Energy storage has been deemed one of the missing links of the energy transition for quite some time now. After the vast deployment of standalone storage assets, which tirelessly (and swiftly) respond for duty when the grid needs it, the long-awaited next phase of renewables-plus storage is finally approaching the mainstream!

The term ‘renewables-plus-storage colocation’ has climbed the ladder in the renewable’s vocabulary, particularly in the merchant renewables sphere. But combining two business models requires the resolution of multiple riddles. What is the optimal use-case of the hybrid set-up? What’s the optimal revenue streams strategy when there are competing interests between the two assets? How does the industry model a cost-benefit analysis to evaluate an investment decision?

The value of flexibility, not only for individual assets, but for the entire electricity system is widely recognized. On one hand, the ability to bid into the market and deliver grid services contributes to tangible ‘value creation’ for storage assets. Overall, policy and regulation players in each country have operated with different gears on that front, in the sense that value creation in each market differs. There’s a wide push for more and more jurisdictions to get up to speed with route-to-market visibility to encourage further deployment. The EU’s landmark Electricity Market Design proposed reform comprises the ultimate testament to the increased ambitions on a regional and member state level.

On the other hand, ‘value capture’ is the tough job of how to tap such value and convert it into realized revenue. This is where tools like optimization agreements, contractual arrangements, and Hybrid PPAs fall into place.

The interest in the asset class is growing exponentially both by policy and regulation (value creation) but modelling the value of storage for an investment case (value capture) is a challenge.

 When it comes to monetization of energy storage assets, it’s really the billion -dollar question to underpin the entire business case. The valuation aim is no different than any other infrastructure investment: investors need to understand the asset’s risk-return profile, its expected revenues and estimated internal rate of return (IRR) to understand whether the investment is worth pursuing. But with energy storage assets, performing this task is not as straight-forward.

In the beginning of the energy transition, the risk profile of renewables attracted financiers like pension funds, institutional investors, and lenders due to the asset mirroring the characteristics of ‘core infrastructure’ assets: low-return low-risk asset profiles which are able to generate stable yields. Since then, not only have the risks profile of renewables evolved, but new asset classes with different risk profiles were deemed necessary and required calibration of investment strategies. And yes, energy storage was the first new asset class to rock the boat.

Monetizing strategies for storage are ever evolving. Starting from grid-level opportunities, grid operators and regulators are creating a plethora of routes to market in the form of grid services for energy storage (and particularly fast responding battery storage) to support the technology’s deployment and eventually take advantage of its competitive edge: quick flexibility to replace services that used to be provided by retiring thermal plants, and tackle supply/demand imbalances from increased renewables penetration.

Some of the most critical revenue streams exist through imbalance markets, such as the UK’s Balancing Market (BM) daily auctions, Capacity Markets (CM) or regulation ancillary services such as Fast Frequency Response (FFR), for example UK’s Dynamic Containment (DC), and Automatic Frequency Restoration Reserve (aFRR) auctions. Such opportunities gave birth to robust business models for standalone storage assets. A prime example is the UK.

As the standalone energy storage concept matured, market players started looking at such assets from a complementary angle, that of co-location. Asset-level opportunities are centered around the idea that storage is primarily improving the performance – and therefore investment returns – of renewables through mitigating the risks deriving from their inherent intermittency nature. Profile shaping comprises a prime example, tackling the effects of cannibalization in the spot markets. The latest mega trend in the renewables-plus-storage sphere is in Hybrid PPAs.

