Frequently Asked Questions
How can a commercial battery be used?
We all know how we use the battery in our phone or car. To charge up a store of power to use when we need it. Phones are typically charged up over night and run down during the day as we use them for calls and increasingly for messaging and data. This is called “time shifting” – charging when power is available (when we can connect to a generator) and discharging when we are out and about. Most people expect that batteries attached to the grid are used in the same manner – to “time shift” power from one time of day when supply is readily available and power is cheap, to another, when demand is high and power is more expensive. This is a valuable use of a commercial battery, but the costs of buying power and the efficiency of each “cycle” of charging and discharging mean that returns from “time shifting” are modest, at about 5% return on capital.
However, commercial batteries can be used for other purposes. If a battery is connected “behind the meter” to a local generator, it can store up power to be sold at the best price when the grid needs power, as opposed to simply “spilling” power on the market when it is generating. The same is true of power consumers; water companies, manufacturers, flour mills all must run continuously and so typically buy power as they need it. In the same way that generators want to sell power when it is expensive, consumers want to buy power when it is inexpensive. Both generators and consumers of power benefit from adding batteries and “time shifting” “behind the meter” and in doing so they reduce the demands on the National Grid.
As well as helping with the volume of power batteries can support the quality of power. This isn’t something that most of us think about very much – “Power is power, right?” Not quite. Traditional power generation involving large rotating generators powered by steam produced a nice clean ‘sine curve’ of power at 50 hertz (cycles per second). The newer types of generator tend to generate more “spiky” power and modern equipment (computers and capacitive devices) is often more sensitive to the quality of power than the more simple devices attached to the grid 30 years ago.
To deal with this, the National Grid operates a series of programmes called Frequency Response (there are a series of “flavours”; static, firm, enhanced) in which it pays an insurance premium to battery owners ready to charge or discharge power in very short increments at short notice (1/4 seconds). These contracts, while not long term, can be worth up to 20% annual return on capital invested in a battery. They work by using the frequency of the grid as a signal to either discharge (when the frequency is below 50 Hz) or take power (when the frequency is above 50 Hz).
To encourage investment in new generation capacity the Grid will enter into long term Capacity Market contracts that pay investors who build new capacity – including batteries. These again are small amounts, up to 5% return on investment, but can be for up to 15 years.
There are other forms of future uses for commercial batteries; each of which can generate a separate revenue stream for commercial batteries. For example the Grid needs a variety of “balancing services” to, for example, manage supply and demand and to restart the grid following a complete grid failure, known as a “Black start”.
In summary a battery is much like a Swiss Army knife, it has many different tools and uses – many of which can be combined and earn revenue in parallel.
Don’t batteries degrade? What assumptions are you making?
As every mobile phone user knows, battery performance deteriorates over time. There are two components to that deterioration – first the availability of the battery to operate and second the capacity (in kWh) the battery is able to store and discharge. Our batteries are guaranteed by the manufacturer to offer over 98% availability over the first five years. In addition, manufacturers warrant that the battery, provided it is not charged and discharged more than a prescribed amount, well under our usage model, will not discharge by more than 85% over five years or 70% over ten years. These assumptions, at their most conservative level, are contained within our business case.
How certain is the business to secure supply of batteries?
Eelpower’s management have unique experience of developing a variety of renewable and electricity storage assets over the last six years. The team have developed direct relationships with many of the major technology manufacturers, including senior level relationships with BYD, Tesla and Trina.
How long are the batteries and other equipment guaranteed for?
BYD provides a five year product warranty and a ten year maximum degradation warranty. We also benefit from a long term O&M contract which covers all equipment supplied and includes response times, availability guarantees with liquidated damages and other availability benefits.
What happens if the market is flooded with commercial batteries?
If the market is flooded with commercial batteries, they will all need to have satisfied the National Grid’s operating terms and secured the contracts necessary if they are to provide a strong economic return. If they do, the price paid for these services will drop and, if uneconomic, Eelpower will not participate in new contracts; its existing storage assets, having been earning current levels of return, will be the lowest cost providers of such capacity. And, as we note elsewhere, we do not anticipate a flood of such batteries without significant bank debt financing during 2017-19.
How do future lower battery prices impact the business?
Eelpower will be well positioned (with operations and management process in place) to benefit in any reduction in battery prices as we continue to develop sites into the future. We are technology and supplier agnostic. With the expected paybacks on the existing batteries, the forecasted revenue curves and the forecasted price reductions of up to 10% per year, we are confident that the current assets will remain competitive compared to new assets.
Who are the competitors?
The competitors to Eelpower are organisations with access to significant equity investment capacity and commercial landowners already in possession of significant connection assets who do not rely on institutional debt. They need to be very focused on a rapidly-evolving market for grid services and prepared to invest in the capabilities necessary to trade using electricity storage assets. Eelpower would like to be in contact and collaborate with organisations with these characteristics.
What are the barriers to entry?
Current and 2017-20 forecast levels of volatility and imbalance on the national and local grids will require significant investment by the grid to manage. First movers, like Eelpower, will have written off the majority of their investment in these assets during this period. This will enable them to be the lowest cost provider of these services, while having developed new revenue streams to support and grow the business.
Is the business exposed to government incentives like Feed In Tariff?
There is no government incentive programme for battery storage and Eelpower see no prospect of their being one (or needing to be one). The National Grid manages a government programme designed to increase grid capacity in which batteries form a part and which batteries can enjoy – these are long term commitments to encourage the whole industry to address the 2/3rds of generation capacity beingThe regulator and the Department of Business Energy Innovation & Skills need to focus on removing barriers to the development of a smart, flexible grid, as demanded by the National Infrastructure Commission in their 2016 report on Smart Power.
What assumptions are you making re future electricity prices?
None. The economics of battery storage, unlike renewable energy generation, are not exposed to shifts in electricity wholesale prices – batteries are only very marginal consumers. Our model assumes that we consume only 12% of the electricity charged and discharged by the battery, which has proved to be a sufficiently conservative assumption based upon our three years of operational battery experience.
What about management risk around the team?
Eelpower is building the small but growing team that will be necessary and sufficient to grow the business working with partners in the engineering, supply, manufacture, operations and management of a network of electricity storage assets. We favour an outsourced model for delivery and this protects the company and its shareholders from dependence upon individuals and unnecessary overhead. No member of the management or board team is indispensable or represents a single point of failure in our processes.
Why not do this within your existing businesses?
The scale and opportunity of the marketplace addressed by Eelpower does not work well with the project-based approach undertaken by our hydropower and solar PV businesses to date. Which is not to say they do not have significant common interest. For the avoidance of any doubt, Eelpower and Barn Energy and Farm Power are not connected businesses, although they share a number of shareholders and a couple of directors.
What about business interruption risk?
Eelpower will have comprehensive insurance against business interruption. Our heritage (and experience) from the renewables construction and generation businesses has allowed us develop a sophisticated network of the best insurance and asset maintenance and protection partners, many of whom Eelpower will engage to ensure uninterrupted availability and, in the event of failure, proper financial coverage for any loss.
What management fees are paid? To whom?
The costs associated with our business include rent (which is often expressed as a revenue share with a landlord).
There are no management fees charged or paid. All costs of Eelpower’s employees and subcontractors are included in our business model.