UK battery storage: revenues, financing and LDES | Panel

And I'm going to take this opportunity to pass over to my colleague, Fintan Deveni, who's going to chair the panel discussion now. So, over to you, Fintan. Thank you very much, Richard. Yes, I'd like to bring the other two members of the panel, who are Mark and Victor. Yeah, come up, please. So, you've got me for the panel discussion, who, the love interest from the previous slides, that's me, you'll be dealing with. You couldn't have written that better. You really couldn't. So, hello, all three. Thank you for two wonderful presentations, Jacopo and Mark. I'd like to start, I think, with something that Mark alluded to in his presentation, which is this idea of the top-bottom spreads, which can potentially have quite a lot of impact on the financing part of what Jacopo was talking about. Victor, I'll start with you, if I may, just to explain, okay, what is this top-bottom spread? What is the intention behind it? And why is it sort of appearing now? Yeah, so it's part of this basically general trend around the maturity of de-risking in GB. So, if you think back a couple of years to 2024, we've just seen all three of the listed funds, Gresham, Harmony and Foresight, getting basically destroyed after... Sorry, that's probably strong. But they lost about half of their share price at the end of 2023 after a year of very bad performance. So, that basically opened the door to the first toll being signed in GB. And since then, we've seen this maturing of the space and the top-bottom spread. It's a measure of volatility, typically identified at the day ahead stage, and it's normally top-bottom X. So, if it's top-bottom two, it's the two highest price hours minus the two lowest. And that spread is being used as essentially a tool to hedge an asset financially. So, that's what that is. And so, Jacopo, is this really being used now in real contracts? To what extent does this influence, you know, the flow that you were talking about? Having one single standardized index is being run by Epex, who are pretty reputable. Are real contracts being signed as a result of this now? I mean, I would say the interesting part is that, thanks to that, we can benchmark those floors and those tolls, right? Before, tolls and floors were some sort of private conversations that didn't really happen publicly between the optimizer, the owners, and so on, or in private rooms. While now that we have this TBX, right, we can finally say, okay, based on this floor, is it fair or not? Because we can compare it with the index, right? And at the same time, I think the fact that we can also hedge adds an additional layer from an investor perspective, which is quite important. A question for you, Mark, is, so, in that chart that you flashed up for a moment. Sorry, yes? Well, I was just going to say, the top-bottom spread is great for me as an optimizer, route-to-market provider, because if I've given somebody a floor, I've got to find some way of hedging that, because I've taken a view on a five- to ten-year contract, and it gives, once I've given the floor, hopefully the finance is quite happy, because he can see it. But I've got to find some way of going to my stakeholders and saying, I've de-risked this by finding somebody in the market to give us a top-bottom floor to take some of the sting out of it. And it's quite interesting, actually, the chart you showed almost mirrored the top -bottom spreads that I put up on my chart. So they're a good one. We did one accidentally. Well, not accidentally. We did one before it was a thing, when we just did block 2A against 5B. It last Q4 just to try it out. And so it was a good learning experience. So my question about the top-bottom spread for you, Mark, is, so we saw in Jacopo's slides a breakdown in September of where the money is coming from. And a big portion of it came from wholesale. But in some of your slides, some of your modal slides perhaps, you might have seen in different months the breakdown of where that revenue is coming from changes. In September, yes, a lot of it is coming from trading the wholesale spread. But in other months, a lot of it is coming from balancing, right? And so if you're valuing your asset against the top-bottom spread, how much do you think of your asset's cash flow is represented by that spread, do you think? I think those graphs are fairly specious anyway because of their one-dimensional aspect that they just sort of show the net position rather. It would be really interesting if you saw them broken down into sales and buys and so on. And that might be more compelling. But they're a really important part of the revenue. And getting that right is quite important. I think because people are selling top -bottom spreads at the day-ahead stage, and you and I talked about this actually, I think I really looked at how people must be hedging them. And the only way I figured it is that actually it's because there's more volatility on the within day, on the actual day, than in the day ahead. So people who sell them are hoping to get out at a profit on the day. So logically, as an optimizer, I probably should be keeping my powder dry till on the day and securing my own top-bottom spread, if you like. And then I don't de-risk my position if I do that. Indeed. One component of this that I thought about is you're saying, OK, there's a lot of money to be made in balancing. Indeed, in some months you can make quite a lot of money through balancing. But one of the reasons