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"BESS is widely accepted within the UK and abroad as a key technology in a transitioning world."
Battery energy storage systems (“BESS”) projects are a growing part of the energy mix. This article considers recent developments in the sector. The UK market is the focus of this assessment, but the trends seen in the UK should also be seen in the context of a wider global rollout of the technology, some of which is assessed here.
(a) The place of BESS in the energy market
BESS is widely accepted within the UK and abroad as a key technology in a transitioning world.
In the UK, government support for the technology has been demonstrated by the success of projects with scope for up to 1.4 GW of co-located BESS under CfD AR6 (including a 300 MW battery for the Hornsea III offshore wind project).¹ As the UK market matures, it is also becoming increasingly clear that “pure play” BESS is bankable.
(b) Developments in the Revenue Stack
Investors have grown increasingly comfortable with the revenue stack as a foundation for the bankability of BESS projects. The diversity of revenue sources, combined with instant demand-response from the technology, allows BESS projects to dynamically respond to market conditions and seek out the best returns.² Revenues from short-term and balancing mechanism trading are being bolstered by growing revenues from between-day trading by longer-duration BESS assets (necessitated by increased intermittency from a more renewables-centric UK energy mix).³
(c) Market challenge or cause for optimism?
In the last 18 months some investors have not seen the returns they had hoped for. As the market has become more crowded, revenues from ancillary services have been eroded and lower volatility in the wholesale market has depressed revenues.⁴ However, the market is dynamic and there are indications that the revenues story is improving as a result of increased price volatility, higher wholesale prices and the onward march of UK renewables project development.
On occasion, BESS operators have also found themselves passed over by National Grid in favour of legacy energy providers. This been attributed to older computer systems giving preference to a limited number of large assets, rather than engaging with higher numbers of smaller, but greener, providers. In response, National Grid aims to reduce the rate at which BESS projects are passed over to a single-figure percentage by next year.⁵
(d) Tolling agreements
On the contractual side, a response from some investors in the face of market challenges has been a pivot to the use of BESS tolling agreements (recently favoured by Shell, Gresham House, and Octopus Energy). Tolling agreements differ from fully merchant profit share agreements and floored agreements in that they shift all trading risk to the optimiser (or “toller”) in exchange for a guaranteed revenue stream.⁶
The growing use of tolling agreements is a natural consequence of a maturing industry. Pathbreaking asset developers running smaller BESS assets and portfolios sought to capture greater upside merchant risk, but as the scale of developers’ assets and portfolios has increased, and more companies entered the market, the risk analysis appears to be shifting the focus to secure revenue streams. It remains to be seen whether developers seek to compete on profitability by creating hybrid revenue stacks (which might commit different proportions of capacity under different forms of revenue contract), or by modulating the duration of different agreements within their portfolios.
"There is a strong trend of accelerating buildout for longer duration batteries, driven by a desire to exploit economies of scale as well as the capacity of BESS operators to respond to higher demand for intermittency management."
(e) Developments in technology and its deployment
The costs of grid-scale BESS have fallen rapidly, with EY predicting further falls by 2030 of 20% to 30%.⁷
There is a strong trend of accelerating buildout for longer duration batteries, driven by a desire to exploit economies of scale as well as the capacity of BESS operators to respond to higher demand for intermittency management. Available data suggests that, 2-hour batteries are up to 38% more profitable than 1-hour batteries.⁸ By 2040 BESS capacity in the UK is expected to reach 50 GW, with some predicting an increased average duration up to five hours (with some assets potentially boasting eight hour durations).⁹ The upper limits of individual asset’s capacity is also set to increase from 100MW (e.g. Dollymans, Clay Tye and Capenhurst assets) to 300 MW (e.g. Ferrybridge, Blackhillock and Thurrock) by 2025.¹⁰ These themselves may be exceeded by 1GW assets as soon as 2027 (such as the Coalburn 2 Energy Storage Project in Scotland).¹¹ This follows similar trends in other markets such as California where the Big Rock project aims to install a 200 MW, 4hr-duration asset.¹² By 2027 nearly half of the BESS projects pipeline is expected to consist of assets with a rated power of 300 MW and above.
