James Smith, manager of the Premier Miton Global Renewables Trust, assesses the performance of battery storage investment companies.
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The three London-listed battery storage investment companies have performed poorly over the past year, and now trade at sizable discounts to published net asset values.
They had been making good returns on providing frequency services (maintaining the national grid at a frequency of 50 hertz) to the National Grid Electricity System Operator (“ESO”), but this is a relatively small market, and returns have fallen as it has become increasingly saturated.
The electricity storage companies are, therefore, increasingly reliant on ESO’s balancing market, where power stations and electricity storage facilities bid to provide power on a short-term basis to help cover imbalances in demand and supply of electricity.
The issue for the storage companies is that the trading system used in the balancing market favours the larger thermal gas fired power stations, mainly for historic reasons given battery storage is a relatively new technology. However, the ESO is making changes to enable a more automated system in which batteries can participate fully. Over time this will allow for grid balancing to operate on a fully decarbonised basis.
In the meantime, batteries have faced two issues. Firstly, they have been under-utilised and have been “skipped” in favour of larger gas fired power stations. Secondly, and taking into account that thermal power stations tend to be dominant in setting electricity prices, weakness in the gas price has reduced the spread between peak and off-peak electricity prices, again weakening returns on storage assets.
Despite this rather difficult position, there are several grounds for longer-term optimism. Firstly, the ESO is making good progress in changing the balancing market to allow for full utilisation of batteries. Secondly, with renewable energy volumes continuing to grow, power market volatility is increasing and will, all else equal, lead to a larger market for grid balancing. Thirdly, batteries have a natural advantage over gas-fired power stations in that they can be operated at times of both insufficient power or excess demand (injecting power into the grid) and also when there is too much renewable electricity or insufficient demand (withdrawing power from the grid). Thermal power stations can, of course, only do the former.
On a positive note, wholesale electricity prices have staged a recovery over recent months, which has led to improved trading for the battery storage companies.