you might not favour balancing so much rather than going intraday is that the balancing mechanism is not a market, right? It is at the discretion of the system operator. So you don't necessarily know if you're going to get taken, skip rates, da-da-da. But one thing that was brought up there was something that's entered into the power market lexicon, which is GCO166. We never got a better name for it, so we're still using its barbarian name of GCO166. And I think part of the intention of that is to make it a little bit more transparent what's going on in the balancing market and reduce that unpredictability. Do you think the MDOMDB data sets as part of GCO166, do you think those data sets are going to change the way in which people see the balancing mechanism from a battery trader point of view? I think, honestly, I think it's going to be the proof the pudding's going to be in the eating. I mean, we're told it will. If you go along to NISO events, they'll swear blind it's going to change the world. It will. We've just got to wait and see. Indeed, indeed. So, Yakupo, we were talking a little bit in the break, and you've got some more interesting kind of perspectives, I think, shall we say, on this new data set. You were talking about how the more data that there is available, so say, you mentioned this even in your meter, part of your thing is taking hard numbers and hard data, and that's what can really tell a story, and that's what can really get you financed. Will these new data sets be made available, be made compulsory? Will that help people when they're financing their assets? I think it's interesting the moment you can basically see, you know, how much a battery still has in terms of energy, if you're talking about the MDO, MDB. Yes, yes. You can basically see from a control room perspective is for sure very interesting, and then from an investor perspective, potentially these two, because you have, it adds that transparency layer that I was talking about also in my presentation. You can basically see how much energy a battery has left. For example, if we're talking about summer and we're trying to push, you know, the solar energy from 5pm towards 8pm and stuff like that, we can basically see, okay, this battery that has pushed this energy forward, like that it still has some capacity left, right, some energy left in it. And from an investor perspective, it adds more data, both from an historical perspective, you know, when you're going backwards and seeing what happened, you know, last summer and so on. And also, like, you can have better forecasts too, right, which is quite important from an investor perspective. And so on this point, Victor, I mean, people like you and me are big data people, I think it's fair to say. We would like all the data in the world to be available so we can sit and analyze it all day. Do you think something like GC0166, this new data being made available, like, kind of, it's data that's kind of closer to the metal, if you will. Like, it's quite close to what's really going on in the physical reality of battery trading systems. Is more data like this good for the system as a whole? Is it good for individual battery traders? Is it better for the system operator and battery optimizers be damned? Or who really benefits in this the most, do we think? Yeah, I think that's a pretty good question. Who's the winner and loser of this? You can imagine some batteries actually would prefer to operate in the dark, if you remember batteries used to nib chase and things like that. I think actually the graph that was in Noemi's presentation, there was a point at the end that said batteries save the day until they didn't. They ran out of charge towards the end, right? And that's the whole motivating thesis for GC0166. The mandate for the system operator every day is they need to reduce the cost of balancing through the whole day, right? So, often what that means is they're saving assets for the evening peak, where the cost of balancing is particularly high. But they haven't had the means to actually do that very transparently. When a battery puts in a bid or an offer, say it's a two-hour battery, so it's got four half-hours in it, the system operator doesn't actually know if that's the first or the fourth half-hour until GC0166, which came live on the fifth of this month. So, I think, in that sense, having that transparency is good for the system operator. But if we kind of go a bit further back in the story of, you know, why people talk about GC0166 so much, it's all because batteries were being skipped. And from an asset owner's perspective, that was negative towards the cash flow of the asset. So, with greater transparency, you can imagine a day in the year where there's actually a reason for the system operator to resist accepting a battery to the evening peak. They might be even more incentivized to do it now that they have this transparent data, and then they might actually choose to skip the battery more at the start of the day. So, kind of, if we link back to the initial motivation, I wonder, you know, how much does it actually benefit a battery to have that exposure to their state of charge, when in the past maybe they could just do what they wanted with the system operator understanding? Yeah. Mark, would you rather stay in the dark? If you were, when you're optimizing an asset, would you rather keep your cards close to your chest, sort of, do you think the greater transparency and the predictability of the balancing