In the medium term, only the best traders will survive in the battery storage market, suggests Kiwi Power head energy merchant Aaron Lally.
Battery storage has pushed itself to the forefront of many investors’ and developers’ plans in the past couple of years given the large fall in development costs. Many potential owners are still struggling to make the business case add up, however.
How can this be when we see revenue streams (without stacking) yielding £70,000-100,000 per MW per year over the past 12-18 months?
The issues facing merchant trading of battery storage revolve around the following points: potential investors being shown incorrect revenue forecasts; lack of trading and revenue generation expertise in the sector; and the lack of trading infrastructure for battery storage.
Incorrect revenue forecasts
In too many cases, battery storage owners are being lied to. Plain and simple. They are being shown ‘perfect world’ revenue forecasts for trading with salespeople convincing them they are able to achieve these numbers. This happened in 2018/19 with FFR price forecasts showing prices 2020 onwards at £15+ MW/h and has happened more recently during 2019/20 with trading forecasts of £60,000+ per MW/h per year. These numbers are unachievable in the current market.
Asset owners are too often pushed into opaque revenue streams with no visibility of the opportunity cost of entering these revenue streams and what could be achieved using other strategies. They are often signed to long-term management contracts and unable to switch out to other more lucrative revenue streams because their trader does not cover that market/service.
Only one company currently offers full access to all revenue streams in the UK. This is abysmal for an industry which has been talking about merchant trading for several years. Battery storage traders have to hold themselves to account.
How can this be rectified? Speak to experienced traders, not former consultants, for real world trading numbers. Get the trader to register your asset as a BMU so you can see when the asset is generating and at what price. Lastly, and most importantly, stress test these revenue numbers yourself. Are assets in the market currently achieving these numbers? If not how can your trader? Do not settle for AI algorithms and machine learning as an uplift when presented with theoretical revenues.
Look under the hood at what these traders are doing. If they are achieving what they claim, they will happily show you their trading software and real-world examples of revenue generation.
Lack of trading and revenue generation experience
Trading and revenue generation is reliant on market experience: the companies that extract the most revenue from assets are the best proprietary traders. This is shown in every commodity storage market: Glencore, Trafigura and Vitol in oil markets; Louis Dreyfus, Bunge and Cargill in Agriculture; the list goes on.
Why is battery storage and electricity any different? Market expertise has to become the focus of battery storage traders’ efforts to succeed. Asset owners have to select traders with market expertise to see returns that justify the large upfront investment today.
Lack of trading infrastructure
Trading infrastructure in the battery storage space is limited and normally developed in-house by battery trading companies. This gives asset owners limited visibility over what their asset is doing and how revenue is being generated as well as any costs applied to trading.
I believe in the medium term we will see many start-ups in the battery storage trading space specialise and start selling their software to asset owners instead of providing route to market services. Too many are trying to leverage their expertise in consultancy or development and apply it to trading. Companies will return their focus to different parts of the value chain: development consultancy, degradation systems, risk management systems, dispatch systems etc.
Protecting yourself as an asset owner
How can you work out how your asset is being managed today if you cannot see it as a BMU and there is no appropriate software?
If you only see a cashflow at the end of each month how do you work out if the trader is applying hidden charges or worse still not dispatching your asset when they report they are and incurring large penalties?
How do you know the trader is even trading the asset themselves and not handing over full trading rights to a third party and paying a fee? (This sounds ridiculous but this does currently happen with some of the largest battery storage traders.)
The answer is you do not unless your asset is registered as a BMU and/or you have software that can oversee what your trader is doing.
In summary: to protect yourself as an asset owner stress test all revenue numbers you are given and look to real world examples. Select the trader with the greatest amount of trading expertise and get them to register your asset as a BMU so you can monitor dispatching and prices achieved. Make sure they are actually trading themselves.
Man + machine + money
Looking to the future, the market is moving forward with longer duration assets and standardisation of technology. The battery storage market will very quickly start to look like other commodity storage markets, particularly the gas storage market.
Few in the battery space have knowledge of this area outside of the large utilities, which will be operating their own battery assets.
Independent storage traders will be the route to market for third party-owned assets unless asset owners want to sit in line behind the gigawatts that will be owned and operated by the large utilities. How can the independents compete with the large incumbents?
Independents will need more working capital to trade and less AI trading algorithms as trading decisions will move from a minute-to-minute basis to a daily decision-making process and then a re-optimisation in the futures market. The capital to trade in the futures and options markets is many multiples that required to participate in the intraday market for example and requires a very different skill set to that being touted by the battery industry as the requirement for battery storage assets.
Many start-ups will not be able to access these markets due to this high capital requirement.
Consultancy will not beat trading expertise in this space. The solution for asset owners has to revolve around experienced trading personnel operating with fully automated trading tools and price prediction algorithms.
Many battery storage traders try to stress the differences of the assets versus traditional generation to impress upon investors their expertise.
The truth is if you are the best at predicting price (whether trading markets or ancillary services) you will extract the most revenue out of the battery storage asset. Power station owners have been trying to do this since the liberalisation of electricity markets decades ago. Perhaps battery storage assets are not that different after all.