The focal level of standalone storage asset is indeed grid services. However, when it comes to co-location, it’s pivotal to note that the two focal levels, grid- and asset-level opportunities, are not mutually exclusive. The combination of value creation from grid-level services alongside optimization of asset-level revenues encapsulates the driver behind the seeking of the colocation promising land.
Value Stream Comments
Balancing service – accessible for SA and co-loc Balancing authorities across Europe have the heavy responsibility of managing the physical aspect of the grid in real time, ensuring that there is a balance between supply and demand. Each country has different mechanisms in place to perform this task, creating services for various generations of technologies to monetize their contribution. It’s deemed a key route-to-market for storage assets.For example, in the UK - Operated by National Grid ESO, the Balancing Mechanism (BM) is the operator’s primary tool to balance supply and demand on the network in real time. 
Regulated Markets – FCR, FFR – an opportunity for SA projects, but also co-loc through optimization agreements for the storage part of the hybrid project Short-term ancillary services enabled the number one competitive advantage of batteries to shine: fast response to grid needs in seconds. The nature of such services is to adapt their requirements depending on what is needed the most. For example, the cadence of auctions is adapting, and so are the rules of participation or the required volumes. Therefore, it’s not merely the strike price that is uncertain, but also the very existence of the service. The opportunistic thesis of such services put the seeds of a flexible mindset in storage asset owners and set the foundations of the famous ‘revenue stacking’ approach. Not one revenue stream is enough to create a long-term revenue plan to enable project or debt financing, so the aim has been to tap opportunities when they arise and feel comfortable with it. Optimization companies became some valuable partners, aiming to create as much revenue visibility as possible to their clients, and being in charge with the day-to-day bidding strategy of the assets through optimization agreements.
Sales in spot markets – price arbitrage can be performed by SA while profile shaping with the same benefits can be achieved by co-loc assets Outside the ‘services’ world, energy storage is also a participant in the wholesale spot markets. The aim is to take advantage of spot market volatility in the day-ahead markets, storing energy when spot prices are low, and selling at peak hours; aka price arbitrage and profile shaping for co-located assets. The wider the average daily wholesale spread, the better. Because such value stream is not a limited participation regulated service, it’s deemed as the most durable long-term revenue stream
Capacity Markets – prime route to market offering some long-term revenue visibility through specific contracts. Can be accessed both from SA and co-loc In the UK - The scheme offers 1-15 year contracts for generation or demand-side response (DSR) units to financially incentivize their availability. The more sought after 15-year contracts are only reserved for new-build assets and comprised the success factor behind the first debt financings for battery storage assets. The upwards trajectory of the clearing price over the past auctions has surprised even the most optimistic observatory, rendering the revenue scheme a highly valuable both for new and existing assets. Othe EU countries - France, Ireland, Poland, Belgium, and Italy followed suit in setting up capacity mechanisms, which is deemed a large enabler of new storage assets to receive financing and connect to the grid. More countries are set to follow, with a prime example being Greece. The design, participation rules and payment mechanism differ from country to country, so participants need to confirm the bankability of such contracts in each region
Portfolio level risk management - the benefits of standalone storage assets and co-located ones can be equally quantified on a portfolio level As renewables portfolios are growing, so are the risks that portfolios are exposed to. Price risk due to merchant exposure, capture risk due to cannibalization, and volume risk due to intermittent are some of the core ones. Flexible assets (such as energy storage or gas engines) and technologies (such as hydro) often help dilute risk exposure through diversification of capabilities. Such a value stream can only be measured through quantitative analysis either on a portfolio level (which could include standalone storage as well) or on individual asset level (only if storage and renewables are co-located) on an overall portfolio level, as it’s not a direct revenue stream such as the abovementioned. In a high pricing environment, imbalance risk for renewables also becomes notable, and through storage co-location imbalance costs could turn into revenue.
Hybrid PPA - a contractual arrangement leveraging benefits both for the grid- and asset-level, only available to co-located assets With a Hybrid PPA, the idea is to get the best of the two worlds: potentially generate revenues through grid services, while improving the investment returns of the renewable asset. The first financial-benefits touchpoint of considering co-locating a renewable asset with storage is the cost savings from the shared grid connection. Such cost savings, as well as saturation in the ancillary service markets, increased cannibalization risk for renewables and volatility in the wholesale markets incentivizing profile shaping of intermittent renewables, comprise factors driving market players to explore the co-location model overall. The maturity of tangible contractual arrangements and the emergence of Hybrid PPAs make the co-location consideration even more attractive. How the two assets will communicate will be dependent on the contractual details. With a Hybrid PPA, it’s possible to have a physical asset to manage the different types of PPA structures, practically turning storage into a physical hedge to complement the financial hedge of the renewable asset. At the same time, another option would be for the two assets to operate virtually independently, with a renewable PPA for the generation, and an optimization agreement for storage. Or adding a price premium to the energy produced from the renewable asset by valuing-in the flexibility which allows better risk management of the energy. 

Revenue streams and use-cases for energy storage assets are multiple. Yes, energy storage is a Swiss-army knife multitasker, but eventually a decision needs to be made as to which business model will prove the one which best underpins each case. After the screening phase of available opportunities comes the time for modelling different scenarios, which we have identified as a core challenge in the industry.