mechanism would offset the fact that you now have to show your hand a little bit? I think the introduction of balancing and quick reserve gave batteries a bit more of an incentive to take part, because they knew they weren't getting great treatment in the balancing mechanism. But quick reserve and balancing reserve really sort of just have just made it a little more attractive, and you get paid that as a capacity payment whether you're, whether you get dispatched or not. So, that does help. But I'm all for more transparency about it, for sure. And I'm really looking forward to see what stats come out with GC166. It'll be quite interesting to see, actually. I don't know if it's within your ability as analysts to see, because we know there's been a gradual introduction of GC166 across the battery fleet. So, it'll be interesting to see whether the ones who are already in it are getting dispatched more than the ones who haven't quite made the transition, which I think is about now, actually, the last chunk. The data is out there. It can be analyzed. We just haven't quite done it yet. I don't know if you have, but not yet. Not off the top of my head. Oh, yes. Oh, one of the big points I think about in the interest of time here. Yes. One of the big points that I think was a little bit, we touched upon a bit in Jacopo's presentation. There's quite a radical change coming to the market in terms of Eldes, right? I mean, we have about 12 minutes, I think, to just check there, which is perhaps not enough time to really get to the bottom of how well this is going to radically change everything. But in the time that we have, I mean, Victor, you and I were talking, the sheer volume of Eldes that's coming through the pipeline, the warfs, everything else, right, in terms of battery storage. It's a huge, huge, huge amount of stuff that's coming through, right? Like, what is, like, can you try and describe what is the sheer scale of the change that is coming in terms of Eldes? Yeah. What's the right way to contextualize this? So, it's a dunkel flouter at the moment. It started Friday morning, I think. And we've burnt about, like, 10 gigs for three days. So, that's about 700 gigawatt hours. So, hold that number 700 in your head. Right now, there's about eight gigawatts of installed BEZ on the system. They're normally two-hour systems. Some of them are one. Let's be generous and say they're all two hours. Two times eight is 16. So, we have 700 shortfall that was met by gas during this dunkel flouter, and we have 16 gigawatt hours installed. So, I think those two numbers contrast. And, obviously, the thesis is that one day the dispatchable requirements of the grid are met by non-carbon assets like batteries. So, I think there's an argument to bring on that amount of Eldes to kind of bridge that gap between 16 and 700. And, just so we know how much is minded to be accepted, it's about 137 gigawatt hours. So, a material increase, maybe tenfold increase from what's installed. I can see why they've done it. I mean, and that's obvious, really, and you made a really good point there. And, if you think about the fact that gas plant, when it does get cooled, because it's got such a low load factor these days, has to extract its scarcity value when it does get cooled. Well, Eldes is a little bit the same, because it's kind of stepping into the place where gas was, hopefully. I hate the mechanism, just because it's so clunky. And, I think it's market distorting, potentially. And, for all the existing battery fleet, there's sort of up in arms about it, as basically 70% of it's lithium-ion anyway. And, you know, we saw, and somebody talked about CFD earlier. CFD was a rubbish mechanism, because it completely destroyed the forward market. And, so, the problem is, is I'm worried that there might be some unintended... I get the idea and why they're doing it, but it could easily be unintended consequences from it. But, on the flip side, though, Jacopo, like having cap and floor, from a finance point of view, like the whole concept is, it gives you guys greater confidence, right? I mean, on this type of assets, yes. Because, I mean, we are talking about assets that require quite a lot of capital to be built. Normally, it takes quite a lot of time to build them, right? And, there are a lot of things that can go wrong in the building phase. And, normally, they have an asset life that is quite big, like quite long, right? So, I think it's one of the best ways to finance them. Speaking of financing them, I do agree with Marco in terms of, from a trading perspective and from all the other batteries that are on the market, right? That could create some issues, I can see that. But, from, if I look at the pure financing perspective, I think there's not many other ways to get, you know, lenders lend against this type of assets, you know? So, I think if the rest of Europe wants to do something similar with this type of assets, I think it will be potentially, they have to find similar ways to... Look, Jacopo, you finances have grown fat on subsidies in the past, doing wind and solar. It's time you took some risk in a market which needs finances who take risk. You know, but I'm all for taking risk, but banks are not. So, that's the problem, right? But, yeah, yeah, no, I think one thing that could be interesting would be how the license works. Like, what can batteries do between the cap and the floor? If they can still trade as normal, right, that could still open some opportunities. I think because of