Optimising Co-located Batteries in 2024

The second half of 2023 saw a surge in investment in co-located battery storage, primarily in response to the well documented delays in obtaining grid connections.

Despite National Grid's recent efforts to alleviate this problem, including the introduction of its queue management process, and the acceleration of connection dates for up to 10GW of battery storage, we expect investors will continue to turn to co-located projects throughout 2024.

Following our previous publication on the key revenue drivers behind storage projects, in this article we set out some points to consider when negotiating optimisation arrangements for co-located batteries.

Approach to Contracting

The most favoured optimisation model for both standalone and co-located projects continues to see battery owners contract with a third party optimiser to maximise the battery's revenue on the owner's behalf, rather than the owner doing so in-house.

While there are some fundamental similarities across optimisation contracts, we are far from a market-standard approach, unlike in other offtake arrangements such as PPAs. This is due to:

• the sheer variety in the sector, size, capabilities and strategic aims of both the battery owners and optimisers on either side of a storage project, and the many different potential match-ups; 

• whilst battery storage is not a new technology by any means, many battery owners are still only in the initial stages of commissioning their first project; and 

• the markets and grid services available for battery optimisation, and the pricing models offered by the optimisers, continue to evolve at pace.

As a result, many aspects of optimisation contracts can be subject to robust negotiation, as the parties are not guided by well-known and long-held market-standard approaches. 

In addition, as the majority of co-located projects are in their infancy, and both owners and optimisersare still acclimatising to the additional variables created by a co-located arrangement (including those listed in the remainder of this article), we are even further from market-standard contract terms for co-located storage.

Thus a genuinely collaborative effort is often required between parties to carefully step through, and accurately document, the practical realities of optimising a particular co-located battery, rather than deferring to a market standard which does not yet exist.

Role of the Optimiser

A trend that emerged over the last few years in optimisation contracts for standalone batteries is the change in what constitutes an optimisation "service".

Many optimisers have stepped back from taking on more of a partner role. Previously it was not uncommon for optimisers to take on a proportion of the commercial risks – like trading losses, loss of collateral posted with various markets, or other liabilities arising pursuant to underlying market access arrangements.

Sharing in the downside in this way rather than just the upside recognised the fact that the relationship with the battery owner is akin to a partnership in many ways - the optimiser has no service to offer without the owner making its battery available, and the owner is dependent on the optimiser's trading expertise.

Now optimisers increasingly look to reduce their involvement to simply providing “start/stop” signals to the battery. If not sufficiently supplemented in the contract, such a narrowly defined scope of service and optimiser responsibility may:

• fail to sufficiently reflect both the optimiser's pivotal role in the arrangement, and the often total reliance the battery owner places on the optimiser's trading know-how, market access and technology;

• overlook the battery owner's need for a fuller end-to-end service, often driven by the cross-sector nature of the arrangement, whereby the battery owner is new to optimisation; and 

• leave the battery owner with a suite of responsibilities they were not expecting to be liable for, and are not equipped to monitor and keep on top of. 

This trend has continued in the contracting for co-located batteries. Given the added complexities of optimising co-located assets, a battery owner may ultimately feel more exposed with a co-located project where the optimiser views its role as being so limited.

As a result, the parties need to expressly identify up-front what each expects of the other on a day-to-day basis, and to work through the permutations of various potential scenarios – from grid constraints to curtailment – to ensure that there is a proper allocation of responsibilities in the contract that reflects the parties' expectations, capabilities and aims. 

Shared Connections and Curtailment

While co-location of a new or existing renewable project with battery storage may offer a workaround to the ongoing problems of obtaining a grid connection, sharing a connection presents issues that impact the entire optimisation relationship.

The existence of a maximum entry capacity under a connection agreement means that the combination of the battery and the generation asset continually presents a key risk – i.e. the entry capacity may be exceeded, and so physical constraints on output will need to apply. As a result, the battery is always at risk of being curtailed to prevent this, and it has the potential to be curtailed regularly.

Furthermore, to the extent the existing generation facility has a PPA in place, that PPA will likely contain restrictions on whether a battery can be installed on site and share the grid connection. Even if it can, the PPA will require the generation asset to take complete priority over the battery, increasing the rates of curtailment.

