Expert Panel: Maximising BESS revenues

Tamarindo’s Energy Storage Report convenes expert panel to analyse the changing outlook for different BESS revenue streams and its impact on investors


July 4, 2024

  • Tamarindo’s Energy Storage Report convenes expert panel to analyse changing outlook for BESS revenue streams
  • Energy storage investors ‘more confident about merchant risk’
  • Geographic diversification ‘key to reducing portfolio risk’
  • But Expanding into European markets can be challenging

Battery storage in the power sector was the fastest growing commercially available energy technology in 2023, with deployment more than doubling year-on-year, according to the International Energy Agency. There was particularly strong growth in utility-scale battery projects, behind-the-meter batteries, mini-grids and solar home systems for electricity access, with the result that a total of 42 GW of battery storage capacity was added globally.

As the IEA has highlighted, batteries are key to the transition away from fossil fuels and the acceleration of the pace of change to a more energy efficient society through electrification and the greater use of renewables. To triple global renewable energy capacity by 2030 while maintaining electricity security, energy storage deployment needs to increase six-times, the IEA has said.

BESS revenue landscape changing rapidly

However, such a rapid increase in energy storage deployment will take copious amounts of investment. And while investors are generally becoming more comfortable with merchant revenue risk, the battery energy storage system (BESS) revenue landscape is rapidly changing. For example, in late 2023 and early 2024, the GB ancillary services market became saturated and prices plummeted – meaning investors are having to factor in new risks that they may be unfamiliar with, such as those associated with the Balancing Mechanism in the UK, intraday trading or perhaps NIV [net imbalance volume] chasing.

Tamarindo’s Energy Storage Report, in partnership with Eversheds Sutherland, convened a panel of energy storage industry experts to discuss the outlook for different BESS revenue streams and the biggest challenges faced when seeking to maximise BESS revenues. The panel also explored how investors are responding to the changing market dynamics.

Here we highlight some of the panel’s main conclusions.

Investors ‘more confident with merchant risk’

With regard to BESS revenue streams in the UK, it was always clear that there would be a move towards merchant revenues and away from ancillary services, said Paul Soskin, head of commercial operations at Masdar Arlington Energy. “I think the case for two-hours duration is increasingly proven, maybe two plus hours,” he said. “With regard to educating investors, it’s a case of getting them familiar with the merchant risks, you’re going to get some bad years and some good years – that is the risk appetite BESS investors should have.” Soskin added: “I think it’s all very exciting and even though in the past few months we’ve not seen optimal revenues, that’s not really the mindset the investor should have as it needs to be reviewed over a longer timeframe.”

Investors are generally becoming more confident about merchant risk, according to Soskin. He said: “2021 and 2022 witnessed unprecedented volatility in the power markets due to the price of gas. It’s also likely that future years will witness further volatility owing to higher renewable penetration. This, combined with unforeseen events or extreme demand during cold winters, makes it appealing for flexible assets like BESS.” Ed Porter, customer success director at Modo Energy, said premiums from ancillary services in the UK have been exhausted and that new services, such as balancing reserve, have also been “provided for at current procurement levels”. He added: “That leads to wholesale trading, and that’s where asset operators are going, and they’re asking: ‘how can I get the most money out of these markets?’ It’s interesting because it brings in a whole new set of skills for operators.”

‘Nerve-wracking’ time for shorter-duration players?

Porter said that, a few years ago, asset operators may have needed to be experts in frequency response, for example, but now they need to be experts in the balancing mechanism, intraday trading and perhaps NIV [net imbalance volume] chasing. However, the outlook is somewhat uncertain. Eversheds Sutherland partner Ben Brown said that the consultation on the Review of Electricity Markets Arrangements (REMA) could potentially create or stifle opportunities for BESS revenues, as could the development of subsidy-backed long-duration energy storage. “For shorter duration players, that could be quite nerve-wracking, as long-duration storage may be able to play around quite happily in the two-hour market so it will be interesting to see how that affects the [revenue] stack,” Brown says.