the weird mechanism using the profit and loss or something rather than some specific revenues, they will trade normally because they're probably quite difficult to track where they are in terms of the... But what I'm really looking forward to is Ofgem creating a department of auditors to check this stuff out because, I mean, anybody knows anything about Ofgem, I think that's going to be the biggest challenge. Yeah, let's leave that point to one side for now. We have our new rings around Ofgem. Victor, as somebody who kind of... Yeah, there's this question of, is this cap and floor, is it kind of putting your thumb on the scale, right? Because the system kind of needs LDES to a degree, right? And are you putting your thumb on the scale to make sure that it really happens? Certain people in the industry are less... I feel that it's not necessarily fair. As someone without that kind of skin in the game, would you say the LDES cap and floor mechanism is fair? Is it, on balance, is it worth doing? Quite a big and difficult question, but... Yeah, it's a good question. Is it fair? I think there was... Yeah, in terms of its fairness, I think what was maybe unfair about it, what Mark referred to as it being clumsy, was maybe the lack of transparency around how they were procuring it. In the end, what they did was take a lot of it all at once. So they had the choice between 2.7 to 7.7. They took it all, 7.6. They're a bit clumsy, a bit unfair in the way that they all put it into North Scotland. And it wasn't clear before the scheme was run that they were going to do that. They actually put out an open letter last Christmas saying, we're going to avoid weighting the criteria against one another. So they didn't really know how they were going to choose these projects. Obviously, for an applicant, you also don't know how they're going to choose the projects as a result of that. And then they're also clumsy in the way that they chose all these very high-duration assets. So I think all of these factors made it feel like the scheme was unfair. I think if you're an asset in Scotland and you realise down the road, you're getting 8 gigawatts of 15-hour BEZ all in the same delivery year, you'd say, this is not fair. So I think that's where those claims are coming from. But I also see the other sides. You know, they're basically trying to resolve the decarbonisation problem quickly. And that's why they were so unfair, aggressive, whatever you want to call it. I'm baffled that it got a Scottish emphasis, though, because you'd have thought you'd want it south of those constraints. Oh, yeah, it makes no sense. Especially given the repetitive retraining that we were talking about before. Yeah, exactly. Where they said, no batteries in the BM. And now they're saying, put all the batteries in Scotland anyway. There's a contradiction there. Yeah, I guess I hadn't considered LDES and repetitive retraining as those two things combining together. Yeah, there's an existing exploit that we don't really have a solution to. So we're throwing much, much, much more capacity at that same exploit that could take advantage of it in the same way. It's a bit like putting that interconnect up to Blythe. Yeah, it doesn't solve the problem in a way, does it? I mean, Mark, even leaving aside the concept of the cap and floor for LDES, right? What baffles me is the sheer scale of some of these assets that are coming on. We're talking about, yeah, the thing that's often trotted out is batteries the size of power stations, like big, big, big boys. I mean, these are big fish, and as someone who's comparatively a smaller fish, would you say, like, does that kind of, does it scare you a little bit? That kind of, if an asset wanted to, they could just flood, like, any particular service, right? They can flood. They could just utterly collapse it. Yeah, I mean, they can absolutely go take out the whole NISO procurement for one of the frequency response services. Just one unit. But the frequency response services, in our eyes, are sort of like cream on the cake, really. I mean, if you get them, fine, but you'll know where you got them by lunchtime, given the way the auction happens, so you've got plenty of time to do other things. So I think there's definitely room for, even if the big batteries are coming on, there's definitely room for the smaller stuff as well. Okay, okay. You've just got to be mindful of the fact that what the procurement will look like. And there is some correlation between, I don't know if you've looked at this, Victor, at all, but there is some correlation between where the wholesale price is going and where frequency response sort of is like a slow-moving average behind the trading prices, if you like, because there's an opportunity cost element to it. Sure, sure, sure. Right, so you believe there will still be a role for these kind of smaller assets that could sort of trade off of that intraday volatility. That's where the gold is, really. There's a lot of tricks that are that size of asset. I think five years ago, build a battery, you're winning, you're laughing. Whereas now, you have to find some kind of operational niche. You either go really, really big, you know, all the old coal station connections, like Coldburn, for instance, that's a strategy. On the other hand, I've seen a lot of people flooding, maybe flooding is strong, but going towards the small assets, the low voltage levels. There are actually a lot of, yeah, bits of value. Not to kind of provide you undue