How such frequent curtailment is defined and measured in an optimisation contract, and how it factors into the applicable pricing model are key considerations. Curtailment naturally has a significant impact on revenue expectations, and revenue sharing mechanisms. Equally important however is how the contract then deals with the interaction and overlap between curtailment and other commonly used but often loosely defined core concepts.

These include asset availability, capacity, outages, grid constraints and even force majeure. Each of these concepts is also impacted by, and must be alive to, co-location. Their usage in the contract must be clear and agile enough to account for the existence of the co-located generation asset, and to ensure that the consequences of one or more of these events occurring is properly understood at the outset and clearly documented.

Trading Strategy

Due to repeated curtailment, a co-located battery will likely have reduced available capacity for trading on a fairly consistent basis, and so likely achieve lower revenue than a similar sized standalone battery. It is therefore key for the owner to ensure that the trading strategy is set to maximise revenue using the capacity when it is available.

Most owners of standalone batteries often take a back seat when it comes to setting a trading strategy, deferring instead to the trading expertise of the optimisers. Owners of co-located batteries tend to prefer to have a more collaborative process with the optimiser to set, and reset, that trading strategy. This allows the owner to ensure that the strategy remains sufficiently dynamic and takes advantage of the markets and the revenue stacking more suitable to co-located batteries.

Forecasting

Most battery owners also often decline the chance to input into the day-to-day trading of a standalone battery. However, co-located batteries normally require a more involved owner, i.e. one which provides the optimiser with daily forecasts of the predicted output of the generation asset, available battery capacity and any upcoming curtailment. The optimiser needs this data in order to calculate what total capacity is available to trade on any given day, as this will vary a lot more on a co-located site.

This does allow the battery owner to set some of the parameters that inform the optimiser's trading activity, and to place liability on the optimiser where it exceeds any maximum entry capacity despite being provided with accurate forecasting. These mechanisms need careful consideration however, where a forecast is incorrect optimisers may expect:

• to take no responsibility for any imbalance created by the combination of the battery and the generation asset or the related liabilities under the connection agreement;
• to take no responsibility for any losses incurred pursuant to underlying market access agreements; and
• to be compensated for lost revenue where a forecast has resulted in the optimiser unnecessarily trading smaller positions (i.e. available capacity was wasted, due to the generation asset producing less power than forecast).

Thus live data sharing and forecasting is an increasingly crucial aspect of optimisation contracts for co-located assets, to allow the parties to maximise the revenue that can be achieved in a co-located context. The parties will need to work together to fairly assess and document how the optimiser's reliance on (and performance against) forecasting impacts the revenue sharing calculations.

Revenue Performance

Attempting to accurately benchmark the revenue performance of a standalone battery presents several issues. While there are some data sources and leaderboards which indicate annual £/MW results for individual battery performance in certain markets, locating a pool of sufficiently similar assets can be difficult (in terms of their type, capacity, location, and the markets they are traded in). 

Sourcing comparable co-located batteries is harder still as there are far fewer of them, and because they sit with different types and sizes of generation assets. They will also be curtailed at different rates based on local conditions and in line with the applicable grid connection agreement.

Despite this owners do often still want to include a revenue benchmarking mechanism in the optimisation contract, taking the view that over time such mechanisms should have more utility as the pool of competing assets grows. However, they may also consider how to contract for an expected level of revenue, either through floor pricing mechanisms, forward trade pricing models, or setting a fixed revenue performance standard, rather than relying on benchmarking. Either way, the ongoing balancing act between the battery and the co-located generation asset, and all associated curtailment, will need to be carefully factored in to the selected mechanism.

Use of Direct Wire

When a battery storage system is co-located with a generation asset, the developer may also consider adding a direct wire from the generation asset to the battery. This way a battery can charge under a direct wire (in which case the generator should be exempt from requiring a supply licence) and therefore the battery project will be able to buy direct from the generation company and reduce associated grid costs and licence costs included in the price of power purchased from the grid.

If the battery project is retro-fitted to an existing generation asset with an existing PPA, for the reasons given above it is unlikely that a direct wire will be a feasible solution. However, for new-co-location projects, this could be an option so that the site as a whole (generation and battery) can be optimised together to ensure the most efficient use and cost of power.