“Bit of a bloodbath:” Big batteries feel the pinch of coal plant extensions and household battery boom

Battery storage may well be the fastest growing, strongest and healthiest part of Australia’s energy transition, but project developers admit they are feeling the pinch between the delayed closures of the country’s coal fired generators, and the massive growth of home batteries.

As we reported last week, the spread of market prices between the highs and the lows has narrowed considerably in recent months, as the so-called solar duck curve has been flattened by increased storage and changing market dynamics.

So much so that, according to the likes of BloombergBNF, actual arbitrage returns for grid scale batteries in the last six months have fallen by a massive 84 per cent from $362/MWh to just $60/MWh a year earlier.

Market players cite a number of reasons – the delays to coal closures such as Eraring, the huge success of the federal government’s home battery rebate scheme, mild winter temperatures, and changing bidding patterns as some batteries become part of bigger trading portfolios.

It seems clear that these are now starting to have an impact on the ability of battery developers to land contracts that are attractive enough to secure finance.

“At the moment, as some of the people in the room probably know, the off-take market for BESS (battery energy storage systems) is a bit of a bloodbath,” Thomas Schmitz, the head of energy markets at Aquila Clean Energy APAC, said during a panel session at the Battery Asset Management Summit Australia in Sydney this week.

“Lenders are getting increasingly worried. They were really, really bullish, saying, “Oh yeah, we can give you 50 per cent gearing on a fully merchant battery,” but and now they’re just not seeing the revenue on that, so that’s starting to to be a problem.”

Smitz says that Aquila, which has at least four grid scale battery projects in development, mostly in South Australia, says the company is seeking to contract about 70 per cent of the capacity of the battery, for at least 10 years.

“Now that sounds a lot, but if you if you take that for the lifetime of the battery, which is now probably 25 years, you’re actually only contracting about 25-30% of the volumes that you are hedging.”

In a way, grid scale battery developers are finding themselves in a similar position, with similar challenges, to the developers of large scale wind and solar – the market is no longer attractive enough to go merchant, and the huge number of projects in the pipeline are fighting over a limited number of contracts.

But this may only be a transient period, and how long this will last will largely be dictated by when the remaining coal fired generators are actually closed.

Yallourn in Victoria is due to close in 2028 and Eraring in NSW in 2029, but despite the repeated denials of the plant operators, there is still speculation, or at least fears, that deals to extend their closure timelines again will be done.

That, of course, will reduce the price signal again, making it harder for new projects to get over the line. The renewables industry is insistent that lingering uncertainty over coal closure dates – because of their profound impact on prices – is the biggest impediment to new investment.

But there is also competition from the other side of the market equation, the consumers, in the rapid growth of home batteries that is also helping to minimise evening prices, and boost middle of the day prices because they are soaking up excess rooftop solar.

“I’d say for sure, residential batteries are competing with grid-scale projects right now,” said Matt Grover, the head of energy markets in Australia for US-based battery storage technology company Fluence.

“That is happening right now, and (it is) contributing to the collapse of spreads right now.

“Will they outcompete utility scale storage? I’m optimistic that they won’t over time, mostly because as the power system becomes more and more weather dependent, AEMO is going to rely on resources that they can control and forecast, and which are visible to them.

“We’re not seeing today enough kind of coordination and orchestration (of home batteries), which is what needs to happen behind the metre for it to become a resource that outcompetes and then plays a larger role in the power system than utility scale storage.”

At least, though, big batteries are uniquely flexible, have multiple potential revenue streams, and are considered essential to provide the reliability and security in a renewables dominated grid.

“It’s really hard to predict the future, but if there is a an asset class that is you know is proven to be the most dynamic and capable and upgradeable piece of infrastructure you could own, it would be a battery,” Grover, added.

“The physical plants we’re seeing these days are really flexible in what they can do. Everyone’s putting in grid-forming inverters and is doing everything they can to future-proof for the next 10 years of foreseeable grid operations.

“And software gets better and firmware gets better all the time, and you’re seeing batteries able to do things that they couldn’t do just a few years ago.”

Panellists described a market moving away from simple, fixed contract structures toward more varied tolling and hybrid arrangements.

Mahdi Behrangrad, the head of the ESS/VPP business department at Japan-based Pacifico Energy says the shift to tolling and hybrid arrangements has accelerated over the past two to three years.

“Before 2022, almost 100 per cent of the contracts received were of a physical type, but over the past two to three years, almost 30-40 per cent of type of the contracts have changed toward a virtual type,” he said.

Behrangrad also flagged another interesting dynamic, overly passive bidding behaviour among some asset owners and the potential mis-match of investors.

“If you are having tantrums and a hard time with a few months of depressed revenue, maybe you’re in the wrong business,” he said.

“If you were expecting that your revenue projections always are going to follow (the same patterns), then again you’re in the wrong business.

“One thing that, as an industry, we should be very careful is not everyone who is bringing dollar and investing projects should be welcomed. Mixing, let’s say, a half-assed portfolio of super aggressive, speculative investors in a room with some pension funds that want XYZ on a fully forecasted two-year (time frame) – that’s the recipe for disaster.”

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