Despite the growth of large projects, there will still be space for smaller-scale assets in the market. Some projects costs do not rise significantly with the size of the asset (e.g. financing costs), and larger assets can benefit from special regimes (e.g. in planning law). However, while batteries are technologically capable of delivering their full capacity almost instantly, ramping restrictions to protect grid stability would require larger BESS assets, such as those on a scale contemplated in the previous paragraph, to increase the amount of power they deliver up to their full capacity over time and then ramp down from full power before shutting off. This pyramid-shaped delivery profile can mean lower revenue per-MWh than for smaller, more dynamic assets. Larger BESS assets are expected to control for this by seeking out longer trades at a lower frequency than smaller BESS assets which will continue to chase the mix of opportunities pursued by the current fleet.¹³
(f) All about lithium ion?
The commercial BESS landscape is dominated by the lithium-ion technology. There are also early examples of non-lithium technologies on the horizon. For example, Form Energy and Xcel Energy are developing iron-air batteries in California and Minnesota respectively. Northvolt has also shown breakthroughs with sodium-ion technology.¹⁴ Whether these developments presage a future wave of disruption in BESS development will depend on the effectiveness and economics of the technologies themselves, as well as the global picture for commodities and trade.
As the picture evolves for BESS developers, market observers will watch closely to see what strategies produce the best results. Will developers find it more profitable to run diverse fleets of assets, mixing sizes and technologies across borders, or will specialisation in assets or regions predominate? Similarly, developers will have to consider how their fleets interact with the evolving demand of the energy market and build their offtake and optimisation arrangements accordingly.
Conclusion
In summary, the BESS sector continues to evolve and grow. As the market develops it is widening the breadth of technologies on which it relies while increasing the depth and sophistication of the revenue stack. As these opportunities and challenges arise, WFW stands ready to help new entrants and old hands alike navigate the evolving BESS horizon.
Footnotes
[1] Modo Energy, “CfD AR6: Battery co-location reaches 1.4 GW high in latest round,” 9 September 2024.
[2] Infralogic Insights, “Infralogic Insights: Infra investors’ cautious love affair with UK batteries,” 20 April 2023
[3] Modo Energy, “GB BESS Outlook Q3 2024: battery buildout outlook,” 2 September 2024
[4] Modo Energy, “BESS in Great Britain: Ten key trends in 2024.” 26 September 2024 and “GB BESS Outlook Q3 2024: battery buildout outlook,” 2 September 2024.
[5] Financial Times, “National Grid ‘throttling’ battery storage development with underuse,” 20 April 2023; Financial Times, “National Grid blames old computer systems for sidelining batteries,” 17 September 2024
[6]Modo Energy, “Battery tolling agreements: How do they work?” 5 June 2024
[7] Ernst & Young Global Limited “Will growing volatility see battery investment charge ahead or power down,” 2024
[8] Modo Energy, “GB BESS Outlook Q3 2024: battery buildout outlook,” 2 September 2024.
[9] Modo Energy, “September 2024: GB battery storage research round-up,” 7 October 2024
[10] Modo Energy “Big BESS: How do revenues compare for batteries above 300 MW?” 16 September 2024
[11] Inspiratia, “Scots mega-BESS secures approval.” 12 September 2024
[12] Inspiratia, “Q&A – Gore Street Capital: Fundamentals of energy storage investing,” 23 September 2024, and “Locals oppose 200MW battery in Washington state,” 23 September 2024
[13] Modo Energy “Big BESS: How do revenues compare for batteries above 300 MW?” 16 September 2024
[14] Financial Times “Northvolt in new sodium-ion battery breakthrough,” 1 November 2023
