Problems with Brazil’s planned battery auction

With Brazil’s Ministry of Mines and Energy asking for feedback about how it should structure procurement of battery energy storage system (BESS) capacity, regulatory uncertainty could deter investors.

The ministry is planning a battery-dedicated grid capacity reserve auction in June, and has held a public consultation exercise.

Matheus Dias, senior research associate at UK-based analyst Aurora Energy Research, said, “Regulatory uncertainties, combined with a tax burden that represents 25% of battery capex [capital expenditure], increase project costs, which end up being passed on to consumers.”

Dias added, “International experience shows that batteries can reduce [electricity] system costs by participating in [grid] ancillary services and through arbitration,” referring to batteries’ ability to charge when grid power is cheap and discharge during peak pricing periods.

The analyst said the ministry’s proposed auction model involves energy arbitrage profits going into a fund to finance the other payments to be made to battery operators, rather than to project developers and their backers.

Aurora said high taxes and the arbitrage question, plus uncertainty about grid ancillary service payments, a vague definition of batteries associated with solar plants, and the proposed classification system of grid charges to be applied to batteries could all deter investors.

“Brazil has the opportunity to develop a competitive energy storage market but current rules could drive project costs beyond the ideal level,” said Dias. “Simulations indicate that hybrid projects, such as solar-plus-BESS, could offer prices 19% lower than standalone battery systems but their eligibility for the auction is still unclear. In addition, allowing developers to retain arbitrage revenue and participate in ancillary services would allow batteries to compete on an equal footing with other technologies, such as thermal [electricity generation], while reducing costs for consumers. Without these adjustments, the auction risks having little competition and unnecessarily high costs for both the [electricity] system and consumers.”

Hurdles

The 25% tax burden on lithium-ion BESS projects could be reduced by tax incentives similar to those applied to solar cells and inverters, reducing the tax bill up to 68% and driving reductions of up to 13% in BESS project bids.

Aurora estimates battery auction bids could be 17% lower in northeastern Brazil, and 9% lower in the southeast, if developers were allowed to bank energy arbitrage profits. Arbitrage could also be made more profitable by removing the ability of national grid company the Operador Nacional do Sistema Elétrico to determine when BESS must discharge, further reducing grid costs.

The ministry’s auction ordinance does not define how batteries could participate in a fee-earning market for providing ancillary services to strengthen the grid. The swift response times, precision, bi-directional capacity, and geographical flexibility offered by batteries means grid ancillary service payments make up the chief revenue source for BESS in France, Germany, Poland, and Belgium, and can account for 95% of income. Fast frequency response payments are the main source of BESS revenue in 70% of the nations analyzed by Aurora.

The proposed legislation also fails to indicate whether BESS connected to solar projects can participate in the auction. Aurora says its Chronos BESS modeling software has estimated solar-plus-storage sites could afford to bid 19% less than standalone BESS projects in the auction.

Aurora added, the ministry has failed to define whether BESS would be treated as electricity generators or consumers – or something else – with regard to the grid usage fees they would face. With grid charges varying significantly across Brazil, that definition could affect competitiveness and lead to regional imbalances in BESS deployment.

From pv magazine Brasil.