Financing Battery Energy Storage Systems for a Sustainable Energy Future

The article highlights the vital role of battery energy storage systems in enhancing renewable energy reliability while navigating complex financing challenges for successful deployment.

This article delves into the crucial role of battery energy storage systems (BESS) in boosting renewable energy generation and its subsequent distribution.

It also examines the financial challenges that arise in the deployment of such systems through project financing strategies.

Why Energy Storage Matters

A fascinating topic came up during a conference focused on electricity networks across Africa: Can the continent rely entirely on renewable energy sources to meet its electricity needs? With abundant solar power available, this seems plausible.

Yet, the reality complicates this vision due to the inherent fluctuations in energy availability, largely influenced by nighttime and inconsistent wind conditions.

These variations can create uncertainty in supply capacity and market pricing, particularly in deregulated markets.

This is where BESS shines, offering short-term energy storage solutions and presenting opportunities for electricity pricing arbitrage.

The decreasing costs of battery technology have made it increasingly viable for smaller, short-duration storage applications, with significant historical reductions in the price of battery cells.

When it comes to efficiency, batteries outperform others, achieving round-trip efficiencies of about 83% to 86% for traditional lithium-ion systems and as high as 93% for lithium iron phosphate (LiFePO4) batteries.

This superiority positions them as favorable alternatives to conventional methods like pumped hydro or compressed air energy storage.

The Need for Inertia Explained

Most electricity distribution networks operate on alternating current (AC) for practical reasons, including efficient voltage transformation.

Stability within these systems is paramount; narrow frequency tolerances (usually 50 or 60 Hz) are essential to protect connected equipment from potential damage.

Traditional power plants, especially thermal stations, deploy turbines with significant rotating mass, which delivers real inertia.

This inherent property stabilizes frequency and voltage amidst fluctuations in electrical loads or supply interruptions—referred to as “inertial response.”

Shifting towards renewable sources like wind and solar energy, without replacing the inertial response, may jeopardize the grid’s stability.

Such vulnerabilities can lead to frequency and voltage variances, resulting in disconnections or system failures.

Disturbingly, certain designs of wind turbines may disconnect from the grid when voltage dips below critical thresholds, which can trigger cascading failures.

A notable incident exemplifying this risk occurred in South Australia in 2016.

A statewide blackout resulted from storm damage, compounded by failures in the transmission network and wind farms, ultimately leading to an outage that took days to resolve.

This event highlighted the critical nature of inertia for grid reliability.

How Synthetic Inertia Works

BESS can provide what’s known as “synthetic inertia.” Through advanced electronic control systems, high-power inverters, and transformers that convert their direct current (DC) output to AC, these systems can dynamically respond to fluctuations in grid voltage and frequency.

This level of responsiveness surpasses traditional methods of delivering inertia.

In the UK, the National Energy System Operator is developing a framework to procure diverse “dynamic response services” aimed at regulating grid frequency.

Services such as dynamic containment, moderation, and regulation seek to complement traditional inertia from thermal generators.

Additionally, plans are in motion to create day-ahead frequency response markets for these services.

While battery systems are highly suitable for these functions due to their rapid response capabilities, managing battery state of charge (SoC) continues to pose technical and commercial challenges.

Furthermore, providers may face the necessity to “stack” multiple services with a single BESS, which can maximize revenue but also complicate operations.

BESS offers a broad range of commercial applications, including:

  • Supplementing power supply during peak demand periods.
  • Timing energy usage to capitalize on price variances.
  • Reducing congestion within the transmission network.
  • Supporting voltage stability.
  • Facilitating black start capabilities for larger power plants.
  • Postponing infrastructure upgrades for transmission and distribution.
  • Providing demand-side services like power reliability and quality assurance.

A key point to remember is that most revenues from BESS derive from functions such as time-shifting and congestion relief, while dynamic response services typically play a smaller role in overall revenues, despite their critical importance to grid stability.

However, relying on time-shifting and congestion relief revenues often comes with merchant risk.

Engaging in arbitrage operations within wholesale markets entails uncertainties, particularly when dynamic response services are auction-based.

Financing BESS projects is complicated by this reliance on unpredictable revenue streams.

The variable nature of merchant income can be exacerbated by policy uncertainties that influence renewable investment and grid improvements, further affecting market dynamics.

Nevertheless, BESS plays an essential role in transitioning to sustainable energy.

