What does it take for something to be seen as a mature asset class when it comes to investment? In clean energy, this is an important question because it can make the difference between projects being funded or not. And the answer is not straightforward.
To start with, the term ‘mature asset class’ does not seem to have a hard-and-fast definition.
In oil and gas, for example, mature assets might refer to infrastructures that are reaching the end of their useful life and may be due for decommissioning, which is hardly a reason for investors to get excited.
Like offshore wind, this is a technology that now has significant operating experience in the field
In clean energy, on the other hand, the term tends to refer to technologies that have achieved the scale, track record and returns needed to no longer be seen as a high-risk bet by investors. Solar power and onshore wind, for example, would qualify as mature asset classes.
So, increasingly, might offshore wind, since projects have been making money for over a decade and vast sums are routinely being committed to the industry across a growing number of world markets. But what of battery storage?
Like offshore wind, this is a technology that now has significant operating experience in the field. Utility-scale lithium-ion batteries were already being installed over a decade ago. Since then, the benefits of battery storage have been proven time and again.
In Australia, for example, one of the biggest battery systems in the world has been credited with adding world-leading levels of flexibility to the grid. Battery storage in the country is now 30% cheaper than gas when it comes to firming renewable power, research has shown.
So, performance is a given. What about scale? Here it’s an even more impressive story. According to analyst firm Wood Mackenzie, global energy storage deployments were due to be three times higher in 2021 than they were in 2020, reaching 12 GW and 28 GWh.
Almost all of that will be in the form of lithium-ion batteries. This is still some way off the almost 44 GW of offshore wind that had been installed globally by the end of 2021, but is a clear indication of the growth potential of the industry.
Looking ahead, Wood Mackenzie expects the Asia Pacific energy storage market to grow twentyfold by 2030, to 400 GWh.
“Europe’s storage market is also set to surge,” says the analyst firm, “with Wood Mackenzie expecting cumulative installs to exceed 100 GWh by 2030, led by Germany and Italy.”
The firm also notes that global lithium-ion battery capacity will double in the next two years. Based on growth alone, perhaps it is time to stop considering battery storage as a risky bet. And when you look at the fundamentals of battery storage, the case is even clearer.
One of the biggest investment problems with renewable generation assets such as solar plants and wind farms is that, until recently, they relied on government support, for instance through feed-in tariffs or contracts for difference, to remain profitable.
Yet this support could not always be guaranteed. The Spanish renewables market, for example, remained at an almost complete standstill for close on a decade after the government there decided to retroactively change the rules on renewable energy support.
Spain last year scared investors by once again raising the specter of retroactive cuts, and similar measures have recently been mooted in France and the Czech Republic, to name but a couple of examples.
Renewable energy investors traditionally had no way of avoiding these risks. It is only recently that solar and wind have become so competitive that investors can guarantee a return from merchant plants that sell electricity directly to the grid without a subsidy.
Battery storage systems, on the other hand, have never had subsidies anywhere in the world. From day one, they have been commercially viable without government support. And as time goes by their competitiveness is improving.
A large part of this commercial capability stems from a battery’s ability to do several jobs at once. While wind and solar farms are simply intended to deliver energy, a single battery can do a host of things.
It can provide power whenever needed, but can also absorb excesses in generation, helping to match electricity supply and demand. Plus, it can provide ancillary services such as voltage control and frequency response.
In fact, batteries today can serve at least 10 separate applications. Each of those can make money, and when they are stacked on top of each other there is usually a clear business case for investment.
In the UK, for example, we estimate that a battery system offering wholesale optimization and ancillary services and operating in the Triads and Capacity Market should generate approximately £59 per kilowatt of capacity in base gross revenues per annum.
Adding further applications, such as participation in the National Grid Balancing Mechanism, could deliver an additional £32 per kilowatt, pushing returns to £91 per kilowatt.
For a battery project such as the 100 MW system we are building at Richborough Energy Park in Kent, UK, that equates to around £9 million revenue a year. At a purchase price of £15,000 per MW of installed capacity, the return on investment is significant.
And investors are starting to notice. At Pacific Green, for example, we closed two major battery storage deals last year —and have many more in the pipeline.
It has taken investors a while to get comfortable with battery storage, probably because the business model for storage is quite different to that for other clean energy assets. But the tide is turning.
As Laurent Segalen, clean energy financier at the structured transaction manager Megawatt-X, said last year: “From a financial point of view, li-ion batteries are now a fully bankable technology.”
We completely agree. The case for investing in batteries simply gets stronger by the day, and while it is an asset class that has risks, like any other, they are increasingly well understood by investors and operators alike. Just like any other asset class we would call ‘mature’.
Publish date: 21 January, 2022