Understanding arbitrage: 2019 will be ‘breakthrough year for battery storage’

Habitat Energy executive director, Ben Irons.

2019 will be a “breakthrough year” for UK battery storage, believes Ben Irons, executive director at Habitat Energy, particularly if volatility drives big price spikes over the coming winter. But new business and commercial models are required to avoid burning out assets. How might they look?

A former executive director at Aurora Energy Research, Irons says financiers have got to grips with merchant risk and are on the brink of signing off some chunky deals.

With renewable subsidies harder to come by, he evokes an image of wildebeest at the Serengeti’s Mara river.

Irons: once one takes the plunge, others follow.

“A lot of institutions don’t want to be the first to sink £100m into storage, but they would be very happy to be the second,” says Irons. “As soon as we see the first move, I think we will see a surge over 6-12 months.”

If prices top £1000/MWh on the Balancing Mechanism (BM) over winter, he says, “it starts to get interesting”.

Commercial break

Revenue uncertainty is the key challenge for most mulling storage investment. Firm frequency response (FFR) was “hot”, says Irons, until prices collapsed due to people piling into a market requirement of 500MW at most.

“That was unsettling, but my view has always been that merchant trading is the best opportunity for batteries. The depth of the wholesale market and the BM and the sheer volume of renewable assets being built out … means there is a level of intermittent generation swinging tens of gigawatts every day,” says Irons. “That is where batteries are so powerful.”

Finding suitable business models is the challenge. Habitat believes there is room for an intermediary to optimise both asset and revenue. Irons thinks the company can help deliver “unlevered returns of 10-12 per cent” by treating portfolios “as if they were our own assets”.

That is, not just for a cut of revenue when it is profitable. But cycling for the most profitable return that respects the life of the battery.

One shot

Irons suggests that is the key difference with merchant storage versus other forms of generation.

“If you have a thermal asset, it’s quite simple. You have marginal cost; whenever the price is higher you generate, whenever it is not, you turn it off. It’s a little more complex than that with the BM and ancillary services, but in a nutshell, that’s it,” he explains.

“Financiers can understand that model. They might hire a consultant to advise on markets, but it’s relatively straightforward.”

Storage is more complex.

“You have one hour of power, when are you going to sell it? When the price gets to £80/MWh and you can make a profit? That is not the correct answer, which is ‘when is the peak going to be?’. There is a higher degree of forecasting reliance required to extract value from that one-shot energy sale,” says Irons, “and the same applies on the charging side”.

The need to sell in and out of multiple markets – day ahead, within-day and the BM – at any time compounds the challenge.

“You can be buying and selling independently in those three markets. You may be selling tomorrow’s power today, not actually having bought it yet. That can be quite tricky.”


Understanding the battery’s physical properties is also crucial to preserve asset life, says Irons.

“If you don’t know how a battery performs and degrades there is a gap no matter the trading expertise – every trade has to cover degradation cost.”

That cost is not constant, with temperature, chemistry and age all affecting the marginal cost of cycling. Without a full grasp of these elements “it is hard to work out which trades create or destroy value”, says Irons.

Commercial misalignment

Batteries’ physical characteristics also mean traditional commercial models may no longer suitable, Irons suggests.

“If you are using a third party aggregator, there is an incentive alignment challenge. Most aggregators will take a percentage of revenue and are therefore incentivised to [cycle] as much as possible. That leads to contract misalignment – and incentive misalignment.”

Running for revenue he says, is sub-optimal and “could degrade the battery completely in four years”. Running more cautiously and for bigger spreads means “you may give away 10 per cent of revenue, but you extend the battery life by 50 per cent or more”.

New model

The question is how to reward a third party for more prudent asset management that preserves the battery while generating best whole-life buck.

“It is more complex,” admits Irons, but that is how Habitat sees its business model working.

“It is not just transactional, more like equity sharing or long-term alignment. But then, what is the baseline and what is the improvement?”

Agreements must therefore be bespoke, says Irons. It is one of the reasons Habitat is positioning to manage larger portfolios of in front of the meter batteries.

The company “prefers not to be called an aggregator” and does not plan to build a virtual power plant. Instead it is developing “a service more like an in-house trading and optimisation scheme for portfolios of 50MW plus”. Or as Irons puts it, “the dream team they would hire themselves”.

Treat it as one of your own

Habitat hopes to announce its first client this side of Christmas – and Irons is confident its model will gain traction.

“Our view is that it’s really complicated to do trading and optimisation. There is no sense in relatively small portfolios building that capability themselves.”

He suggests it may cost £1m-£2m to build a desk and establish a route to market.

“That is a big drain on return and not something most developers want to spend their time doing. So our view is that a third party relationship makes the most sense. The key principle is to act as if we, the third party and the battery owner, are the same company and optimise on that basis.”

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Can the Balancing Mechanism offset FFR price erosion?

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BTM storage: resilience trumps grid revenues?

Revenue and regulatory risk remain key challenges for BTM battery storage

I&C energy storage: firms banking on FFR are “gambling”

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  1. “If prices top £1000/MWh on the Balancing Mechanism (BM) over winter, he says, “it starts to get interesting”.

    Bit more to this:

    – If prices paid to certain units top £1k, and if you are one of those units, then it’s interesting and/or
    – If aforementioned prices make it into the cash-out price, then it’s interesting.

    If £1000 is paid to 4MW here and there then it’s a drop in the ocean.


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