We are proud to introduce a set of studies on the appraisal of battery energy storage systems (BESS), produced for the European Investment Bank (EIB). The series explores the economic, financial, and regulatory dimensions of BESS project appraisal across Europe, with the aim of informing the EIB’s investment appraisal methodologies and strategic engagement with storage technologies.
Context and Strategic Importance
BESS is increasingly recognised as a key enabler of the European Union’s (EU) decarbonisation and energy security goals. The EU’s storage capacity is currently around 70 GW (25 GW of which are BESS), yet the Commission has called for over 200 GW of storage capacity by 2030. Utility-scale BESS is the most scalable near-term solution to fill this gap, with institutions like the EIB having a pivotal role to play in accelerating the technology’s deployment.
However, current investment levels fall far short of what will be required to achieve these ambitious targets. The traditional appraisal methodologies used by investors to evaluate projects are most appropriate for projects deployed in a relatively static environment; they insufficiently capture the full range of factors important in systems undergoing transformative change.
Our studies explain why both public and private investors should evolve their appraisal methodologies to reflect the dynamic system in which they are investing. This is vital to secure sufficient investment flows to the technologies that can support the energy system in decarbonising and ensure that capital is allocated to projects likely to remain financially viable in markets subject to rapid change.
Publications
This report evaluates the system-level economic rationale for BESS investment, highlighting the limitations of standard cost benefit analysis (CBA) methodologies which rely on static ‘counterfactuals.’ Sensitivity analysis of a single BESS project using existing static appraisal approaches showed that the economic internal rate of return (EIRR) could vary from –1% to +37% depending on the counterfactual and related assumptions used. Instead, we recommend adopting a forward-looking dynamic appraisal methodology. At a minimum, any storage CBA should recognise the ongoing and fundamental system change, using scenarios to quantify the difference in system operation with and without a proposed project. However, given the range of qualitative benefits storage can provide to the energy system, a methodology combining qualitative and quantitative approaches (such as Risk-Opportunity Analysis (ROA)) would generally be preferable. Together, these approaches will enable prospective investors to better understand the usefulness of additional storage investment in the future energy systems and markets in which the assets are likely to operate.
To complement our paper on the system-level value of BESS, this paper analyses the factors determining the revenue opportunities and risks, and hence financial/business viability, for BESS projects in Europe. As capital-intensive assets, the majority of BESS costs are upfront, whereas project revenues will likely be accrued across a 10-to-15-year period from electricity markets that will be subject to significant change as energy systems decarbonise. The three core revenue streams for BESS in Europe are identified (ancillary services, energy arbitrage and capacity markets), and their past and emerging trends evaluated. Given their evolving nature, we then apply participatory systems mapping to analyse the factors and future dynamics likely to change the BESS revenue outlook under each of the core streams. This research enables us to make recommendations to either boost or de-risk the BESS business case in Europe. Further, we evidence the need to adopt a dynamic financial assessment methodology. Revenue back-testing is deemed an inappropriate financial appraisal methodology, while traditional modelled revenue forecasts that remain reliant on static assumptions should be critically analysed and supplemented using the insights from systems mapping exercises, informed by country-specific scenarios.
These two core reports, centred on utility-scale BESS, are complemented by a briefing paper on “Hybrid Storage Assets.” This outlines the characteristics, challenges, and opportunities faced by behind-the-meter and co-located BESS, collectively referred to as ‘hybrid storage assets’, and how these roles may offer unique value. The paper highlights their potential to offer significant support to meeting the EU’s decarbonisation goals, given their unique siting in the energy system. However, their profitability and deployment are highly dependent on national regulatory frameworks which vary widely across Europe. We recommend granular, country-specific assessments combined with the economic and financial appraisal approaches advocated for in reports 1 and 2.
The UCL Centre for Net Zero Market Design is part of the UCL Institute for Sustainable Resources and researches policy and market reforms for a low-carbon UK electricity system, focusing on surplus energy, investment, and global energy transitions.
Image credit: UniEnergy Technologies, CC BY-SA 4.0 <https://creativecommons.org/licenses/by-sa/4.0>, via Wikimedia Commons.