have seen the frequency market size increase from c. 350MW to just over 1GW. By mid-2021 procurement will be over 1.5 GW. This will continue to drive ‘super-normal’ revenues for sites operational over the next few years with historic trading revenues now able to provide investors with the increased certainty that if regulation or the frequency service market framework were to change they would be able to make money from trading their assets.

Finally in 2021, we see conditions ripe for battery storage in the UK. At a high level, the investment story has always been there for the UK and European markets – fossil fuel and nuclear plant decommissioning alongside the rise of intermittent renewable generation leading to increased market volatility. Prior to 2021 many traders were selling their trading expertise for market volatility that was just not realising in the data. This is why most battery storage sites to date have been operational in frequency services, FFR and more recently Dynamic Containment, with those in the Balancing Mechanism and wholesale traded markets drastically underperforming. With the recent increase in market volatility, realised trading returns are now starting to underpin the investment case for battery storage, with frequency services providing additional upside.

At VEST Energy we believe the UK and European electricity markets are just beginning to come out of the price volatility cycle lows and trading revenues will start to get a lot more interesting.

Cover Image: The normally always-busy Oxford Circus Underground train station lies empty during the pandemic. Although COVID-19 lockdowns suppressed volatility, investors could still have achieved their required IRR for a battery storage asset during 2020. Credit: wikimedia user kwh1050.' publisher Solar Media will be hosting the Energy Storage Summit 2021 in an exciting new format on 23-24 February and again on 3-4 March. See the website for more details

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