Geographic diversification key to reducing portfolio risk

Arenko CEO Rupert Newland said that there are several layers of risk that investors need to consider when investing in storage. “You’re going to have concentrated revenues that are totally linked to supply and demand for each of the different services – I think on the ancillary services side, they are now over provided for and the truth is you really need to have the balancing mechanism operating properly in order to have both the depth of market and also for the inherent volatility in the system to be expressed properly, both in the balancing mechanism and the wholesale markets,” Newland said. He added that the ESO [GB National Grid Electricity System Operator] “currently manages batteries on a separate desk, so in effect batteries are balancing the bits which the main desk cannot sort out first and that therefore puts batteries at a disadvantage as, under this structure, they can therefore only ever operate on the margins rather than taking on the central balancing of which they are capable.” Newland continued: “Solving this would add depth to the markets available to batteries but also save money for the end consumer who ultimately pick up the tab”.

Tom Tindall, senior vice-president, markets & commercial at Brookfield Renewable, said the value is where “liquidity is lowest and the visibility on revenue is lowest”. He added: “It’s very easy for an infrastructure investor to get their head around capacity market auctions that give visibility on revenue four years in advance. The day ahead shape and spread there is also something you can get your head around, but on its own is not enough. So then it’s about understanding intraday market revenues, but you’re going a little bit on trust, perhaps a digital twin or simulation that’s been put together.” However, Tindall said there are reasons for optimism: “Battery costs are declining – there is a required revenue and that should be getting lower and lower.”

Bankability question ‘bigger than ever’

Hannah Staab, director of development projects at Copenhagen Infrastructure Service Company, said the bankability question is bigger than ever before given the “changing revenue stack”. She added that project funders require a sizeable proportion of contracted revenue, but with the revenue stack “going more merchant, that is always more challenging”. Staab said that in the last 12 months, optimisers have, to a significant extent, adjusted their offerings, and tolling, or hybrid floor plus tolling agreements are starting to emerge. She added that such agreements are being considered, but it can be “hard to make it work”. Staab continued: “We still believe in the macro case for storage, but to convince investors, you ultimately have to put some numbers in a model and they tend to want you to use the most conservative numbers and we’re seeing the forecasts diverge quite significantly, so that could be a challenge.”

Australian cap & floor mechanism will open up alternative funding sources

Dane Wilkins, EMEA managing director at Pacific Green, said that some governments around the world are coming up with interesting ideas, such as a cap and floor mechanism in Australia, which – if developers are considering using third party project finance to build assets – provides “a much greater playing field for people to secure alternative sources of funding”. He added: “We’re expecting clarification on the details of the innovative MACSE revenue support mechanism in Italy in the autumn which will facilitate investment to accelerate the build out of BESS.”

Expanding into European markets can be challenging

Caroline Clapham, partner at Eversheds, said many market participants are now looking to expand from the UK into international markets, but added there has been a bit of a disconnect in the sense that UK investors have got comfortable with merchant risk and therefore believe they can go into European markets that have limited contractual revenue streams. However, one of the issues is that the optimisers are not yet present in those markets in a significant way. She added: “Companies with in-house trading capabilities seem to be able to make the early investments into European projects work, but it’s a kind of chicken and egg problem for other investors who rely on third party optimisers who require sufficient demand to commit to various jurisdictions. This appears to be causing a bit of a slowdown in terms of more investors expanding to include European projects, meaning each of those countries might need to go on the journey the UK has gone on in the last six years, building out an extensive network of third-party service providers supporting the industry.” Clapham said government support mechanisms to include additional contracted revenue streams in European countries could help in this respect.

This is an abridged version of a special report, ‘Maximising BESS Revenues”, which offers insights into the changing outlook for different BESS revenue streams and its impact on investors from a panel of experts convened by Tamarindo’s Energy Storage Report, in partnership with Eversheds Sutherland. To download your free copy of the full report, click here.

Pictured (clockwise from top left): Hannah Staab (Copenhagen Infrastructure Service); Paul Soskin (Masdar Arlington Energy); Tom Tindall (Brookfield Renewable); Sumit Joshi (Baringa); Steven Coppack (Timera Energy); Ben Brown, (Eversheds Sutherland); Rupert Newland (Arenko); Ed Porter (Modo Energy); Dane Wilkins (Pacific Green); Caroline Clapham (Eversheds Sutherland)

The panel discussion summarised in the report was the third in a series of debates organised by Tamarindo’s Energy Storage Report in partnership with Eversheds Sutherland. For information about upcoming Energy Storage Report panel discussions and to enquire about participating, email Energy Storage Report editor Ben Cook at