By David Post, Research Analyst at King’s Private Equity Club
With the massive penetration of renewable energy capacity worldwide, energy storage is starting to play a key role in the energy transition. Wind and solar energy are the key contributors to a cleaner environment, but nobody can predict exactly when the wind will blow or when the sun will shine, which means these renewable energy sources are quite unpredictable. Thus, this article will explore the importance of battery storage, its growth over the past years, and conclude by highlighting its huge potential for varieties investments.
Energy storage is providing the solution as it allows to proactively manage this “intermittency” at attractive returns. Renewable energy is typically stored during so-called off-peak hours; when the demand is lower than the available renewable energy, hence when energy prices are low. Conversely, renewable energy is discharged during peak hours, when the prices are high due to the fact that demand is higher than available renewable energy. In other words, energy storage allows project owners to arbitrate between peak and off-peak hours, facilitating so the accelerated roll-out of renewable energy capacity. Moreover, energy storage, and in particular batteries, which have a very fast response time, can also be used to provide frequency regulation, a mechanism used by power grid operators to correct events when the system frequency gets too high or too low. As renewable generation increases, the power grid becomes less stable, triggering more of these “frequency events”, rendering the batteries even more needed. Lastly, energy storage is often used as a means to provide backup power during power outages, thereby helping hospitals and other fundamental sectors in the economy running at all times. Thus, this article will explore the growth of battery storage over the past several, thereby highlighting its huge potential for varieties investments.
Energy storage has undergone a fascinating journey – only a few years ago, this technology was in its Research and Development stage, but over the last 2 to 3 years in particular the USA, UK, Australia, and South Korea have seen an impressive spurt with the deployment of several gigawatts of capacity due to a variety of factors. First of all, the cost of lithium-ion batteries has declined drastically over the last 8-10 years, leading to a lifetime LCOE (Levelized Cost of Energy) at par or even below competing for conventional technologies, like gas-fired power plants. Secondly, regulators have started to enact rules enabling the direct participation of energy storage in local energy markets. In this promising context, it didn’t take long before larger utilities and industrial customers started to launch tenders to attract project developers and financial investors to build and finance storage projects. The first tenders in the UK (2014) and US (2016) offered project owners a long-term capacity payment, which was deemed particularly interesting to risk-averse investors since it provided a predictable project lifetime cash flow. However, these lower-risk capacity payment contracts soon saw an erosion in returns, triggering the development of new business contract structures, where investors and project owners could tap into a combination of lower fixed capacity payments and higher, but riskier return merchant revenues. Thanks to very sophisticated software, batteries can now optimise their value across various revenue streams, also called revenue stacking, rendering investors double-digit returns and fast pay-back periods.
Energy storage not only provides resiliency and flexibility to power networks but also represents an interesting opportunity for investors willing to diversify into cutting-edge technology and contribute to the energy transition towards a cleaner environment. In this exciting context, a growing number of financial investors have started to invest in energy storage projects or portfolios. For example, March 4th 2020 marked the date when Blackstone completed the acquisition of “NRstor”, a Toronto-based developer of battery storage that focuses on the construction of these storage systems throughout the whole of North America. This firm has over 200 MWh of operational battery storage and is considered to be a market leader in Ontario, Canada, and other parts of the U.S. According to Bilal Khan, the senior managing director of Blackstone energy partners, “Battery storage will play an important role in the North American power grid and be critical to achieving ambitious renewable targets”.
Furthermore, other players like Susi Capital, Arian, Gresham, Gorestreet, and Macquarie are just a few names of larger financial firms that have started to deploy capital in this new technology. For instance, on November 25th 2021, it was announced that Gresham, a specialist alternative asset manager based in London, procured 380 million in funds from Natwest bank to invest into their battery storage portfolio. According to Ben Guest, Gresham House Energy Storage Fund manager, “[They] recently set out ambitious plans to significantly increase the size of our portfolio over the next two years, given the UK’s need to increase battery storage capacity tenfold by the middle of this decade. This facility will provide [them] with the financial headroom to achieve our growth plans”. In fact, according to Mercom capital (a trusted news outlet for energy investments), in 2021 $17bn was raised from the battery storage sector, where 101 corporate funding deals were made. This marks a 159% increase from 2020, suggesting the immense growth potential the energy storage sector has in the years to come.
Battery storage allows for renewable energy sources (solar and wind) to be safely stored and then released at high points of demand. Most battery storage facilities are powered through the use of lithium rather than other chemicals, since lithium has been shown to increase the efficiency of battery storage systems, allowing them to charge faster and last longer. Following the drop in prices for lithium batteries, investors have their attention to the development of projects throughout places like the USA, UK, Australia, and South Korea. Although the market for battery storage has just recently emerged making it susceptible to big changes in the energy market, the revenue invested by private equity firms and prior case studies such as that of Blackstone shows the great potential this sector has within the energy market.
King's Private Equity Club is a student society at King's College London, providing a high quality of networking, speakers, workshops and social events to the King's Community. Our goal is to improve our members understanding and employability.
