Five tips for an effective energy storage business case

• As individual markets evolve, energy storage revenue streams become more difficult to predict
• Meanwhile, regulatory uncertainty and grid connection challenges can spook potential investors
• Methods for assessing the value of energy storage must be up-to-date, while those responsible for assets must bolster energy trading and risk management capabilities

Building a business case for energy storage projects can be challenging. A key reason for this is that revenue streams for such projects can be unpredictable. This is partly due to the fact that energy storage markets have evolved differently in different markets – for example, in Australia, investor interest in battery energy storage system (BESS) projects was first triggered in response to power outages. However, as the market has changed over time, while grid stability is still an important consideration, in order to maximise potential revenues Australian investors are now more focussed on shifting energy produced by solar farms during the day to the evening peak, as well as developing new commercial opportunities such as power purchase agreements (PPAs) between generators and end-users, such as mines and data centres. Data centres, in particular, represent a major opportunity for energy storage developers around the world. There have been recent examples of energy storage providers in the US signing deals with data centre companies with the aim of providing batteries for onsite energy storage at data-centre sites. 

Regulatory uncertainty can scupper business case

Another key concern that can jeopardise energy storage business cases is regulatory uncertainty. A prime example of such uncertainty concerns the Inflation Reduction Act (IRA) in the US. This Act created tax incentives for storage projects in addition to introducing tax credits aimed at boosting battery manufacturing capacity in the US. However, despite the legislation’s success in boosting job creation in energy storage-related industries, the election of new US president Donald Trump has cast doubt on the future of the IRA, with Trump pausing the disbursement of grants and loans under Act shortly after entering office.

Grid connection challenges can deter investors

Meanwhile, grid connection challenges for energy storage projects can also make it difficult to build a strong business case for investment. Data has shown that more than 1GW of energy storage capacity is held up in US grid interconnection queues and the volume of projects getting stalled in this way is growing year-on-year. This is another element of uncertainty that makes investors nervous about backing storage projects. Add in issues such as perceived fire risk associated with battery storage projects and securing investment can prove to be a major headache.

However, there are a number of key principles that can be adopted when developing business plans for energy storage projects that can help to maximise the chances of successfully securing financial backing for schemes. Here are five tips for developing an investable business case for energy storage:

1. Ensure the methods used to assess the value of energy storage are up-to-date

Given the large amount of emerging technologies in the energy storage sector, there are often a lack of projects to act as a reference for estimating potential revenues. In addition, given the flexible nature of energy storage assets, sophisticated modelling is required to factor the volatility inherent in the provision of ancillary services, arbitration and frequency control, for example. McKinsey has argued that due to this uncertainty, investors often underestimate the value of energy storage in business cases.

2. Ensure scenarios for power market evolution is factored in to business plans

How will markets evolve in future? It’s important to calculate the potential pace of renewables and storage deployment in potential markets. Factor in the possible lengthening of interconnection queues. Also, consider whether any upcoming change of government in particular markets will impact on the regulatory framework for storage. Is the deployment of different types of renewable energy generation capacity expected to speed up or slow down in future?

3. Bolster your trading and risk management capabilities

Effective energy trading will become an increasingly important factor when seeking to maximise revenues from energy storage projects. But which type of trading will work best? Consider whether day-ahead trading or intraday trading is producing the most successful results. Working with a battery storage optimisation company could improve trading results significantly. Meanwhile, in such an unpredictable environment, working with, or employing, first-rate risk managers will be crucial.

4. Analyse the most effective energy dispatch allocation across markets

Batteries need to be the ‘right size’ in terms of both energy capacity and power capacity for charging and discharging. As McKinsey has highlighted, a storage asset “might find attractive charging opportunities in ancillary services while discharging into wholesale”. In addition, it is possibly that capacity might also be ‘overbooked’, that is, committed across multiple market products that exceed 100 percent capacity. It’s vital that these different factor are kept under permanent review in order to ensure profits are maximised at all times.

 5. Tailor your approach to the specific market

Revenue streams in individual markets will be impacted by a range of factors, including the local power market dynamics, the regulatory framework covering storage as well as incentive programmes for the sector, applicable carbon prices, as well as the outlook for future renewables and storage deployment, for example the risk of ‘flexibility overbuild’. An overbuild of energy storage in relation to renewables deployment will impact on profit margins for storage assets.