New providers, new structures drive evolution of BESS offtake in Europe

Market moving to more sophisticated structures

The structure of the Kvosted deal was not revealed, while for Windyhill it is a ‘floor,’ which Javed explained in the context of the UK market.

“The floor product is pretty well understood at this point. Essentially it means an offtaker guaranteeing a minimum amount regardless of power prices and what revenues it generates, with a profit share for everything above that,” she explained. 

“Now recently we have seen the first few tolling deals signed, though they are still not as widespread as floors, at least in the UK. We’re also seeing more financial structures being layered on top too, like the day-ahead swap.” 

The toll is on the other hand the main way offtakers offer revenue contracts in Germany.

More players needed for UK clean power goals

But the more significant trend is the growth in the number of companies offering structures of any sort, she said.

“What’s changed is that there are a lot more players entering the market. You’ve had utilities in the space, but now there are commodity traders, increasingly there are more financial institutes, even insurance companies who are willing to have flexibility in the portfolio and as a result offer offer a fixed price product.”

“Previously, it was a limited amount of offtakers, and even less if you only consider credit-worthy counterparties. We need a lot more flexibility to be unlocked to achieve the Clean Power 2030 [policy targets] in the case of the UK, and to enable that, we need a far bigger pool of creditworthy offtake providers.”

Innovations in optimisation

The optimisation space has needed to evolve and innovate in order to keep up with a changing market, and by and large it has done very well, Javed says.

“The sector has been really good at having algorithmic trading capabilities. Human traders don’t have the capabilities to be able to price in all these multiple things you need to track, so in general the sector has been really good here,” she says.

The general trend is that a market starts off with merchant models with high ancillary service prices, which are relatively easy to trade, before moving to contracted structures as revenues fall.

“At that point players are happy to keep projects on a merchant basis, but as they start seeing the ancillary services saturate, they start looking to contract revenues,” Javed says.

“That could be the floor or it could be a toll. More and more we also hear from operational projects that have been under a different structure and now they’re looking to contract a higher proportion of their revenues.”

“That is the trend we can expect to see in mainland Europe, but it also depends on how good the DSOs and TSOs are with regards to integrating flexibility, because the current regulatory signals depending on which grid we talk about, are not necessarily favourable.”

FCAs in Germany

That naturally led on to a discussion around flexible connection agreements (FCAs) in Germany, something Javed discussed in a pre-event Q&A with Energy-Storage.news. Although in principle designed to help storage get on the grid quicker, they are cited by every operator in the German market as a major challenge.

“In the case of Germany, rather than enabling that flexibility, we are seeing more and more asset owners getting FCAs, which are actually limiting the flexibility of the assets,” Javed explains.

An FCA is an agreement regarding grid connection by the TSO, which puts restrictions on the asset. It could be limiting your ramp rate to 15 minutes or saying you cannot charge or discharge during certain windows.

“If we talk about a more efficient market, we would see that BESS would be allowed to be more flexible as an asset. It would be allowed to trade across all these available revenue streams, and the grid would get better and better in terms of how it utilises it, which would mean enabling more markets or more services for BESS.”

“But that again depends on then how they see flex and whether they see it more as a burden to be able to integrate that within their existing systems, which are not necessarily fit for purpose.”

“The FCAs show that the TSO systems are unable to integrate BESS, which is a very fast acting technology and could be utilised to manage the system as well.”

“It’s not the case that every grid offer in Germany is an FCA. But now the more and more we talk to asset owners, it seems like most if not all assets have some limitation or some arbitrary restriction being put on it. And those restrictions may also change in future.

Denmark

From being relatively quiet in the prior period, grid-scale BESS project final investment decisions (FIDs) have come thick and fast in the past six months. Alongside Kvosted going into operation (surpassing a 43MWh project as the country’s largest) FIDs on projects have been announced by Greenvolt (110MWh), Infranode (120MWh) and Copenhagen Energy (53MWh).

Javed explained that Denmark’s electricity market has unique characteristics and challenges.

“Denmark is a bit different from other grids in the sense that it’s a zonal market. So you have DK1 which is interconnected with Germany and you have DK2 which is interconnected with Sweden,” she says.

“It is a small country with a very high wind, wind capacity, which drives the need for flexibility in terms of unlocking BESS. It’s a very liquid market, also interconnected with Germany, which has similar similar dynamics, with regards to liquidity as well as volatility.”

“We have talked about regulatory hurdles with regards to other markets. In Denmark, for instance, you have a different hurdle, which is that if you’re a standalone asset charging from the grid, you are seen as a consumption asset and you need to pay tariffs, which could be quite high. That then drives the need for co-location.”

“Because then if you’re an asset co-located with solar, you could charge the battery without paying those tariffs and then discharge with favourable pricing conditions.”