Grid-scale battery storage is taking off in Australia, but it is still a struggle for investors to get value from their services. The contracts for the new Victoria big batteries explain why.
Australia is at the start of a big boom in battery storage. The Tesla big battery is up and running, and by the end of 2019 will likely be joined by another dozen or so installations of varying sizes. Some bigger and some smaller.
The big test for investors and developers for battery storage is how to get their money back. Despite the speed and flexibility and versatility of the technology, there is actually no market for many of its service.
And that explains, why the two batteries to be built in Victoria this year – the 25MW/50MWh Tesla battery to be co-located near the 60MW Gannawarra solar farm near Kerang, and the 30MW/30 MWh Fluence battery at the Ballarat terminal station – relied so heavily on state and federal subsidies.
As we wrote last week, Tesla highlighted the problem in its recent submission to the National Energy Guarantee, noting that 40 per cent of the services it has delivered since it started operation in December have been for free.
That’s because there is no market for the many of the services it provides, particularly the stunning speed of its response. Even the institutions don’t seem to recognise what the battery storage has shown it can do.
Tesla has already shown that its presence has delivered significant value to consumers and the grid, by smashing the cartel on FCAS (grid services), keeping prices down in wholesale spikes, and adding to grid security.
There are estimates that the Tesla big battery has delivered value worth tens of millions of dollars in just its first three months of operation, but it has only been able to access a portion of these benefits.
The energy market rules, Tesla, the Australian Renewable Energy Agency, and many others note, are designed to suit Australia’s ageing fossil fuel fleet. The rules simply haven’t caught up with technologies like battery storage.
That perhaps explains why the owners of the new Tesla big battery to be built at the Gannawarra solar farm and the Fluence battery to be built at Ballarat have signed away market revenues for the next 12 to 15 years.
Under a complex financing arrangement, EnergyAustralia will take the market risk, and will operate the entire charging and dispatch from the two batteries in exchange for a fixed $50 million fee.
That $50 million fee will be shared between the owners of the Tesla battery (Edify and Wirsol) and the Fluence battery (Ausnet), and that will be their lot until the contracts expire in 2030 (Tesla) and 2033 (Fluence).
Ross Edwards, the head of trading at EnergyAustralia, says the fixed contract – along with the hefty up-front support totalling $50 million from the Victoria government and ARENA – was necessary to get the batteries built.
“It’s still early days for battery storage in this market …. And this will bring forward an investment that would not happen otherwise,” Edwards told RenewEconomy.
(It should be noted here that the unrewarded value of the two batteries – as noted by both the Victoria and federal governments – would be reduced costs for consumers, greater energy security, and higher penetration of renewables.)
Edwards says EnergyAustralia will explore a range of value streams in the market: capacity (selling at times of peak demand), arbitrage (buying low and selling high) and FCAS (grid services).
“Part of our approach is to understand how these (revenue streams) land in the future,” Edwards tells RenewEconomy.
“We need to understand these things better … how they will overlap, or if they will be totally exclusive …. and we need to understand the risks.”
“There is only so much modeling you can do to understand what these things will deliver. Most reliable modelling will look backwards.”
John Cole, the head of Edify Energy, which with Wirsol Energy will jointly own the battery, alongside the nearly complete 50MW Gannawarra solar farm (pictured above), making it one the biggest such installations in the world.
He says his company will likely be “under water” on the transaction, even with the big grants from the Victoria government and ARENA.
“We are not doing it for the money, we’ve done it for the learning,” Cole tells RenewEconomy.
“From a strategic perspective, and for understanding how the batteries will work, we will learn a lot. They – the batteries – will be a fundamental part for the future.” Indeed, he says they will be a category killer for the energy industry.
“I’m a big believer in lithium-ion, I think it will follow the same cost curve as solar, and that has fallen 80 per cent since I have been involved in the industry.”
Ivor Frischknecht, the head of ARENA which has agreed to match Victoria state funding and grant $25 million to the two projects, says the issue is one of costs, which are coming down, and markets, which are yet to develop.
“The market is still fairly immature,” Frischknecht tells RenewEconomy.
Costs are coming down, but this will largely be driven by technology and manufacturing developments overseas, which will in turn be delivered by scale of production, as happened in the solar industry.
The other side is revenue, something that is within Australia’s capacity to influence.
Frischknecht points to potential markets such as fast frequency response, fault current and black start capability – which batteries can deliver, but have no access to under current rules.
“The revenue side is still early in terms of development, and that in addition to the cost is the reason that (these developments) need substantial subsidy.
“That’s why we want to be involved. What we want to do with these projects is to put the collective learnings to the various regulatory bodies and regulatory initiatives.”
As for costs, Frischknecht says around 30-40 per cent comes in the “non battery-pack costs,” such as cost of installation, software and engineering.
“That has a huge ability to come down … we saw that come down by a factor of five in large-scale solar … and they will come down with storage with volume.”
Other issues involve regulatory issues such as their status as a standalone facility, or as part of a solar or wind farm. Tesla has made a similar point. The differences in fees and network costs is potentially significant.
“There are some big gnarly issues that have to be sorted out,” Frischknecht says. “We don’t necessarily have the answers yet. Once we do, that will increase the value of battery storage.”
Giles Parkinson is a journalist of 30 years experience, a former Business Editor and Deputy Editor of the Financial Review, a columnist for The Bulletin magazine and The Australian, and the former editor of Climate Spectator.