Monthly Market Thoughts – BESS: A teenager who thinks they know better?

Battery Energy Storage Systems (BESS) have been the talk of the town for the last 15 months at least.

The sector went through quite a journey in 2023, from being perceived as an emerging technology to a potentially more mainstream one. Regulatory frameworks stabilised throughout Europe, some were even announced in countries the sector had not yet reached.

Most importantly, investor – and lender – appetite grew to a point where the UK market - until recently and to an extent still today the dominant one for the sector - was no longer seen as the only viable option.

At inspiratia's Energy Storage Summit, held in London in October 2023, the audience sounded bullish on the prospects for the sector, talking about the rise of co-location versus standalone, of long duration versus short duration and so on.

Concerns around revenues being under pressure were voiced and addressed, but confidence remained anchored on one main conviction: BESS is the obvious solution to the intermittent nature of renewables and the integration of these variable sources of electricity into a congested grid.

Market concerns

But as usual, the reality on the ground is somewhat different. Fast forward to mid-year 2024, and not everyone in market circles is 100% convinced that getting into BESS early on was a great idea.

Somebody – who is now starting to take positions on BESS deals – talked to me about "an initial gold rush" into the sector. And it is funny how sometimes market comments come in three.

A source who did join that initial rush, told me they sure wish they hadn't. "Returns have not been quite what we had expected," they said. That's two.

And then number three came along, when an adviser just plainly said: "BESS numbers simply don't work".

Scepticism around BESS financing models tends to revolve around their revenue-stacking nature. It starts with arbitrage, then goes through the imbalance market, followed by primary then secondary adjustments, all of which have an impact on capacity payments.

Someone recently pointed out that by nature, BESS is an arbitrage and merchant project with a potentially deadly combination of technology risk and merchant exposure. This makes projects heavily reliant on PPA prices which only get agreed towards the end of the project financing process.

Lenders who have financed BESS projects, and made good returns out of it, point out that strong regulation, offtaker agreements, and capacity payments are all needed to make the model work. And those conditions are only available in some select markets in Europe.

The issue, perhaps, is that many lenders and other market players have approached BESS financing in a too traditional, no technology risk, contracted revenues focused, in other words, too infrastructure-like way.

"By this definition, BESS is not infrastructure and should not be financed as such," a source said.

Nevertheless, a number of transactions in the UK and elsewhere have been financed (are financed) fully merchant without full historical evidence of how the system would work, or how pricing would react when this new technology and new way of trading is plugged into the grid.  Some banks and investors got their fingers burnt by playing with the plug.

"BESS is a bit like a young teenager who thinks they know better," one contact said.

Market overview

There is no denying that BESS has an essential role to play in balancing the Grid and supporting renewable energy in the efforts to meet net-zero targets.

To give a sense of the activity in this sector, inspiratia's Deal Database tracked 43 financial closes for a total worth of over $4 billion investment in the sector across Europe from January 2023 to date. The UK made up the overwhelming majority of that, with 33 projects and a total of $2.3 billion in value. Italy comes second, with four projects.

That picture seems broadly reflected in inspiratia's recent coverage, where UK deals make up the bulk of the headlines, other countries are registering activity. Just last week, Octopus Energy Group and Gresham House Energy Storage Fund announced a 900MWh battery-leasing deal for the UK. As part of it, Gresham House leased just over 50% of its battery storage portfolio - which includes 14 large-scale batteries - to Octopus Energy Group's Kraken platform.

Other recent UK deals saw Atlantic Green signing an operations and management contract with Ameresco for its 300MW BESS in the UK; NatPower UK signing an agreement to build a 1GW BESS; and Balance Power targeting FID on a 180MW BESS portfolio by the end of the year [2024].

And things are moving in Italy as WElink Group recently secured a €20 million borrowing base facility for Kommunalkredit Austria to expand its pipeline of BESS in Italy; Zhero Europe, backed by a consortium led by TotalEnergies, is developing a pipeline in the country; and Bluefield Partners is targeting FID on its first Italian BESS project following the results of Italy's upcoming MASCE auctions.

Energy Storage Summit 2024

Challenges, opportunities, and emerging markets for the energy storage market in Europe will be thoroughly discussed on 25 June at inspiratia's Energy Storage Summit 2024.

Industry experts from across the spectrum, including investors, developers, lenders, and advisers, will cover a broad range of topics, including financing, duration, co-location, and regulation.

There is still time to attend, if interested, do not hesitate to reach out. Perhaps the question will be answered there: Is BESS a teenager who thinks they know best?