“The addition of BESS can mitigate the risk of long-term PPAs”

Nuveen Infrastructure is one of the world’s leading investment managers in renewable energy with more than EUR 5 billion of assets under management. Where does BESS fit in the company’s investment strategy?

We are seeing BESS as a critically important technology because of the scarcity of grid connections and the exponential addition of renewable capacity. Whenever we can, we are looking at hybridization to optimize the grid connection points we have. With more than 2 GW of operational renewables assets in Europe, we are exposed to a variety of risks, such as cannibalization risk, which can affect financial performance in the long run. We see batteries as a mean to mitigate such risks in our portfolio.

In terms of capacity auction and availability of ancillary service revenue streams, some countries are more attractive than others. We are particularly bullish on the Nordics and southern Europe – Italy, Iberia. For example, we consider Italy’s MACSE auction very attractive in terms of visibility of returns, and that means that we will be able to take the investment decision on some Italian projects very soon. Presently, we have 30 MW of operational batteries in Europe and 700 MW in development either on a collocated or standalone basis.

Which are your preferred offtake options for BESS assets?

When we have a standalone, grid-connected BESS, we look at tolling agreements or some profit-sharing mechanisms. This depends on our project finance profile – if we do equity investment, we have a bit more freedom and potentially more risk appetite.

When it comes to collocated assets, like the ones we are currently developing in Italy, then we are looking at hybrid PPAs. The key question is how to make it work with either a new or an existing solar PPA offtake agreement with an industrial. We’re having many discussions around that, and we think 2025 is when we will have our first PV-plus-BESS PPA. It all comes down to how well we negotiate that with an industrial – we need to be very transparent so the industrial can understand our constraints, whether we need to mitigate the shape of PV output and potentially minimize negative hours, and in turn, we need to understand their targets. Only a transparent discussion can lead to a win-win structure.

Hybrid PPAs are a very nascent offtake structure. In Europe at this point there are around seven such deals. With BESS revenues being highly unpredictable in the long run, how do you negotiate hybrid PPAs?

We anticipate the future collocation of BESS in the PPA structures that we sign. We make sure that the offtaker is aware of the future BESS colocation and we agree, transparently, to come back to the negotiating table and to ask if our partners see value in renegotiation the PPA by including a BESS asset. If they see no value, we would leave the PPAs at arm’s length and then we would make our CapEx BESS investment and trade the battery on the market. We would still be allowed to charge from the renewables plant onsite provided virtual financial settlements are in place. We consider the addition of BESS as a mean to mitigate some risks of the PPA which would be beneficial to both parties.

Assuming a solar installation is backed by a 10-year PPA, would the same or a shorter offtake deal apply to the collocated BESS asset?

The same. But, what makes sense is to reassess the offtake deal on a two-year basis because the value pools for BESS, such as capacity markets and ancillary services, are extremely dynamic. This needs to be smartly negotiated because we also don’t want to impose any long-term constraints on the BESS. A poorly structured PPA would limit BESS revenue potential.

When adding BESS to a PPA at a later stage, you need to renegotiate prices and terms. What is changing the most in this process?

It depends on what you try to achieve. If you try to limit some risk, you can increase the price. But, if you need to allocate the BESS capacity to specifically reshaping your solar profile to meet some other requirements from the industrials, then you need to assess the BESS revenue vs. the market, and then you again need to negotiate very transparently. Because eventually, the hybrid PPA business model is simply competing with other revenue streams like ancillary services and peak shaving arbitrage opportunities. So you always compare returns from different revenue business models and take a decision based on your expectetions and appetite for revenue certainty.

How do you see the field of hybrid PPAs evolving in the coming years?

Today, this is still a very nascent market but there will be a lot of transfer of knowledge from the UK to other parts of Europe in the coming couple of years. I’m sure that in 2025 we will have the first requests for quotation (RFQ) for BESS+PV PPAs, and hopefully we as PPA sellers will be offered the chance to demonstrate that we can come up with win-win structures. Also, we can trust that the most educated industrials will be also able to define PPA structures that they need and will take that to the market and organize their own RFQs. Finally, we can also trust BESS optimisers and traders to find a way to standardize offtake deals.