Buying lightning – Battery storage is reinventing the grid

How do grid-scale batteries make money?

Crucially, batteries must become more bankable as unpredictable revenue streams and comparatively lighter state support make them less attractive to investors than traditional renewable power projects.

Currently, battery storage projects are often hard to finance on the basis of solely serving capacity markets and ancillary services, parts of the wholesale energy markets that bolster security and stability.

However, certain financing arrangements can make a difference in getting projects off the ground. The increasingly popular co-location model (which places batteries alongside a renewable power generator) means storage projects are bolstered by the more stable revenues of a clean energy project backed by enhanced state support, such as contract for difference regimes. Moreover, cash sweep mechanisms, a derisking tool where a proportion of free cash is used to repay debt, can also help secure lenders. Also helpful is scrutiny of the creditworthiness of offtakers or energy aggregators, a form of consortium arrangement where customers group together to buy power on better terms.

Dated regulatory regimes can also make scaling projects difficult in certain jurisdictions,  reflects Rupert Baker, Singapore-based projects partner: "You need private investment to get the speed and penetration, but you also need a fit-for-purpose regulatory framework." Despite these hurdles, investment is growing. According to the IEA, storage projects received $40 billion in 2023, a fivefold increase since 2018, with CNNP Rich Energy in China, Hecate Energy in the US and Engie in Europe among the largest investors.

"Other options are entering a long-term tolling agreement with an investment-grade offtaker that will use the battery for a period in return for a toll or lease payment or entering financial offtakes such as 'virtual tolling' for all or some of the battery's capacity or for only certain market trading intervals. Then there are revenue floor guarantee offtakes such as Commonwealth Capacity Investment Scheme Agreements or Long Term Energy Service Agreements in New South Wales. It's a different investment proposition depending on which you choose."

Technologically, batteries have little to prove beyond progress in lifespan, efficiency and costs: their centrality to the energy transition is beyond question. The commercial argument in Western markets, however, remains open. "To finance batteries and lure private investment you need to have enough revenue in the longer term to amortise that often high upfront capital expense," concludes Baker. "You need certainty of revenue."