The trend for co-locating assets – wind plus storage, solar plus storage (and even EV charging infrastructure) – continues to be a key theme. For the developer, co-location maximises land usage and grid capacity. The multiple revenue streams provided are likely to make the project more attractive from an investor point of view.
Whether or not a developer seeks to co-locate at the outset, it should seek to ‘future-proof’ its project. It can do so by ensuring options and leases allow for a battery facility in addition to the main generation facility and by structuring its planning applications to cater for a possible battery ‘add-on’. This will help to maximise the value of its asset.
A question of balance
For investors, the attraction of the co-location model lies in the ability to balance out the intermittent generation nature of the main asset and reduce ‘price cannibalisation’ by storing energy generated until times of peak demand – this too helps to maximise revenue. Co-location could provide the option to oversize the output capacity of the main generation asset with excess capacity stored until it can be exported. Co-location in assets can lead to proportionate reductions in capex and opex costs, which all help strengthen the financial model.
“The key thing is to make sure that the assets are financially viable in their own right, have their own revenue streams and work on their own merits”
An upscaling of renewable generation is needed if the UK is to meet its net-zero targets. However, given the country’s unpredictable weather and grid constraints, storage will be needed as a key part of being able to achieve those targets. It would therefore seem that co-location is a big win. Yet although that is the case in theory, the reality is not so clear cut.
One of the challenges is that, from an investor point of view, there is the complexity and uncertainty of the revenue streams. Battery storage projects – even where they are standalone assets – have different structures from other energy projects and require revenues to be stacked and which are not guaranteed to the same extent. If you then add co-location into the project model, the complexity increases even more and the interaction between the two assets needs to be carefully managed. So how do you create a viable project model?
The current market view is that in order to build a viable business case for co-location, the assets involved need to be treated as if they are separate standalone assets. Even then, there is no one-size-fits-all solution and the business case will differ from project to project. If, for example, the primary reason for co-locating storage is the arbitration of the generation output, then this is a similar optimisation problem to that of a standalone storage project. This flexibility can be embedded into the project and the business case can be built by combining multiple revenue streams including ancillary services, FFR and CM derived from the battery asset.
If the business case is focused on connection issues or restrictions around active network management of the grid connection, which can curtail the amount of power that can be added to the grid, there is the potential to use co-located storage to manage these constraints more effectively. However, for this model to work both the generation and the storage assets have to be optimised to ensure that the value of combining those assets is maximised.
Regardless of the business case, the key thing is to make sure that the assets are financially viable in their own right, have their own revenue streams and work on their own merits.
The co-location business model is not viable if the generation asset does not work on its own and the assumption is that the battery asset will be compensation for any shortfall. That is particularly important from an investment perspective. Not only will investors buy into the longer-term projections and the protection that co-location can deliver from cannibalisation; there is also an increasing understanding that the cost-efficiencies between the assets can boost the return models of both. However, an investor is going to want certainty that the assets can each operate and deliver returns. Without this, the investor may question the viability of co-locating versus investing in the individual assets as separate projects.
One potential solution to providing investors with revenue securing in the co-location model is where there is an offtake partner that can provide a power purchase agreement. Although there is already a route to market that provides a PPA for both standalone storage assets and generation assets, there is an additional level of complexity when the PPA needs to combine two assets. Could either a private wire PPA or a hybrid PPA provide the solution?
Hybrid PPAs are a relatively new concept in the market, with Statkraft and Habitat Energy having launched products in 2020. A hybrid PPA combines both assets into a co-optimised PPA structure that could deliver better value for co-located projects. By providing site-wide rather than single asset optimisation, a hybrid PPA can accommodate the different onsite generation assets, with different marginal running costs, and the flexible nature of storage and its ability to provide multiple services. This could be an area to watch in the coming months and, if the figures add up, it could provide a much-needed boost to co-location.
An easier route to market could be through securing a private-wire PPA, which would bring a secure revenue stream and a potentially higher PPA price. However, the issues of finding an offtaker willing to enter into a long-term PPA with appropriately robust grid-sharing arrangements, and the obstacles thrown up by the electricity supply licence exemption rules, continue to make projects of this kind a challenge.
Despite all these considerations, co-location is not an overnight trend. In fact, the opposite is true, and more projects of this nature will be developed in the coming months. In addition, high investor interest and the trend for downstream investment are going to lead to more capital being deployed into renewable generation projects. With the right partnership between an experienced developer and investor, this could open the gateway for co-location. In a sector that is always innovating in the drive to reach net zero, it will be interesting to see how this segment of the market develops in 2022.
Kay Hobbs is a partner, corporate renewables at UK law firm TLT