The results of the National Grid's Enhanced Frequency Response (EFR) tender published in August 2016 have come to be seen as something of a pivotal moment for the fortunes of energy storage in the UK - especially for battery technology.
The statistics will be familiar to many: 61 of the 64 EFR bids related to the use of battery storage, offering over 4311MW of capacity, and battery solutions dominated the 200MW of capacity accepted by the National Grid. "Battery storage" and "energy storage" are used increasingly interchangeably.
One successful bidder (and the only bidder to be awarded two EFR contracts) was Low Carbon, which was awarded contracts for 50MW of capacity. On 1 March 2017, Low Carbon announced that it was forming a joint venture - VLC Energy - to exploit the commercial opportunity presented by EFR contracts.
The announcement catches the eye because Low Carbon's joint venture partner, VPI Immingham, is owned by the oil trading giant Vitol group. In addition to battery storage dominating the EFR tender and commercially "coming of age", was this also the moment when the business case of a "green and clean" project became commercially viable without Government subsidy?
Of course, Vitol is not alone when it comes to oil companies investing in renewables. Statoil, Royal Dutch Shell, Total and Aramco each announced the making of investments in the renewable energy market in 2016. Total is reported to have acquired a 90% stake in battery designer Safte Group, building on earlier acquisitions in the solar sub-sector.
These investments are significant, but represent only 2% of net operating income for Statoil, Royal Dutch Shell and Total. Aramco's CEO said recently that oil and gas will continue to play a significant role in the future energy mix for decades to come. Oil remains the staple product of core business of these energy giants.
The investments in batteries and battery projects do however demonstrate that project sponsors are developing business cases which are credible investments in their own right, or at least worthy of early adopter speculative investment. Evidence of early adopter behaviour is positive as it suggests there is optimism that there will be a market in the near to medium term.
If there is a market, then what are the legal, practical and technical matters which need to be considered by entrants to this new market?
Any person who has worked in the roll-out of renewable energy projects in the UK will find many of the legal and technical requirements of progressing a project to financial close familiar, including securing appropriate land rights for the battery and any access to the grid, contracts for the design, installation and commissioning of the technology. There are bankable, tried-and-tested solutions.
There are however particular issues which arise due to the nature of the battery projects and the business cases which underpin them. Project sponsors will need to understand the following elements and how they interact in order to ensure there is a cohesive, bankable project:
- Revenue streams: EFR revenue is but one element of the possible income stream for a battery project. A complex array of possible income streams exist (including tariff arbitrage, super red credits and triad avoidance) but not all can be "stacked". The differing eligibility rules for income streams also require consideration from a technical and regulatory perspective: for example, super red credits are only paid where the asset is connected to a DNO's extra high voltage grid.
- Co-location: if the battery is co-located with a renewables installation and the two elements are funded by different investors, it is likely that the funders will require separate treatment of the battery from a contractual perspective (for example, in terms of loan facility agreements, security and so on), which may require private power purchase and grid sharing agreements. Any risk of impact on the subsidies for the existing project will need to be evaluated.
- Planning considerations: storage projects would likely be consented by way of a planning permission from the local planning authority, but it is possible that larger projects may require consent from the Secretary of State as a nationally significant infrastructure project. Some projects may be consented under DNO general permitted development rights. Time and effort can be saved by pursuing the correct form of approval.
- Evolving regulatory landscape: "energy storage" is not currently a recognised activity or asset class from a grid charging perspective. Consequently battery projects are classed as "generators" of electricity, which gives rise to some unexpected results: liability for DUoS charges and also potentially the Climate Change Levy. Financial model assumptions should be checked against the legal framework.
With such a vast array of possible permutations, each project should be approached individually and a ground-up approach applied to due diligence.
The European experience of battery projects may yield some useful insights for energy companies wishing to move into the UK energy storage market.
A number of European countries are years ahead of the UK in terms of the take-up of renewables. As the requirement for energy storage necessarily follows the increased uptake in intermittent renewables, the early adopters of renewables now also have a more mature energy storage market.
Germany perhaps provides some of the most useful insights. In some ways Germany's Energiewende is more ambitious than the UK: German policy aims to produce at least 80% of its electricity from renewables by 2050 and reduce greenhouse gas emissions to 1990 levels in the same timescale. In direct contrast to UK policy, this is to be achieved whilst phasing out its nuclear power plants by 2023.
With a significant quantity of electricity produced by wind and solar, Germany has developed a pioneer market to manage the short-term grid balancing requirements as well as longer-term seasonal variations which are inherent in solar in particular.
Geographical constraints mean that there are limited opportunities for the adoption of pumped hydroelectric storage. As such the pioneer market has become dominated by battery storage, with the widespread roll-out of new solar-storage hybrid solutions (for both commercial and residential settings), retrofitting of batteries in existing solar installations (which are subsidised by low-interest loans and investment grants) and innovative "storage as a service" facilities offered by utility companies to the residential market.
In summary, Germany has moved from the pilot / R&D phase to the commercial / monetisation phase in both the commercial and residential sectors. A state of affairs which many in the UK are eager to replicate, and which investments from the likes of Vitol indicate are not all that far off.