2 days ago
Next big energy trade is mega batteries for Europe's excess power
LONDON: Three years ago, Castleton Commodities International (CCI) analysts huddled in their London office to discuss how to make money from a growing phenomenon in the European power market – negative prices.
The dislocated markets and sharp price swings they saw are exactly the type of conditions that commodity traders like CCI thrive on.
It's only becoming more widespread, as renewable output far outstrips demand at times during the day, sending prices below zero and causing excess supplies to be wasted. Then hours later, a drop in wind or the sun going down can see prices jump back up.
The problem is that storing electricity when it's not needed and selling when prices are higher is much harder than for other commodities like copper or oil.
CCI found a solution: It decided to get into the battery business.
While CCI was an early mover among commodity traders, it's one of a growing number of firms including heavyweights Vitol Group and Trafigura Group that are investing in utility-scale batteries.
After making fortunes hauling oil, gas and metals around the world, the traders are turning their attention to opportunities buying, storing and selling energy back into grids – especially in Europe, where capacity is set to rise sevenfold by 2030.
'It is the ultimate fast and scalable way to pick those instances of extreme volatility and address that volatility,' Arie Pilo, CCI's head of principal investments, said in an interview.
'You don't see Brent moving from minus US$50 a barrel to plus US$3,000 a few times every week. And that's what power allows you to do.'
Europe's renewables output has boomed in recent years to help meet climate goals, but investments in battery storage have struggled to keep up.
The region needs 'gazillions' more large-scale batteries to address the issue of negative prices, Vitol chief executive officer Russell Hardy said in February.
Of those looking to roll out projects, CCI's spending plans for Europe make it one of the biggest early investors in the sector.
Since its meeting three years back – and as negative prices became even more common – it has amassed industrial battery assets in some of Europe's most renewables-heavy regions, including the United Kingdom, Netherlands and Germany.
The company bought majority stakes in storage developers S4 Energy BV and Lower 48 Energy BESS Ltd, and plans to invest US$600mil to US$1bil by the end of 2027 in a portion of 10 gigawatt (GW) of potential storage sites, according to Pilo.
Traders hope that the investments will help them profit from the wild price swings in power that are often far bigger and more frequent than in other commodity markets, especially as batteries become cheaper and better.
'The trick here is you have to have many of these assets in many different locations to be able to do this at scale,' Pilo said.
The big price swings are getting more frequent as solar and wind farms increasingly overload grids for part of the day.
If the planned excess power can't be stored or used, prices turn negative. And sometimes renewable plants are forced to turn off to maintain the stability of the grid.
Then there are also hours when there's not enough output and stored electricity, meaning the grid can have to fire up more fossil-fuel plants. That can come at a steep price and produces emissions.
Harnessing batteries and the trading opportunities they bring can help alleviate these problems, by charging up when there's excess power and selling later when renewable generation dips.
The technology's role in ensuring energy security was also highlighted by widespread blackouts in Spain and Portugal this year. The push by trading houses is part of a wider move into liberalising electricity markets, that have long been dominated by utilities like Electricite de France SA and Uniper SE.
The expansion is set to continue. Take top independent oil trader Vitol.
VPI Holding Ltd, which is part owned by Vitol and has battery sites in Ireland, plans to invest €450mil (US$520mil) in developing a portfolio of 500 megawatt (MW) of German storage through a joint venture in the coming years.
Vitol's VC Renewables subsidiary already has capacity in the United States, with more currently in construction there and another 2GWh in its near-term pipeline.
Meanwhile, Trafigura-backed Nala Renewables has battery investments in Belgium and Finland, and plans to have a multi-stage portfolio of around 1GW by year-end, chief executive officer Mike O'Neill said.
There are also others – including Danish traders Norlys Energy Trading and Equinor ASA-backed Danske Commodities A/S – which act as traders for electricity stored by developers who have batteries but don't buy and sell power in the market.
Utility-scale batteries are similar in size and appearance to shipping containers.
Sites are often located near where large amounts of renewable power hit grids – for example close to Scottish wind farms or huge banks of solar panels in Germany.
'You can compare it to owning oil tanks in Cushing or the Permian – traders always have to have these assets at the hub,' said Laurent Segalen, a battery sector investor and founder of advisory service Megawatt-X.
Sub-zero power prices aren't the only rationale for investing in batteries. Traders can profit by simply selling stored power for more than they paid for it.
They can also make money in the ancillary services market, where mechanisms are used to maintain grid stability. That's particularly the case for traders operating in multiple regions.
'It's not just buying the two lowest or three lowest hours and selling the three highest,' Pilo said.
Batteries are also attracting a variety of other investors.
They include specialist developers like KKR & Co-backed Zenobe Energy Ltd, traditional energy firms like utility SSE Plc and French oil major TotalEnergies SE, as well as investment funds like Gresham House Energy Storage Fund Plc.
The drop in battery costs is another driver. General battery prices slumped over the last decade as manufacturers scaled up on the back of the electric-vehicle revolution, filtering through to the smaller sector of those used for grids.
Improving technology also means units can store more power and operators can better time when to release energy into the grid to maximise profit.
'You're starting to see viable reasons to invest in battery energy storage projects in Europe,' BloombergNEF analyst Nelson Nsitem said. 'That's caused by a lot of renewable capacity, big differences in swings in prices across the day and battery prices coming down.'
Some of the biggest barriers to entering the market for large-scale batteries include getting access to sites to build and, crucially, rights to connect to the grid.
For those who've been able to do that while benefitting from cheaper batteries, the business case is only getting better.
'The cost of a new battery has come down to the tune of 50% in the last two years and that's been a very, very positive development for people that moved in early like us and that had the chance to build in all these plots,' CCI's Pilo said. — Bloomberg
