Ain’t seen nothing yet: New ways to make money from big batteries are on the way

New revenue streams for big batteries will emerge in the next decade as big international energy traders start work in Australia, and they can’t come too soon for developers still struggling to get financiers to understand how energy storage systems make money.

“A lot of this stuff we’ll see, we haven’t started seeing yet,” says Pacific Blue CEO Domenic Capomolla. 

He expects to see a range of new derivatives appear in Australia in the next five to 10 years, such as trading cap contracts, one of the main financial tools that retailers and generators use to manage their exposure to very high spot prices in the wholesale electricity market. 

In 2019, University of Queensland installed a 1.1MW / 2.15MWh battery and documented its experiments with using it instead of a traditional cap contract, which pays out when market prices go above a set threshold – normally $300/MWh.

What is still unclear is how to manage the physical limitations, such as network constraints, which purely financial contracts don’t have. 

“Studies have shown that [for] a two hour battery, you can reduce your cap requirements by 50 per cent. [For a] four hour battery, you can reduce your cap requirements by 90 per cent. The market hasn’t started trading caps on the back of batteries yet… but it will as companies like InCommodities are coming in,” Capomolla said during an industry forum last week. 

InCommodities started operating in Australia in May last year, initially to offer “a variety of risk management and trading solutions” including power purchase agreements and long term offtake deals. 

It, and other international trading houses, are entering Australia to make money from the extremely volatile electricity prices. 

“They’ll start developing synthetic products, stuff that we haven’t seen,” Capomolla said. 

“Weather derivatives, I reckon, will come off the back of batteries because they can be supported by batteries’ fast start. And a lot of those weather events that a weather derivative pays out [on] are 24 hours [and are] short moments in time. 

“The smarter commodity houses are just coming into the market….there’ll be caps introduced that are knockout caps. They might be look backs. Batteries can provide the physical facility to back up some instruments.”

Lean in to LTESA, CIS

Volatile battery revenues mean locking in initial funding to build them is still challenging, says Ampyr chief Alex Wonhas. 

He says batteries earn about 80 per cent of their revenue from 20 per cent of the time it’s operating, and banks and other financers are still struggling with that. 

But Wonhas, as the chief of a developer and on the board of EnergyCo in New South Wales (NSW), believes the way to easier funding is for governments to lean into ideas that are already in use.

Specifically, these are the Capacity Investment Scheme (CIS) and NSW’s Long-Term Energy Service Agreements (LTESA).

“[These have been] a really great achievement, and it looks like the NEM Review is starting to think about a similar mechanism to support future investments,” he told the same industry forum. 

“I think we need to double down on this, create real clarity, and especially get long term contracts in place, because in the end you can invest in anything, but the more risk you take on, ultimately consumers have to pay higher prices.

“It’s not that difficult. I think we already have the mechanism which is the CIS, you just have to tweak some of the parameters to really tune it up.”

One of the main avenues the NEM Review is looking at is creating a warehouse that would hold very long term offtake contracts until buyers are ready to take them on. 

Generators build projects with a 25-30 year lifespan, but energy buyers are looking for much shorter duration contracts of only up to a decade, Tim Nelson told the Australian Energy Week forum. 

A warehouse function is something the Australian Energy Market Operator (AEMO) could take on, he said.

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