Against the wind
The battery storage sector is moving headlong against global inflationary trends with a massive deflationary push. Results from various tenders show prices coming in well below expectations. The storage sector might soon catch up with the generation sector.
The Italian tender was a standout last week. The tender, the first in the country, was four times oversubscribed and the weighted-average allocation price came in at €12,959/MWh/year, marking a nearly 65% discount on the official strike price of €37,000/MWh/year. Industry experts had predicted prices dropping down to near €20,000/MWh/year so the actual figure was a surprise to one and all – apart from, of course, the bidders.
This week bids went in for the 2GW/8GWh Saudi tender being run by Saudi Power Procurement Company. Results are yet to emerge but there is said to have been a higher number of bidders for a renewable project than of late in the Gulf and the pricing is expected to be highly competitive.
A month ago, Saudi Electricity Company secured two 500MW/2.45GWh schemes in Tabuk and Hail Provinces with EPC bids of US$73–US$75/kWh from Chinese manufacturer HiTHIUM and Saudi EPC contractor Alfaner Projects.
And in Argentina a battery storage tender, again a first, saw prices come in at a weighted average of US$11,336/MW/month. The reference price was US$15,000/MW/month. The Energy Secretariat was so pleased it invited five qualified projects totalling 222MW, which were not initially selected, to contract if they can bid at US$12,591/MW/month. The schemes cover the Buenos Aires Metropolitan Area.
Of course, tender results do not tell the whole story, particularly for a fluid market such as the battery storage market. Still, it is good to see auction prices going down, rather than up, as was the case for many construction sectors following Covid.
The Italian tender, in the south and central part of the country, saw, not surprisingly, a major local player Enel Green Power win half of the 10GWh four-hour, 15-year contract capacity. Eni was another big local winner. However various smaller scale developers won too, such as BW ESS, NatPower, Greenvolt and Whysol.
The low prices reflect "fierce competition and the dominance of low-cost supply chains", said Jinko Power's Italy manager Felice Lucia. "This mirrors what we saw in Abu Dhabi’s solar auctions – once bids went ultra-low, only the most integrated supply chains could survive.
"At €12,000–€15,000/MWh/year, a four-hour system earns approximately €50,000–€60,000/MW/year gross. In other words: to compete at these levels, batteries must reach €60-€80/kWh installed by 2026–2027", he said.
Italia Solare's storage and hydrogen group coordinator Mauro Moroni praised the tender results overall but added that "low prices are not enough [as] we need a market that favours a variety of players, including small and medium-sized operators, not just large ones".
He said that "area or operator limits can be a useful tool if well calibrated" and that more revenue strategies are needed in the BESS space as "MACSE is a cornerstone but cannot be the only solution – capacity markets, tolling, PPAs and merchant (deals) must become part of the toolbox to ensure a rich and resilient ecosystem".
Up north, in Italy, the battery storage market has a more varied commercial structure, akin to those in many other parts of the world. Private-to-private tolling agreements, considering both fixed-price and floor-type scenarios, are emerging.
Straightforward public tenders are becoming more common in the battery storage arena across the Gulf, Australia, Spain presumably and so on. But the commercial market template is fluid.
In the UK, balancing and ancillary markets on the grid provide revenue support but recently tolling has become popular, allowing banks to come in on the back of guaranteed revenues. The capacity market contracts only account for 10% of revenues. The issue in the UK now is getting grid allocation, given there are so many projects being proposed, and not being crowded out of the existing well-located substations. The National Energy System Operator is prioritising projects.
Now the sector is established, and the really good sites have been snapped up, banks are said to be seeing more merchant type deals reemerging in the UK.
Fidra's 1.4GW/3.1GWh Thorpe Marsh scheme was financed on the basis of three revenue floor contracts, a tolling contract and 280MW left as merchant with an optimisation contract. Adaptogen Capital is keeping its development merchant for the time being.
Lion Storage financed its 364MW/1.4GWh Mufasa scheme in the Netherlands under a merchant model. “The project is backed by a unique revenue stream model that works as a merchant offtake in which both risk and gain are shared between the BESS and the utility,” Lion Gate's lawyer Gerard Koster at Dentons said, explaining that “in a normal merchant deal the SPV sweeps all the proceeds from its revenue strategy, while in this new model the project gets to balance the use of the connection and makes the offtake a win-win for both developer and utility”.