competition later on, but there's a lot of value at that part of the network. So, I think there is some defense for small assets against the kind of onslaught of 500 megawatt plus assets in the pipeline. I think, particularly in GB, you have to be cleverer per megawatt installed capacity. Like they said, a lot of money that you would if you had just installed something into Malaysia and Europe where those spreads are far bigger, right? Like those top-bottom spreads that you get in somewhere like Poland and Romania, it's like you can just sort of park yourself in those spreads and just make loads of money, but you've got to be cleverer, I think, in GB. One final question I might ask for Jakob on this is, how healthy is the state of kind of battery investment in GB as against somewhere like Poland or Romania? If you can just be kind of dumb, for lack of a better word, with your strategy in those Eastern European markets, but you have to be really, as Victor says, if you have to find your niche in GB, why would I not just take my money and invest it in a different market, right? I mean, to be honest, I work more with Central and Southeast Europe right now because it's the markets that are more hot, especially from a merchant revenue side of things. But going back to what I was saying to Mark, the funny part is that their investors, and I mentioned this in the presentation, right? They are asking for the same record that they see in GB, right? But it's not possible, right? It's physically not possible because we don't have that record there. And so if we are speaking with commercial banks, they only lend against the contracted portion of the revenue. And of course there, there is not so much will of doing contracted revenue because the merchant revenue is so high at the moment there, right? Or let's say Poland had very good, you could make very good revenue with the capacity markets, right? Now the derating factor was quite, like, you had a big derating, right? And then it went down, I think it's 17.6% or something like that now. I don't remember the exact figure. But so now things are moving more towards tolls, for example, you know? But once again, I think the evidence part of things is once again very important also in those markets, especially if you are relying on merchants. And let me just be clear, when I say evidence, I don't mean giving out positions or, you know, what you're going to do in the future. Because then also from an optimizer and trading perspective, you are exposing yourself to risks of front running, right? So that's not what I mean. But in terms of evidence on availability, evidence on revenue post-settlement and so on, this is something that in those markets that don't have that kind of operating history that the Great Britain has helps, right? Especially if you don't get the contracted revenue that easy. I'm getting eyes from my colleague over there. So I think that might be all we have time for for this panel discussion. So, yeah, all that's left is to say thank you very much, gentlemen. And, yeah, thank you. A round of applause, please, for Clinton, Victor, Jacobo and Mark. If you, Richard's got your chocolates awaiting the Montel chocolates for you all. Thank you so much for that fascinating chat into BESS, despatch and investment. That now brings us to the end of today. I just wanted to end with a few closing thoughts. I'm a journalist and I love words. Repetitive retraining is a new one. Thank you for that, Mark. Megatrend, polar vortex and unprecedented are also going to stay with me today. So what have we learned today? I think, really, there's three key themes as reflected in our sessions. And they show us that, firstly, geopolitics is reshaping the geography of energy. The Strait of Hormuz shows how vulnerable markets are to choke points. Thank you, Henning, for that fascinating opening section. Energy security isn't just about having enough supply. It's about where that supply comes from, how it moves, and how resilient those routes really are. And I am captured by the idea of catapulting floating mines. Never heard of that before. Fascinating stuff. And then if we move on, connectivity. And the connectivity... Oh, sorry, gone a bit too fast. ...is becoming as important as capacity. As renewables play a bigger role, interconnectors are no longer just a way of trading. Electricity, they now underpin security of supply, system resilience, and price stability. And then, finally, our last session around flexibility and best, including that wonderful panel we've just had. It's an increasingly valuable asset. That is clear. Battery storage is a huge opportunity. And as we've heard today, a theoretical revenue opportunity is not the same as a bankable asset or investment. Understanding that difference will be critical to that next phase of the transition. Three themes, then. And one conclusion, if I may, which is that the energy transition isn't simply about replacing one source of energy with another. It's that fundamental architecture of energy markets is changing. Geopolitics, physically, and commercially as well. Well, thank you all for today, and for coming today, and for your questions as well. I'll just invite you for one last round of applause, if I may, for the panellists, for our moderator, Richard Sveresen, and for you guys as well, as well as the team that have put on today, which is Maya, Elizabeth, and Teresa as well. So thank you all. And please join us for a drink in a moment outside. Thank you very much. APPLAUSE