Applications for Energy Storage in European Power Markets

The potential benefits of energy storage are widely recognised, from load-shifting power from high to low price periods, to managing intermittent generation on power networks by providing services to the system operator (SO). What is less certain is the profitability of those different services. Do battery owners contract for one or multiple different products, allowing for the mutual exclusivities between each? Should developers consider large or multiple small-scale projects? Who will the final customer be? Will battery owners contract with utilities, system operators or indeed home owners?

Policy makers and regulators must also ask if existing market designs will incentivise the optimal deployment of batteries, or whether innovative battery solutions will be hindered by existing regulations and policy designs.

The most obvious role for batteries is load shifting power from low to high power price periods, be that charging off the electricity grid, or charging via nearby low-cost renewable generation. Today, the value of this intertemporal arbitrage is modest. In the U.K., for example, load-shifting currently delivers less than a third of a battery’s target returns, although as battery costs decline, renewable penetration increases, and the U.K.’s cash-out policy reform is implemented, the potential returns from arbitrage may increase. Currently, 11 percent of Li-ion batteries installed globally are used for load-shifting type services.

The next most obvious application is for batteries to contract with SOs to manage the risk of there being too little, or indeed too much generation on electricity systems at any given time. Batteries’ flexibility to rapidly charge or discharge allows them to provide valuable up and down frequency regulation. That capability allows batteries to contract for the most lucrative of the suite of balancing services with SOs, often under long term bi-lateral contracts with capacity and utilization type payments. Today, 49 percent of Li-ion batteries installed globally are used for frequency regulation type services.

A third application is to locate batteries on local distribution networks, or indeed ‘behind-the-meter’ on industrial and commercial sites. Those applications could then avoid suppliers costly use of system charges (e.g. ‘TRIADs’ in the U.K.), or could contract for balancing services with SOs.

In the absence of frequency regulation contracts, of which there is a modest requirement in most developed countries, it is those multiple revenue models that batteries will look to next – be it a green-field site, or a site co-located with renewables or industrial customers. Depending on the location, size and technical characteristics of the battery, it would contract for balancing services for a portion of the day. It would then load-shift during peak price periods and avoid use of system charges when they are highest.

That type of model optimally contracts for different services both daily and seasonally to maximise aggregate returns. The trade-off, however, is that those are complicated business models with multiple revenue streams and counterparties – often with short-term contracts in opaque markets that are challenging to raise debt against.

Capacity markets do give some long-term revenue certainty, but those revenues will only ever provide a portion of the profitability required for a battery to deliver a reasonable return to investors. Developers and financiers will need to grow comfortable with the multiple overlapping revenue streams that batteries would contract for, each with differing degrees of revenue certainty and product risk.

From a policy design and regulation standpoint, there are still lingering ambiguities as to the categorisation of batteries in policy documents. Batteries often fall somewhere between generation and demand-side response, neither of which currently recognise the full value of batteries. As battery costs fall and mass deployment becomes real, policy makers must consider if existing policy designs accurately reflect the system benefits of storage, or if additional provisions need to be made.

Either way, declining battery costs make their deployment a near certainty. There are high-value markets that support battery deployment today, with more complex models supporting battery deployment in the near future.

Lead image: European countries 3D illustration. Credit: Shutterstock.

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