This week’s Smart Energy Finances looks at research from LCP Delta, which finds a 71% decline in UK’s profits for battery storage, compared to the highs of 2021 and 2022.
This is according to new research coming from the UK-based energy analytics and consultancy firm, underscoring the challenging financial landscape facing investors in the maturing battery market in Great Britain (GB).
The company’s 2023 Battery Investment Landscape report reveals a 71% decline in average profits, necessitating a shift towards more sophisticated financial strategies to optimise revenue generation.
LCP Delta’s report emphasises that traditional revenue streams for investors are diminishing, a decline mainly attributed to the saturation of frequency response markets.
Following a peak in 2021 and 2022, states the company, the battery market has experienced a substantial drop in profits in comparison to the past two years.
This decline has been exacerbated by decreasing wholesale power prices and energy trading values.
Seven lessons
Through the report, LCP Delta identified seven critical financial lessons for investors, developers, and operators of battery energy storage systems (BESS) from the market situation in the UK to navigate such market conditions. The below is based on an excerpt from the report:
1. Margins will not meet prior highs
Until recently, states the research company, battery systems in GB generated profits by predominantly focusing on frequency response markets, particularly Firm Frequency Reserve (FFR) and Dynamic Containment (DC) services.
However, with these markets now saturated, achieving high returns through a straightforward strategy is no longer feasible.
2. Operators need to develop more sophisticated strategies to outperform competitors
LCP Delta’s report highlights the need for battery operators to adopt sophisticated trading strategies due to the market’s saturation.
Namely, states the company, revenue stacking from wholesale, balancing markets, and other riskier strategies like NIV (Net Imbalance Volume) chasing could potentially be lucrative for battery operators to target; such strategies could result in greater variation in the performance of different battery trading strategies.
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3. Although potentially lucrative, system balancing comes with high risk
According to the report, when stacking revenues, system price spreads offer the most lucrative opportunities, however, these can also be the hardest to efficiently utilise.
A sustainable trading strategy that mitigates risk and exposure, one that aligns with the more realistic growth in the GB power market post-2022 volatility, would be a better bet.
4. Frequency Response markets, now saturated, will become a less important part of the BESS revenue stack in the future
According to the research, due to the market’s saturation, achievable prices have been eroded.
Although there are signs of increased prices with procurement uplift, this price response is unlikely to be significant, considering the strong battery storage pipeline in development, which will compete for these contracts.
5. Connection timeframes must be realistic with such a strong BESS pipeline
Citing their STOREtrack platform forecast of the BESS pipeline for GB, which is upwards of 18GW by 2030, a key consideration for developers and investors is the delays in obtaining grid connections with grid operators.
Although National Grid ESO has published a five-point plan to ease the bottlenecks, with the projected 18GW pipeline, the issue is likely to remain.
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6. Select the right location and site configuration
Location, states LCP Delta, is becoming a critical factor for developers.
While the UK government contemplates potential reforms like REMA (Renewables Energy Market Arrangement) reforms and adjustments to existing network charges, these changes could present both opportunities and challenges for operators.
For instance, the introduction of Locational Marginal Pricing (LMP) may result in narrower profit margins for BESS in less favourable locations, while those situated near demand hubs in underserved areas could enjoy more favourable revenue prospects.
According to the LCP Delta, with long connection lead-times and lower availability of connections, now may be a more appealing time to also consider co-location of storage. This will also help an intermittent renewable asset to mitigate the impact of negative pricing on the unit.
7. The Capacity Market can underpin investment cases, but bidding strategies need to consider future deratings
Citing a significant decline in derating factors for the T-4 capacity auction for 2027 to 2028, unless Capacity Market auctions clear at higher prices than have been observed in recent years, it is unlikely that BESS operators will be able to turn to the Capacity Market to sufficiently recuperate their own missing money in other markets.
Maintaining competitiveness
According to the report, to maintain competitiveness developers must intensify their due diligence efforts, considering factors such as project duration, technology and location with meticulous care.
Additionally, states LCP Delta, as demand surges due to the electrification of heat and transportation and the expansion of renewable capacity to decarbonise the power sector, the need for flexibility, especially in terms of energy storage, will continue to grow.
With this growth, highlights the report, despite short-term market signals softening the long-term outlook remains positive for BESS growth, driven by the increasing intermittency in the system.
With LCP Delta’s findings it will be interesting to see how the battery market evolves but also whether the European landscape reflects these conditions. What are your thoughts – let me know.
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Cheers,
Yusuf Latief
Content Producer
Smart Energy International
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