Vattenfall plans 3 GW of batteries, offers tolling contracts

pv magazine: Vattenfall is active in many roles in the large-scale energy storage sector, including as a project developer. What is your strategy?

Nicola Kleihues: We already have several co-located assets in operation where the battery [energy] storage system shares a grid connection with a wind or solar farm. It will be normal for us to combine each photovoltaic power plant with a battery. We are also working with another business model: standalone batteries. Our strategic plan is to have 1.5 GW of co-located batteries and 1.5 GW of standalone [energy] storage by 2030.

Where are you on this path?

We’re currently facing several investment decisions regarding co-located batteries in hybrid projects. We expect these to happen this year unless there are any surprises in the approval and grid connection processes. We also expect a key decision soon regarding standalone projects. We’re primarily talking about two-hour [energy] storage systems and, of course, all of these projects should be profitable. However, there are also difficulties with grid reservations. For example, sometimes you don’t get the power you need which, naturally, also affects profitability.

How did you determine the 1.5 GW plus 1.5 GW?

For co-located projects, the planned battery capacity is derived from the solar pipeline – we include a storage system at the grid connection point. We generally base this on the installed photovoltaic capacity on the AC [alternating-current] side. The final scaling then depends on the available space and the actual capacity at the grid connection. Even with standalone batteries, the storage capacity is determined by the grid connection available at the respective Vattenfall site.

Have you already been able to reserve a large portion of the network connections for yourself? 

This is the case, for example, at the site of the power plant currently being dismantled in Krümmel. There, we are planning a standalone battery with a nominal output of up to 400 MW, although the exact size of the battery still depends on further planning.

Vattenfall not only develops projects, but also trades energy. What are your plans in this area?

Daniel Schwarz: There is only one path for the energy transition, and that is the path of renewables. We have now reached a certain critical mass of renewables in the grid, where intraday and day-ahead [electricity] prices, especially in spring and summer, are so negative during the daytime that it is difficult to profitably market assets outside of [German renewable energy law] EEG subsidies. This requires [grid] flexibility. In trading, there is the possibility of creating a profitable business model by combining battery [energy] storage with renewables. It also reduces risk. Therefore, we plan to contract around 1.5 GW of large-scale battery capacity from other market participants over the next few years. Vattenfall also benefits from decades of experience in operating and marketing electricity from pumped-storage [hydroelectric] power plants.

Batteries can be traded on intraday and balancing power markets. There are now many artificial intelligence-backed “algotraders” which use computers make decisions to achieve optimal results. How do you do this?

DS: We integrate large-scale batteries into our automated trading processes. The level of automation has been gradually increased over the last five years so that we now operate fully automated. We also use self-learning or machine-learning algorithms. Unlike pure algotraders, our portfolio of our own renewable energy plants and external plants, in direct marketing [a German requirement that publicly tendered projects sell their electricity on the short-duration spot market], underpins our optimization and marketing activities. This is a subtle, yet very essential, difference.

Back to the projects: Do you only develop projects yourself or do you also purchase projects?

NK: We’re looking at projects. However the market is very heated at the moment. Battery projects are being offered at very high prices so you have to think carefully about whether to develop them yourself. This is reminiscent of the situation in the photovoltaic market about two years ago. Back then, prices were sometimes as high as €200,000 ($228,000)/MW [of project capacity] – very high but at a time when corresponding revenues were also possible.

Can you say what a fair, rational price would be for battery projects?

NK: Development costs are often in the low double-digit thousands [of euros] per megawatt. What developers want to see when selling ready-to-build projects is currently less based on the costs and more on the value of the system. And this value – as was the case with solar projects back then – can be assessed very differently. The current price range is correspondingly wide.

What else do you look for when someone wants to sell you a project?

NK: There are three essential aspects of project rights. These are the land leases, the permit, and the grid connection. It’s important that the grid connections are genuine reservations and that they secure capacity in both directions: feed-in and [for charging]. A daily statement is not a binding grid reservation, however, this is often cleverly presented in M&A [merger and acquisition] teasers. This must be thoroughly examined during due diligence.

How complicated is the building permit?

NK: There are different ways to advance battery approval. One is through the zoning plan process, similar to the one used for solar projects. The other is through privileged access to the substation under Section 35 of the German Federal Building Code. In the later stages, surprises can certainly occur. Objections cannot always be anticipated. Projects are often sold well before they are ready-to-build, where certain milestones have been reached, but others are not yet complete.

Are you also interested in completed projects?

DS: I am not aware of any case where someone has fully developed their asset to the commercial operation state and then wants to sell it.

However, such cases do occur with photovoltaic projects.

NK: In the battery market, we are not yet where we are in the solar market.

