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Power demand and supply: a move to battery storage?

  • United Kingdom
  • Real estate

09-04-2018

On 1 March 2018, the wholesale price of electricity peaked at £990/MWh.

The current "usual" wholesale electricity price is around £40-45/MWh. Such spikes and lesser gaps between the supply and demand at any given time mean the national peak power market is worth an estimated £800 million per year.

Clearly demand and supply will fluctuate, but the figures above keenly illustrate a major issue the electricity industry is currently facing: how to iron out or at least minimise such price spikes. More broadly, how to ensure continuity of electricity supply during the current decline of domestic production and the likely future increased demand (to cope with a growing population and he move towards technologies such as electric cars).

Environmental pressures have led to the closure of the vast majority of coal fired power stations in recent years, and an increase of energy production via renewables and gas fired power stations has not made up for the shortfall. Interestingly, energy consumption "from the grid" has actually dropped significantly in recent times given the decentralisation of generation (factors such as many homes now benefitting from their own solar panels). Regardless, there is a need for a significant response as the UK moves ever closer to a potential power shortage.

Clearly there are times when the supply (or potential supply) of electricity to the grid vastly outstrips demand and given this, we are seeing the first tentative steps into industrial-scale battery storage. This will enable the harnessing of surplus power, ready for use in times of peak demand. We are seeing an increasing number of options for land rights being taken with the intended goal of installing significant levels of battery storage for use when demand requires.

Initial set-up costs are substantial. Planning applications and grid connections can each cost many tens of thousands of pounds. The technology itself is not cheap and much of it only comes with an expected 10-15 year life span. Therefore, future refurbishment or even replacement also needs considering, particularly on the basis the operators are predominantly requesting options for 20-30 year leases.

At time of writing there were 24 projects with a combined 19.7MW of operational battery storage (6MW of which at a single project in Leighton Buzzard). There are proposals for many more, however, with over 150 in the planning pipeline. Given the set-up costs and need to take advantage of economies of scale, the scale of these future projects are significantly larger: those 150 proposals are for over 2GW of combined battery storage; many of the projects may never proceed but those that do will clearly be much larger than those first few.

Ongoing sustainability is also by no means guaranteed. Most peak response contracts available are only a few years at present, and this makes it hard to have any certainty about income streams. Given these issues, and a need to show a viable and profitable business model to attract investors, many of these battery site proposals also include elements of localised generation as well (historically of diesel but increasingly now of mini gas turbines). This enables the provider to "top up" the batteries when they are not being used and potentially also sell power directly to the grid.

At present, there are barriers in the way. There are the costs and usual issues affecting all energy installations, such as public distrust and resistance in particular to having such installations in their "back yard". Such resistance is even greater where there is an element of generation proposed alongside the battery storage given the inherent associated noise and pollution. In addition the battery sites do not enjoy anything like the kind of incentives or protections which have historically been offered to other new energy installations. Without feed-in tariffs, subsidies and minimum pricing for example, it is hard to get a project funded in the first place and this is stunting the potential growth of this new industry.

So for battery projects to be viable, technology needs to advance enough to see the price drop significantly (or some other subsidy come along to assist site set-up costs). There will be an uncomfortable mix of "clean" energy (the storage element assisting to reduce reliance on fossil fuels and other "peak response" energy) and "dirty" energy (the localised generators on site to keep them topped up and potentially also sell some additional energy to make ends meet).

Legally and financially, documentation is taking notes from clean energy: rents based on permitted/generating capacity in addition to rents based on land area. Bankability remains paramount given the necessity for private financing due to the factors noted above. Landowners, needing some certainty given the special purpose vehicle nature of many of the companies involved, are requiring substantial rent deposits and/or decommissioning bonds.

Some documentation is going further in favour of the landowner, requiring that there are rights to re-negotiate in future if the technology becomes substantially more efficient. One of the most pivotal clauses will be the permitted use itself: the project will want maximum flexibility to enable them to also generate, whereas a landowner may well resist.

Doubtless other nuances will emerge in time and we will see more standardised documentation (as has happened in the clean energy market of the past decade or so), but at present the documentation is open to change. As indeed is the commercial basis of such projects: how to make them fundable or if there may be some other, more viable way to deal with peak power demand in the future. Only time will tell if this is indeed the future, or an excellent idea which will never quite get off the ground.

 

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