Its ability to integrate renewable generation and provide synthetic inertia emphasizes its importance in low-carbon energy frameworks.

In the UK, ambitious plans targeting carbon neutrality by 2030 anticipate a significant increase in battery capacity, likely requiring additional government support for investment.

As electricity markets around the globe, including several regions in Africa, move towards deregulation, they may seek lessons from established markets regarding design and support mechanisms.

The UK has consistently led in market innovation and deregulation.

The European legislative framework recognizes the need for backing low-carbon flexibility solutions, a sentiment echoed in the UK’s Review of Electricity Market Arrangements.

Nonetheless, consensus on the most effective approach to these interventions remains elusive.

In the UK, a proposed cap-and-floor framework for long-duration energy storage seeks to guarantee minimum earnings for favorable projects while also capping potential returns.

While the exact definition of “long duration” is yet to be settled, it suggests that some long-lasting batteries could fit into this structure.

Currently, there’s no designated support system for shorter-duration storage, such as batteries; however, discussions about modifying capacity auction arrangements are ongoing.

The government is contemplating adjustments to prioritize low-carbon flexibility sources like batteries in capacity auctions.

Variations in support frameworks have also been observed across continental Europe.

For instance, Greece has established a regulatory return scheme for a pumped hydro project, while Italy’s Electricity Storage Capacity Procurement Mechanism contemplates regulated returns for storage investors.

Thus, when financing BESS projects in Europe, investors are likely to focus on jurisdictions that offer long-term contracts with reliable partners, or provide robust policy support that ensures stable revenue.

This doesn’t imply merchant-funded projects are impossible, provided there’s a careful analysis of market trends and diligent revenue diversification, such initiatives can still find funding.

To successfully structure BESS projects and their financing, it’s essential to understand the unique characteristics and performance indicators of batteries.

Manufacturers typically highlight two main metrics to aid in optimizing usage and performance:

  • State-of-Charge (SoC): This measures the battery’s current charge level as a percentage of its total capacity, indicating how much energy is stored relative to its maximum potential.
  • State-of-Health (SoH): This compares a new battery’s capacity to that of an aged one, often expressed as a percentage of maximum energy compared to rated capacity.

The SoH of lithium-ion batteries tends to decline predictably over charge and discharge cycles, usually estimated around ten years for daily cycling (approximately 4,000 cycles) under standard conditions.

Variables such as temperature and depth of discharge can impact battery life; to achieve maximum durability, operational parameters should be carefully managed.

Usable battery lifespan varies by application.

As degradation occurs, it is necessary for BESS project companies to consider this when defining commitments to offtakers.

If long-term contractual obligations exist, companies may need to allocate funds for cell replacements, which must be factored into service pricing.

For example, when integrating a BESS with solar photovoltaic systems, the economic life may be more predictable.

In contrast, when delivering dynamic grid services, usage patterns can be more erratic, complicating financial forecasting.

Battery suppliers typically offer warranties that guarantee usable energy capacity for specified times, generally linked to anticipated SoH decline.

There’s potential for modifying warranty conditions for optimal performance, though this may involve additional costs.

To minimize degradation rates, operators can manage maximum charge limits and depths of discharge within specific SoC ranges.

Implementing dynamic adjustments to battery management systems can enhance lifespan, albeit sometimes at the expense of immediate usability.

The lifespan and performance of battery cells significantly depend on maintaining suitable environmental conditions.

Operators must adhere to the temperature limits defined by suppliers to protect batteries from thermal incidents through effective system design and redundancy measures.

Charging and discharging speeds can influence battery performance; thus, these limits should be integrated into battery management systems.

Moreover, ongoing support and upgrade capabilities for management systems are critical for securing stable operations.

Used batteries, such as those retired from electric vehicles, could find valuable applications in stationary BESS contexts at lower costs than new cells.

However, financing these alternatives raises concerns regarding their remaining economic viability and predictability.

Battery energy storage systems are pivotal in our journey toward a sustainable energy future.

While they hold the promise of improving grid reliability and facilitating the integration of renewable energy sources, the quest for financial backing for BESS projects brings significant challenges.

Confronting these issues involves not only crafting robust regulatory frameworks and innovative government support but also strategically structuring projects and managing risks.

Navigating these hurdles is essential to unlocking the full potential of battery storage systems and creating a resilient and sustainable energy landscape.

Source: Natlawreview