UK battery energy storage system (BESS) project premiums have fallen 15% in the last few months, a source told our sister site Energy-Storage.news.
Rising financing costs and plummeting revenues have been experienced throughout the UK market as the share prices of the three big listed energy storage funds have fallen 40-50% since the start of the year.
Falling revenue expectations and higher financing costs
The UK market for short-duration BESS projects has boomed in recent years to become the largest in Europe with over 3.5GW now online and projects benefiting from high ancillary service market prices, particularly in 2022.
Saturation of those markets was always expected for 2023 but revenues may have fallen more sharply than expected as the wholesale energy trading opportunities, like in the balancing mechanism (BM) haven’t materialised to make up the difference.
Recognising this, LCP Delta recently released a report urging investors to consider more “sophisticated strategies” to increase revenue such as such as revenue stacking from wholesale and the balancing market as more lucrative options for battery storage investors, or else riskier options such as Net Imbalance Volume chasing.
This has led to a fall in both the valuations of those companies developing and operating projects, and the prices that purchasers are willing to pay for early-stage or ready-to-build (RTB) projects.
“Development premiums have come down 15% in the last few months as revenue expectations have fallen,” a BESS finance source told Energy-Storage.news, speaking anonymously.
This is also partially to do with the rising cost of capital. The effect of rising interest rates is felt in the debt space instantly, but with debt typically 20-40% of BESS financing at most the effect on the cost of equity, which takes longer to be felt, is more significant.
Both of these factors have been partially offset by falls in the cost of BESS equipment seen this year as the supply-demand imbalance closed after 2022’s supply chain shock, which saw BESS costs rise by 25% and led to the untimely fall of some firms in the engineering, procurement and construction (EPC) sector.
“Because the cost of raising these investment funds has gone up, people will want to make more return on their equity. So if I was happy to invest in this and get 9% return before, now i want an 11% return. So the price they will be willing to pay is going to drop,” a separate source added.
