The innovation necessary to ensure the successful delivery of the energy transition presents investors with opportunities to optimise their portfolios with new asset classes capable of providing healthy returns and supporting accelerated paths to decarbonisation. 

One of the key answers to intermittent production, energy curtailment and grid limitations are Battery Energy Storage Systems (BESS) that can provide resilience and flexibility to energy markets. The co-location of BESS and renewable energy infrastructure, such as solar, presents a logical and innovative solution. 

Pathfinder Clean Energy (PACE), the UK-headquartered international developer of utility scale solar PV and BESS projects, is to prioritise co-location in the UK as it seeks to lead the industry in developing strong and flexible assets.

Utility scale co-location is an emerging asset class, with limited transactional data currently available, but PACE’s analysis suggests that it can provide a premium of up to 3 percentage points on the returns over and above stand-alone merchant PV assets. At the same time, exposure to merchant price risk is lower than that of stand-alone PV assets. 

“Co-location has huge potential to increase returns and reduce risk as well as providing a better asset for the UK energy market. PACE sees co-location as critical to its strategy in the UK and internationally,” said Rob Denman, managing director of PACE. “As an industry we need to innovate constantly to deliver projects that bring value to the energy markets and their transition to decarbonisation. At PACE, we’re proud to lead this activity.”

 

The benefits of co-location include:

  • Increased resilience of income – Renewable energy brings lower cost electricity to the market, but its intermittency brings volatility. As wind and solar grows in the UK and global power mix, colocation of generation and storage assets increases resilience:
    • Reducing energy waste – during periods of curtailment, also forecast to increase with growing renewables deployment, power generated by solar panels can be diverted from grid export to the BESS, meaning less power is wasted.
    • Improving price capture (compared to a stand-alone PV system) – power generated does not need to be sold immediately, but can be stored and sold when prices are more favourable.
  • Hedging price risk – Where solar PV projects are entirely dependent on absolute power values, BESS projects trade primarily off the volatility in the intra-day power markets. Co-location thus reduces price risk in 2 ways:
    • Mutual price hedging – High levels of solar PV output can depress or “cannibalise” power prices because demand for power rarely matches peaks in solar PV output. However, cannibalisation creates arbitrage opportunities for BESS, which can buy power when it is cheap and dispatch the power when prices have firmed up. Likewise, lower cannibalisation will favour solar PV at the expense of BESS. The two technologies thus provide a mutual hedge for a key price risk. 
    • Un-correlated revenues – BESS projects have access to revenues that are independent of absolute power prices, such as Dynamic Containment – the ability to manage the balance of supply and demand in real-time – and other ancillary services, the capacity market and local balancing. This means that BESS revenues are only partially correlated with solar PV revenues, providing further risk mitigation.
  • Shared grid connection costs – a single connection can be used for both the PV and BESS system, which reduces the costs when compared to stand-alone assets. PACE’s modelling suggests that a stand-alone asset might use around 14% of total grid capacity over the course of a year, whereas a co-located asset, in the same location, might use around 29% of grid capacity. This is partly attributable to the BESS using the grid connection to import and export power when the solar PV is not using all of the connection capacity. In particular, power markets are at their most volatile on winter evenings when the grid connection is not used by the solar PV.

 

As well as improved financial returns, co-located assets help to relieve grid congestion at peak generation times by delaying power exports. This allows for more renewables to be connected without the need for investment in the grid, meaning that the Government’s net zero pledges can be met at a lower cost.

PACE has over 260 MWp of solar projects fully permitted or submitted into planning and across this portfolio is looking to co-locate over 100 MW / 200 MWh of energy storage. Over 120 MWp of solar and 90 MW / 180 MWh is targeted to commence construction in 2024.

Also read our article on clean energy, the: ‘Sunrise Investment’