In conversations with optimizers, BESS investors typically prioritize a high IRR (Internal Rate of Return). Expressed as a percentage, this is the pace at which an investment grows. A high IRR means the investment is recovered quickly through the revenue that is brought in. Due to a lack of market maturity, transparency, and proof of commercial performance, investors ask for backtests to assess battery profitability, but these backtests can give a skewed and biased impression of BESS revenue potential.
Despite the progress made in battery storage technology and marketing, it remains a nascent market, with the majority of projects still under construction. That is why claims about revenue achievements are still easily blown out of proportion. Investors have no way of knowing if an optimizer has invested years of work, research, and development into an in-house framework running on cutting-edge technology or if they just came up with an arbitrary number from a spreadsheet that trumps someone else’s arbitrary number from a spreadsheet.
In the industry, optimizers are often reduced to cost positions instead of revenue-enabling allies. The result: Since investors cannot compare different offers, they go to the cheapest available option (as shoppers do). What gets left out of the equation is basic business math: If you cannot compete on quality, you need to compete on price. A 0.5% lower revenue share will seem a lot less significant when the performance of optimizer A is far from matching optimizer B’s. As soon as the assets currently in development go live, the market will face a big showdown. This is when the implications of price over quality will become evident. When choosing a BESS provider, it is advisable to weigh safety, performance, and reliability as carefully as price.
Revenue potential depends on the revenue source. We distinguish between the following models: tolling, floor (with and without cap), and fully merchant. Tolling is an attractive option to those seeking guaranteed revenue, but contrary to popular belief, it is a relatively new practice in the battery space – only very few contracts have actually been signed. Pricing guaranteed revenue is complex. It requires various data points ranging from COD (Commercial Operation Date) and warranty terms (cycles, degradation, average SoC – State of Charge, etc.) to physical location. Most current offers do not factor in any of these variables. Image pricing a rental property solely based on the fixtures of size and completion date. Aspects such as heating, insulation, and location factor heavily into this equation. Similarly, tolling for BESS must be priced according to the asset’s specifications.
Contract duration also impacts price. The visibility on energy markets gets worse the farther into the future you move. This is due to a lack of tradeable prices and uncertainties regarding the buildout of renewables and BESS. Additional factors, including (future) asset types, also matter, as revenue streams react differently to different kinds – most players look only at power (GW), but duration (GWh) plays an even more critical role. Therefore, later COD and longer duration will lower the guaranteed revenues.
Bankability is key. Depending on the asset owner’s situation, guaranteed revenues are needed to finance a planned project. If you want to build a house, it is in the bank’s interest to ensure that you can afford to pay back the loan you take out. If you do not meet the bank’s financial requirements for a mortgage, your application for financing will be denied.
Experience is essential in BESS optimization. If you want to sell your house in the future, its condition will significantly influence the value. A well-maintained property equates to a higher asking price. Similarly, staying within warranty terms when optimizing a battery avoids issues with the OEMs (Original Equipment Manufacturers) and covers the highly complex degradation topic. Without these precautions, battery optimization could result in a loss of performance warranty in the worst-case scenario.
While we have yet to achieve ideal levels of battery revenue transparency, some vehicles help us better understand the potential, including bankable forecasts, backtests, battery indices, and portfolio performance (learn about the differences between these methods here). Due to its certifiability, portfolio performance will be a game-changer for the BESS industry. This new metric reflects actual revenues confirmed by an independent third party—it does not get more transparent than that.
There are six key components that help compare different optimizer portfolios:
Transparency is an efficient way to drive market maturity of grid-scale battery storage. It attracts investment, eliminates uncertainties, and enables informed decision-making. Many players do not have operational data available and are looking for ways to derisk their business cases, which are typically based on bankable forecasts. We share our learnings and observations and, as the first optimizer, provide historical insights called portfolio performance for an additional view on asset revenue potential. This missing piece of information can ultimately be used to validate forecast accuracy and optimizer performance.
Do you have any concerns about revenue assessment for your battery?