CMS Breakfast Seminar: Co-location of storage and renewable generation

Introduction

The intermittent generation profile of wind and solar farms is one of the main challenges of the energy transition. How do you store green electricity when the sun is shining, and the wind is blowing so it can be used later in the evening or at night?

Stand-alone battery energy storage systems (BESS) try to address this by storing electricity when prices are low (i.e. the sun shines and the wind blows) and selling it later.

Another approach is locating batteries at solar or wind farms and optimising the amount of electricity imported or exported into the grid.

CMS London organised a seminar with industry experts to discuss the challenges and opportunities for the business model of co-located projects.

Panelists

The panel was made up of:

• Charlie Websper, Senior Director, DIF Capital Partners
• Ralph Johnson, Head of UK Business Development, Habitat Energy
• Hannah Staab, Head of Strategy, Natural Power
• Rosalind Smith-Maxwell, Director, Quinbrook Infrastructure Partners

Insights they shared

WHY CO-LOCATION

Co-locating a battery and a solar PV farm has some direct benefits:

• Both projects can share grid connection costs, and having a battery on-site reduces the imbalance charges for the solar generator.
• An on-site BESS can store excess production and help deal with active network management problems and grid constraints.
• The load factor for UK solar PV is only about 10% to 14%, leaving enough room for a battery.

PROJECT SETUP

Almost all co-located projects in the UK couple the BESS with the solar farm on the AC (alternating current) side of the inverters, requiring one set of inverters for the solar farm and a second set for the battery. This reduces points of failure (i.e. one broken inverter doesn’t take down your entire project) and allows the installation of separate electricity meters.

Coupling BESS on the DC (direct current) side is trickier. You save costs, as you only need half the number of inverters, though this is partially negated by the fact that DC/DC inverters are more expensive than their DC/AC counterparts.

Another factor to consider is that it is harder for DC-coupled batteries to participate in the ancillary services market.

All panellists agreed that DC-coupled batteries only make sense if you significantly oversize the PV farm and use the battery to avoid clipping losses in the current market environment.

As for the contractual setup, having one SPV owning the battery and the solar PV generator is the preferred option. This removes the need for grid-sharing agreements, and the solar cash flow can be used to support the operation of the battery.

REVENUE MODEL

Combining a solar generator with a battery gives you a firmer generation profile, which means you can achieve prices above the solar capture prices.

The priority use of the export connection is given to the solar PV generator. This impacts the arbitrage trading of the battery only minimally due to the low load factor of solar PV.

However, optimising a co-located battery is more labour-intensive than a stand-alone BESS project, and you can only achieve 60% of the FFR revenue and 70% of the capacity market payments.

Asset owners, therefore, often use one optimiser to manage the solar farm and the battery, allowing the creation of revenue stacks:

• Solar: submit part of the capacity in CfD auctions while operating the rest on a merchant basis
• BESS: participate in the ancillary services market and pursue price arbitrage through physical or financial trading

Over the next few years, there will be significant changes to the revenue model.

• Ancillary markets are becoming saturated. Arbitrage trading is becoming more and more critical for battery projects.
• The current indication is that the GB power market might be split into different price zones as part of the REMA process.

FINANCING

Lenders are still uncomfortable taking significant merchant risk exposure and prefer fixed-price contracts. For example, DIF closed a financing for a co-located project earlier this year and had to sign up to a 10-year floor price contract for the battery. This leaves significant arbitrage upside potential on the table.

Another aspect lenders worry about is the interface risk between the ICP, the solar EPC contractor and the battery OEM.

RETROFITTING

As grid connection dates for new projects tend to be several years in the future, retrofitting older PV plants offers the opportunity to deploy capital in the shorter term if you can get import capacity. But it is only happening slowly, despite the first project in the UK being completed in 2017.

One panellist highlighted that the battery needs a minimum size of 20MW to make this economically attractive.

Another panellist mentioned that sellers are asking buyers to value the potential for a battery retrofit in recent sales processes for operating solar PV plants.

DIFFERENCES WITH US MARKETS

Due to its size and market structure, the US market is seen as more advanced than the UK market.

The West Coast market’s extreme duck curve incentivises longer duration storage (4 hours) for load shifting. In Nevada, for example, evening prices from 18:00 to 21:00 hours are six times higher than power prices at noon.

And US corporate off-takers increasingly demand renewable energy 24/7, incentivising co-location to shift part of the daytime production into evening hours.

CHALLENGES FOR CO-LOCATED PROJECTS

The seminar concluded with the panellists discussing what challenges they see for co-located projects in the UK.

• Lenders need to get more comfortable with merchant risk.
• Investors need clarity on the potential shift to zonal pricing and other topics in the REMA process.
• Larger price differences between daytime and peak-demand times would encourage the installation of longer-duration storage, as seen in the US markets.
• Increasing costs and falling power prices have reduced the profit margins of batteries.
• BESS have a different risk profile than a solar farm, which can lead to higher costs (e.g. a higher fire risk, and therefore insurance is more expensive).

My thoughts

Co-locating batteries and solar farms allows for a more efficient use of the grid connection and is the next stepping stone towards an electricity network that offers renewable electricity 24/7.

Retrofitting operational solar farms with batteries can be a stop-gap measure to help us reach the net zero targets. But this only works if the existing grid connection allows for large enough electricity import.

When comparing the UK and US markets, you notice that intraday price differences here are not significant enough to make load shifting economical.