Building into overbuild
All the indicators for the battery storage market are currently positive. Capex prices are still falling, price forecasts are rising, grid capacity is being increased. But there is an interesting conundrum – the more build, the better the outlook.
At what point does the market get flooded with new capacity? Right now the addition of any new battery storage capacity is perceived as a good thing – particularly after the Spanish blackout in April caused, apparently, by too much voltage. Or maybe too much unbalanced voltage.
The rush to increase battery storage capacity is aligned with the rush to build new grid capacity to adapt to the era of flexible generation. It appears there is no ceiling to the amount of new capacity that is needed or to the grid upgrades required.
Last week the UK grid operator NESO awarded 34.5GW of new battery storage capacity up to 2030 with the figure increasing to 48.7GW by 2035. Revenue forecasts from the listed Gore Street Energy Storage Fund show despite this big increase, prices remain on an upward curve during that period.
But there is some volatility within the forecasts themselves. They were updated at the end of September from only six months previously, at the end of March. Despite the short time period the fund still reported its net asset value has dropped 10.6% due to the new forecasts. Whoops. The new forecasts actually show higher predicted revenues in the short term, up from £55/MW/yr to 2028 but plateauing at around £80 in 2030 compared with £95 in the previous forecasts. The £80 figure remains constant to 2050.
The fund has an asset in Germany. For this asset the realised price was actually a lot higher in September, more than £120, compared with the £80 in the March forecast. By 2003, the two forecasts merge to the £100 mark.
Interesting then that Wood Mackenzie issued a report last week suggesting the good times in Germany are not forever.
Germany's battery connection requests have ballooned. At the beginning of the year there was around 300GW of connection requests for BESS across Germany and this has risen to over 500GW according to Woodmac. But while current market conditions appear lucrative, "revenue streams face pressure. BESS assets compete for volatility at peak price margins. Frequency market revenues, highly sought after in Germany, represent shallow revenue pools typically well below 1% of system peak demand in GW terms. They quickly saturate as BESS deployments approach and overtake this market need."
Is there a tipping point at which enhanced project buildout suddenly squeezes the volatility battery storage projects thrive on? Or indeed when grid upgrades lessen the advantages of premium slots at the current placed substations? Is it likely a market that thrives on volatility will settle down to a stable price era?
It depends. But reports from various markets suggest not. Some are up big time and some down big time. In the UK average BESS revenue increased by 18% compared with FY24/25, and by 63% compared with the equivalent six-month period last year, April to September 2024, according to Gore Street. This at a time when 1.1GW of new capacity was installed. Adding a further 34.5GW under NESO's plans by 2030 will be challenging to say the least for the supply chain. After 2030 will come the long storage schemes, which will introduce a level of certainty into the market.
The Texas ERCOT market saw revenues falling 90% below expectations. Gore Street said two factors are at play. The first is "depressed gas prices reduced pricing volatility, limiting opportunities for batteries to capture high spreads through arbitrage. The second is "market saturation, with the rapid deployment of BESS assets in the state causing margins to compress and reduced ancillary service revenues." Things were not as bad in California where revenues fell only 35% due to peak demand dropping in the summer on lower temperatures.
Each market has its own dynamics. UK investors no longer have to go overseas to get projects and indeed the UK and indeed Germany could now be a magnet for developers. But battery storage serves a volatile trading market so it can be expected volatility is inbuilt into the schemes.
Over time tolling agreements, capacity market arrangements as in Australia and ideas such as cap and floor revenue supports will reduce the volatility. For any energy project the spread between the inputs and outputs is a trading or spread risk but for battery storage there is an inbuilt desire for volatility on top.
Still construction costs keep tumbling. Consultancy Ember suggests the all-in cost for a scheme is now US$125/kWh with a 40% fall recorded in 2024 and another major fall predicted for 2025. The levelised cost of storage is now US$65/MWh as a result on some attractive assumptions – 20-year lifetime, 7% discount rate, 90% efficiency, 80% utilisation rate, 2% degradation per year and 2% operating costs.
