Declining capex prices have fuelled the appetite for new battery energy storage projects despite issues in various power markets across the world. The introduction of tolling agreements into the sector will ease the path for debt financings if sponsors are willing to take a settled, but possibly lower return. After the initial enthusiasm for the sector, it has certainly been a bumpy ride for sponsors, but this is one battery sector which is not going away.
2025 will be the year of the battery energy storage systems sector, according to report from analysts at RBC Capital Markets. Capex costs have dropped by up to 60% and projects are being scaled up in size and duration "resulting in BESS being increasingly cost-competitive for delivering flexible capacity", the report said.
"For a renewable sector affected by curtailment, price cannibalisation and therefore concern on returns, batteries can be the solution for European renewables companies now trading below invested capital. The deployment of batteries could move the sector from selling a commoditised to a premium product more adapted to the 24/7 needs of customers, driving higher returns for European renewable players," the report said.
Finding the right contractual model, however, will not be easy. Co-location of generation and storage in one project is becoming an attractive option. But when should the battery element be energised? Should batteries simply be a seasonal play boosting generation during the winter when sun does not shine so much or an all year round play mixing generation, energising and storage.
Tolling is now becoming an option as new tollers emerge. Sponsors can guarantee their revenue going forward and at the same time attract project debt sized on the toll. But they will give up potentially lucrative future trading returns. With more renewable generation coming online, the need for flexible generation is jumping. As the market relies more on intermittent generation, the power markets will become more volatile. This is a problem that can be solved with battery storage.
Capex risk? If battery prices continue to fall, sponsors will benefit from a stable revenue stream even if the cost of their project has become expensive by comparison with newer projects. But prices go the other way? After all, the market is reliant on Chinese supply.
The tolling market is starting to grow. Shell signed up to toll the 100MW/330MWh Bramley scheme being developed by BW EES and Penso Power in Hampshire UK this summer. Octopus has entered the market. Statkraft is an established player. In the US, Arizona Public Service is signing up tolling agreements and in Texas, the ERCOT market should have at least 2GWh of tolled capacity by the end of 2026 via Equilibrium Energy and CPS Energy.
EIG-backed Fidra Energy is certainly pushing ahead in this new market on its 1,450MW Thorpe Marsh scheme in south Yorkshire, UK, which is currently being project-financed. It is planning to back the project revenues via a combination of tolling contracts and route-to-market power purchase agreements backed by a floor price. It has shortlisted three potential tollers and says there is plenty of appetite in the route-to-market space. The contracts would run for between seven and 10 years, leaving a merchant tail on the deal. The final split between tolling and route to market has yet to be decided, but this will impact on the debt sizing.
The Gresham House Energy Storage Fund has announced a "toll, refinance, augment, repeat" contractual model, an ambitious plan to boost Ebitda revenues from £45m next year to £150m in 2027. The plan involves project financing assets backed by tolls.
"Project financing with contracted revenues significantly reduces risk of unexpected drops in revenues and provides a more stable platform for optimising Gresham House Energy Storage Fund's capital structure and payment of future dividends. Potential returns remain strong thanks to project financing offering a lower cost of capital and unlocks growth through augmentations and the new pipeline in the three-year plan," the fund said.
The fund has already concluded tolling agreements on its 845MW/1,207MWh portfolio with 260MW already under a two year toll with Octopus with up to 568MW due to be onboarded. Under the tolling Octopus pays a fixed fee per MW on the projects in return for the use of each project's batteries. The fixed fee rate is determined by the duration of the asset expressed in hours and excludes capacity market payments which the projects will continue to receive separately.
Battery storage currently provides market flexibility rather than full baseload. Durations are increasing up to eight hours, but could the sector solve the dunkelflaute period in early November across Europe when low wind and low solar irradiation hit at the same time?
RBC suggested "as baseload capacity retires, and reliance on renewables rises ... we expect higher volatility in trading spreads. However, we would note that battery storage cannot address longer duration flexible capacity, and we expect long-term generation shortfalls to be met by a small, and infrequently utilised fleet of CCGTs or hydro where available."