Once you’ve completed a battery energy storage system, you need to market it. This can be done either through a merchant agreement, where you, as the owner, receive a share of the actual revenue and bear the marketing risk, or through a tolling agreement. That is a type of purchase agreement for electricity flexibility in exchange for a fixed fee over a specific term. How are these two options developing on the market and what do you offer?

DS: Either I have the opportunity, based on my business model, my investors, and the resulting financing structure, to assume a certain amount of merchant risk or I have the need to reduce the risk. This is definitely a trend we’ve observed over the past 18 months. This is primarily due to the increasing amount of institutional capital flowing into existing and new projects through institutional investors such as banks, thus driving the rapid growth trend in battery [energy] storage. Regarding marketing, we have been committed to tolling from the very beginning. This is primarily driven by our portfolio. It’s quite clear that with a portfolio-optimized view, you approach the market with an asset differently than would be the case if you were purely market-driven. In this regard, we see ourselves as very competitive and close to the market.

Do I understand correctly: If you include energy storage with a tolling contract, you can consider this as flexibility that you combine with your renewable assets?

DS: Yes. We lease the large-scale battery at a fixed price and, in return, receive the autonomy to manage the asset as we wish. This reduces the costs of imbalances and balancing energy in our portfolio and provides flexibility precisely where it offers the greatest added value for the electricity market.

Swiss market data company Pexapark published an article on the E-World website which stated that there is a relatively large discrepancy in Germany between the expectations of energy storage investors and those who want to secure capacity. Do you agree?

DS: I don’t see that at all. If we look at a standard market contract with a term of five to seven years, and the offtake premiums per megawatt per year, and compare that with the costs, then there are enough cases that are profitable and take the interests of the parties involved into account. We are already in very advanced discussions with various market participants who are also reflecting this to us. I think we have to differentiate between what investors expect and what is communicated as potential revenue assumptions. These assumptions naturally fuel certain expectations but they are some way off from where we would have hypothetically been last year, where we are today, and where we see ourselves in five years. That is the time frame we need to consider.

Does that mean you expect revenues to go down?

DS: I wouldn’t say they’re going down but you shouldn’t underestimate the fact that someone is taking the entire marketing risk off your shoulders. If you were to agree on a price, there would be years where the value for merchant marketing would be higher but also years where it might be significantly lower. In that case, we would always pay the agreed premium, which is sufficient enough for the project developer to not only cover their costs but also make a profit on their investment. Furthermore, it’s very important that we don’t just discuss the price but also consider other parameters. As is so often the case, the devil is in the detail.

But so far there are only a few tolling agreements in Germany, right?

DS: I would say there’s significantly less at the moment than we’ll see at the end of the year. It’s definitely an issue and it’s driven by the fact that more and more institutional capital, i.e., debt capital, is flowing into these projects. And this capital raises the question of how the proceeds are secured. Tolling is the answer.

NK: It is often assumed that battery [energy] storage systems are difficult to finance because the revenues are uncertain and the investment costs are too high. We can talk about tolling periods and tolling amounts but as Mr. Schwarz has already said, tolling models are fundamentally affordable. The actual financing barriers currently lie elsewhere, for example with construction cost subsidies [levied by grid companies on energy storage assets to reflect grid management costs]. These involve amounts in the tens of millions [of euros], with no clarity as to whether these will ultimately have to be paid and how the [German] Federal Court of Justice will deal with this [a case related to a developer who wants to remove the construction cost subsidy is pending]. A further uncertainty lies in grid reservations: On the one hand, dynamic grid reservations are being pushed forward and, on the other hand, it is unclear, for example, when and with what capacity one will receive power. This has a significant impact on profitability.

How will the market develop further?

NK: One interesting aspect will be whether the boom will occur in phases. Currently, many investments are being announced in the battery sector. There could also be a correction after the initial expansion phase because there is a risk that the expansion of renewables – especially in the photovoltaic sector – may not continue as we have seen in recent years. This would also impact the battery business model as market volatility is naturally very beneficial for battery revenues.

How do you view the announcements of Germany’s future federal government?

NK: It’s welcome that they fundamentally recognize the role of [energy] storage. However, the specific measures still need to be refined. In the approval process, in addition to preferential treatment for renewables, preferential treatment at substations should also be enshrined in law. The term “system serviceability” is also too vague, so far. In practice, this ambiguity is already causing problems, for example in approval and grid connection procedures, where requirements and responsibilities are often interpreted differently. I’m also irritated by the strong political focus on gas-fired power plants. The potential of batteries apparently hasn’t been properly considered yet. They can be deployed quickly and cost-effectively – and prevent system bottlenecks.

From pv magazine Deutschland.