In today’s evolving energy landscape with the increasing integration of renewable energy sources (RES) and the phase-out of fossil-fuel-powered facilities, battery energy storage systems (BESS) have emerged as a key area for investment. The significant shift towards sustainable energy solutions has created the foundation for BESS to thrive, with the prospect of substantial growth in investment over the coming decades.
Battery energy storage systems possess the ability to participate in multiple revenue streams and, at the same time, stack some of them to optimize revenue generation. Not only do BESS support grid stability and provide balance in increasingly volatile and congested systems, but they also capitalize on the volatility in short-term energy markets, leveraging their capabilities to participate in energy arbitrage.
Optimizing earnings through strategic stacking of revenue streams requires investors to develop cross-market optimization strategies whilst taking regulatory compliance and market dynamics in consideration. Furthermore, the trend of increasing BESS duration is here to stay and will likely grow to capture more value in trading spreads or to secure capacity remuneration in markets where it is a viable option. The changes in revenue opportunities across the expected lifespan of BESS underscore the importance of carefully considering assumptions regarding the warranty and insurance conditions to utilize the system in a way that allows tapping into the emerging market opportunities. For that, flexibility is increasingly becoming a must-have.
As technological advancements continue to drive down the costs associated with longer-duration energy storage systems, BESS is well-positioned to directly compete with other energy storage and generation assets. This shift in the energy sector not only extends BESS’ reach, but also further diversifies its revenue streams allowing BESS to compete effectively in an increasing number of ancillary services.
The costs associated with deploying and operating BESS must be balanced with the specific use cases underpinning the business case. For example, the planned utilization impacts both the need for capital and operational expenditure. A misalignment between the expected deployment (revenue streams) and assumptions on costs represents a risk to the profitability of a project. Investors and project developers particularly need to account for the largest components of capital expenditure, such as buying the system and land rights, as well as the operational expenses for running the system, such as grid fees, optimization costs, and operations and maintenance. Lastly, planning for the end of the BESS’ life during the construction phase can potentially improve the business case through updated assumptions regarding the residual value of the system, as well as risks or opportunities associated with recycling.
We anticipate that new technology will likely make BESS cheaper and more appealing to investors year by year, quite visible by 2024 to late 2020s. This may affect the strategy around investment opportunities and timing. The influence of technological advancements on the business case in terms of battery lifespan can be material, as illustrated by the difference in number of cycles between Lithium-ion batteries and Lithium-iron-phosphate batteries, making technology choices a pivotal consideration for investors.
In addition to revenue and cost considerations, other elements to consider when assessing investment prospects include:
- understanding of how the evolving regulatory framework may affect revenue stream accessibility;
- exposure and sensitivity to shifts within the market environment and system conditions;
- approach to augmentations and system adjustments to optimize the long-term value and potentially benefit from future technological advancements; and
- operational risks that could affect performance and reliability and mitigation strategies in place.
Developing models that simulate scenarios and options of revenue stacking, market prices and utilization, while maintaining warranty conditions or stress testing is a must. This should be done under different assumptions on regulation, market, competitive dynamics, and technological advancements to provide insights into potential developments. Understanding the potential value at risk enables better informed risk-management decisions and development of mitigation strategies, where risks are material. CRA leverages an Energy Storage Operations model alongside fundamental analysis and market and regulatory review to assess risks and recommend mitigation strategies.
In the following whitepaper, we delve into a comprehensive exploration of the revenue streams, cost dynamics, and other critical considerations that are integral to creating a robust BESS business case, offering valuable insights for investors seeking to leverage the full potential of this dynamic and evolving sector.