Energy storage systems are rapidly becoming a core part of the development towards a decentralised and flexible energy system, where fossil fuels are replaced by renewable energy sources such as wind power.
Major transitions create interesting opportunities for alert investors. This article briefly outlines the key aspects investors should understand about grid-scale energy storage projects, their returns, and how those returns can be optimised.
For investors, being in the right place at the right time, and often among the first, can make a significant difference. The battery energy storage market has grown rapidly in a short period, however, and the earliest entry phase has already passed. So has the train left the station?
Not quite, says Cactos CFO Sampsa Hämäläinen. Although returns from energy storage markets have declined from their peak years, investment costs for energy storage systems have also come down. The market has not disappeared, and grid-scale projects remain profitable.
According to Hämäläinen, new technologies often attract investors to the same market all at once, increasing the risk of overinvestment. This happened with wind power and will likely happen with technologies such as artificial intelligence as well.
That does not mean investors should wait for a “perfect moment,” Hämäläinen points out. If you want to enter the market, it is better to act sooner rather than later.
“Investments in energy storage should be planned for the long term in any case,” says Hämäläinen. “There are no quick wins.”
For now, the market still offers reasonably attractive returns, but over time these will decline as technology becomes cheaper and investments increase. At this stage, attention should be focused on how quickly an energy storage project can be delivered and connected to the market. Smaller grid-scale projects are more agile in this respect than large-scale developments, even if they lose out on unit costs, Hämäläinen estimates.
So far, energy storage systems have paid back their investment in an average of 2–3 years, assuming there has been no long delay in market entry. Even a delay of six months or a year in delivery can have a significant impact on overall returns, as the strongest early revenues are lost.
“If one project takes 1.5 years to deliver and another takes six months, the revenue earned during that year from ancillary service and wholesale electricity markets can make a big difference for an investor,” Hämäläinen notes.
Until now, most energy storage revenues have come from ancillary service markets, but according to Hämäläinen, this is not an unlimited source. In the future, revenues will increasingly come from wholesale markets. In addition, Fingrid is currently developing new market models to integrate energy storage into transmission and main grid support.
According to Hämäläinen, new markets may emerge around grid bottlenecks and nodes, when electricity is no longer sold generically across Finland but at specific points in the network.
“For investors, it may become relevant to consider the geographical location of an energy storage system, as this can affect future returns,” says Hämäläinen. “Bottlenecks are likely to be located close to production or consumption.”
In Hämäläinen’s view, it is clear that energy storage systems will be needed in one form or another in the future’s decentralised energy infrastructure, especially if the alternative is simply to build more expensive grid connections.
The batteries in energy storage systems degrade over time as they are charged and discharged. The more frequently a battery cycles, the faster it wears. Even so, Hämäläinen believes that battery lifetime should not be over-optimised at the expense of returns, even when planning long-term investments.
He illustrates optimization with two examples: one operator uses the batteries at full capacity, shortening their lifespan but increasing early returns. Another uses the batteries more conservatively, extending their lifespan while generating smaller returns spread over a longer period.
“If you use the batteries aggressively now and achieve higher returns, is that worth it compared to having a slightly longer battery lifetime?” Hämäläinen summarises.
There is likely no single correct way to optimize battery usage, but Hämäläinen personally leans towards capturing higher returns earlier. This is because no one truly knows what the world will look like in 20 years.
“Besides, financiers typically want their capital returned within the first few years of a project.”
Hämäläinen also points out that in addition to usage, battery lifespan is affected simply by time, as other components of the energy storage system age just like any technology.
According to Hämäläinen, the physical battery hardware is quite similar across suppliers. The real differences lie in where the battery management and control systems are developed.
If cybersecurity is not properly managed, it is theoretically possible for someone to breach an energy storage control system and disrupt the electricity grid. This can have serious consequences for society.
For this reason, energy storage technology also involves political risks, Hämäläinen says.
An unlikely – but not impossible – scenario is that the EU could ban, for example, devices controlling embedded systems manufactured in China from being connected to critical infrastructure such as the electricity grid. Similar measures have already been implemented in Sweden, Norway, Denmark, and the Baltic states, where the use of Chinese-made equipment in 5G networks has been restricted or banned.
However, political risks do not affect all players equally. In Cactos’ products, for example, a strong emphasis is placed on domestic development, and the systems use Finnish technology, which makes them secure both in Finland and internationally.
Would you like to hear more about Cactos' smart energy storage systems? Contact us, and let's discuss your needs further.
