Battery Energy Storage Systems (“BESS”) are infrastructure technologies that can store large amounts of energy for an electricity grid. BESS projects are currently very profitable. In emerging countries such as the Philippines, unlevered investment payback periods for BESS projects are 3 – 5 years.
Homeowners with rooftop solar may have come across home energy batteries (the size of a large appliance). These batteries store energy to power homes in the evening (called “Energy Shifting”) or during brownouts.
Storage enables higher penetration of renewables into a grid
Similarly, BESS are large-scale projects that can be used to shift energy consumption from the daytime when it is generated to the nighttime when it is also needed. The more an electricity grid (of a country/island) relies on intermittent renewable energy, the more important the role BESS plays in providing stability. This is because BESS provides much more services than just supplying energy during periods when there is low/no generation.
Aside from Bulk Energy Services (such as Energy Shifting), BESS is also utilized for use-cases known as Ancillary Services:
- Operating Reserves — BESS can be used to provide back-up power to the whole grid in the event of plant outages or natural disasters
- Frequency regulation — BESS can be used to smooth energy supply/demand imbalances that change the frequency (hertz) of electricity moving through transmission lines
- Inertia — BESS can be used to harmonize the frequency of the grid in certain difficult-to-access locations
- Voltage Control — Frequency regulation for back-up generators
- Black Start — Batteries can be used to jump-start natural gas plants
Ancillary Services are necessary to stabilize electricity grids (ie prevent blackouts and brownouts), particularly those in emerging markets where grid infrastructure tends to be less maintained or overburdened.
Additionally, BESS can also be used to defer investments in augmenting transmission & distribution lines that are no longer adequate to support the energy consumption of homes and businesses in a specific area. While building new transmission lines can take years to plan, approve, acquire the right-of-way, and construct, a BESS can be developed on a single piece of land in 6 months.
BESS around the Globe
Each use-case and geography can be more appropriately-served –resource-efficient, effective — by different BESS technologies. However, 80% of global BESS installed storage capacity uses variants of Lithium-ion technologies.[i]
The global capacity installed this year alone (29.5 GWh in 2021) was more than that installed in the previous 15 years combined (Total of 54.4GWh). Over the next decade, an additional ~$262Bn will be invested in new storage projects.[ii] This is because of the high project returns in countries with a strong enabling regulatory environment.
BESS in the Philippines
Installed (“commissioned”) storage capacity in the Philippines represents 89% of the 1.5 GWh currently installed in Southeast Asia.[iii] The Philippines also has the largest pipeline of capacity under construction, primarily for frequency regulation services.
Philippine projects benefit not only from the global decrease in li-ion battery installed costs over the past decade, but also 1) a good understanding of the technology’s benefits, particularly for archipelagos, after seeing pilots (AES commissioned the country’s first BESS in 2016); and 2) an enabling regulatory environment, relative to regional peers.
Philippine Laws allow BESS multiple revenue streams
In 2015, the Energy Regulatory Commission allowed the use of BESS in frequency regulation. In other Southeast Asian countries, this ancillary service can only legally be provided by generators such as natural gas, hydroelectric and geothermal plants. Resolution 9 Series of 2015 allowed BESS operators to sign Ancillary Services Purchase Agreements with the grid operator.
In 2019, the Department of Energy of the Philippines (“DOE”) introduced a Framework for Energy Storage Systems to expand the role of BESS by further allowing batteries to provide ancillary services, sell in the Wholesale Energy Spot Market, and supply power under Power Purchase Agreements. The DOE also mandated the private operator of the grid to procure reserve capacity of 4% of maximum hourly demand.
The Philippines currently has a deficit in Operating Reserve capacity. Bloomberg predicts that the country will face a shortage until 2025.
Drivers of BESS Investibility in the Philippines
Depending on the rated max power output, the total installed cost of a li-ion BESS is $400-$700/kWh to acquire the battery module, inverter, BOS and EPC. Costs vary based on durations (1-hour, 2-hour, 3-hour, 4-hour, etc)
A project is not NPV+ if it generates revenues only from Bulk Energy Services (Energy Shifting, Load Following, Peak Shaving) where the energy is bought-low and sold-high. Ancillary Services revenues are actually the more profitable segment. The short payback period is due to BESS in the Philippines being allowed to generate multiple revenue streams from:
1. Capacity Payments: BESS projects are paid ~$46/MW per hour for Reserve capacity they do not discharge. This is currently the main revenue driver for Philippine BESS; and
2. Energy Fees: BESS projects are paid when the battery injects electricity into the grid. This revenue stream compensates the project for the charging cost when the project buys energy from the grid.
BESS players in the Philippines (Masinloc and Kabankalan) have signed Ancillary Services Purchase Agreements with the operator of the grid for a Capacity payment amount of ~$46/MW per hour.[iv]
Short-duration BESS currently has an unlevered project payback period of 3 — 5 years. The picture below is a back-of-the-envelope computation for a 10MW/10MWh system and 10MW/20MWh system on the left and right, respectively.[v] Please note that the calculations below are only indicative figures.
A. For a 10MW/10MWh system (which is a 1-hour duration battery), the total installed cost is $4.4m and annual potential revenue from Capacity Payments is $1.0m where the grid operator pays for an estimated 25% of annual hours capacity.
B. For a 10MW/20MWh system (which is a 2-hour duration battery), the total installed cost is $7.8m and annual potential revenue from Capacity Payments is $2.0m where the grid operator pays for an estimated 25% of annual hours capacity.
Costs to charge the battery are offset by Energy Fees paid by the grid operator (described above) and O&M costs are negligible. With a project life of ~20yrs, unlevered IRRs are very good for an infrastructure project. Taking on project financing will further increase the equity IRR.
The main takeaways are: 1) BESS offers stability to a decarbonizing grid, which has societal benefits to individuals and businesses and climate benefits to the world; 2) It is highly-profitable for certain use-cases; and 3) BESS can scale economically in emerging markets with the support of enabling regulation.
[i] BloombergNEF “Batteries Surge in Southeast Asia Energy Storage” (November 11, 2021)
[ii] BNEF Energy Storage Outlook 2021 (November 5, 2021)
[iii] BloombergNEF “Batteries Surge in Southeast Asia Energy Storage” (November 11, 2021)
[iv] BloombergNEF “Batteries Surge in Southeast Asia Energy Storage” (November 11, 2021)
[v] Framework for calculating payback period based on Lazard’s Levelized Cost of Storage Analysis -Version 7.0 (October 25, 2021)
Disclaimer: This post reflects my personal views and not those of the International Finance Corporation, World Bank, or any other member of the World Bank Group