This year has been all about energy – whether on the supply side, where our own domestic gas and electricity bills have risen to ‘eyewatering’ levels, due to the War in Ukraine and its impact on the gas market; or on the generation side, the wider issue of global climate change.
2022 has been a year marked by record-breaking floods, deadly heatwaves, and other extreme weather events, on top of global energy and food shortages and a cost-of-living crisis. In light of the issues caused by the gas shortage, a lot of countries rowed back from earlier commitments to carbon-free energy production, and COP27 in November became less about making new commitments to lowering global warming, and more about arguing whether countries had made good on their commitments to change made at COP26.
The solution that many have come to is a greater reliance on renewables. Decoupling from imported energy and creating a situation of energy independence and security, has become more attractive to governments – especially those in the Western democracies. Moreover, the need to limit global warming has meant that across the world there is a transition from carbon-intensive methods of power generation to low-carbon impact renewable technologies.
However, the elephant in the room is – and has always been – storage. Renewables – specifically wind and solar and to a lesser extent hydro and marine – are not reliable as a replacement for baseload power, because the sun doesn’t always shine or wind blow at times of peak demand for energy. As a result, the power is often generated sporadically or at the wrong times needing a separate assembly that can capture and store the energy and discharge it when and where it is needed.
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But developing a new project – especially a storage asset – is currently a long and costly process, and according to Cornwall Insight, the independent energy research, analytics and consulting firm by co-locating new projects with pre-existing ones can be cheaper and quicker.
Cornwall Insight recently published a report assessing the cost, planning and revenue benefits alongside some of the main challenges and uncertainties of co-location. The report co-authored by Matthew Chadwick, lead research analyst for Cornwall Insight and Nick Fothergill, a partner at UK Law firm, Weightmans, found co-location can provide a range of benefits to renewable generators and developers.
The report outlined four key benefits to co-location:
- Cost savings – Both capital and operational costs can be reduced by sharing existing infrastructure and land. Combining storage and generation assets allows more effective utilisation of connected grid capacity;
- Faster grid connection – Currently, a stand-alone storage asset faces a wait for a grid connection beyond 2030, whereas co-location allows assets to come on-line much earlier by utilising an existing grid connection;
- Revenue stacking – Storage assets can be used to avoid curtailment of renewable generation assets or to load shift generation output from times when capture prices are low, or negative, to peak times when capture prices are high. Alongside maximising the revenue of the generation asset, a storage asset can also participate in wholesale arbitrage, grid flexibility services, the balancing mechanism, and the capacity market;
- Planning permission – Currently the national planning policy requirements in England present a major barrier for new onshore renewable generation. But the policy hurdles do not apply to existing sites, and so co-location of a new asset with an existing one presents a valuable opportunity to bring more onshore renewable generation on-line.
There are, according to Chadwick and Fothergill, several challenges that need to be overcome to unlock the investment potential of co-location. The report outlines the following areas that need to be developed before the potential of co-location can be realised. These include:
- Price certainty – For co-location, all the assets should be financially viable on their own and the business case for co-location needs to be made clear. One of the assets is likely to be constrained as a result of co-location, so the benefits need to outweigh the cost of this constraint;
- Optimisation – Linked to the price certainty, co-located assets require careful optimisation to produce the most lucrative energy output profile that is in line with the contractual mechanisms of the site. Similarly, the ratio of generation capacity to export capacity needs to be optimised for the characteristics of a co-located site, to maximise efficiency;
- Insurance – There is concern in the insurance community regarding the fire risk of battery storage, with clearer guidelines and standardisation in operating procedures needed to build confidence and encourage insurers.
There is great potential for co-location – especially as the transition accelerates – the report claims that there is a large pipeline of co-located assets set to come online across the next decade, with an increasing trend of large-scale energy parks, which combine several of the co-location types behind one grid connection, and district energy networks, where large-scale property developments are designed in tandem with the provision of low-carbon energy and heat.
Chadwick and Fothergill say that as more co-located sites are established, there will be more of a blueprint available for best practice solutions, helping to overcome the challenges of price certainty and optimisation. Corporate and hybrid power purchase agreements could both provide valuable routes to market for co-location in the future.
Fothergill said: “It is time to think differently about how we approach co-location projects in order to maximise investment and make such schemes viable. There is no one size fits all approach, and flexibility is essential in order to generate the best outcome for all.”
For investors, the attraction of the co-location model is its ability to balance-out the stop-start generating capacity of the main asset – for example a solar farm – and reduce the price cannibalisation of the energy generated and store it for peak times, and best pricing, thereby maximising revenue. Adding other assets to the main generator, will allow the co-location site to oversize and store excess capacity until it can be exported. Sharing facilities can significantly reduce the opex and capex costs of stand-alone power generators, which will only strengthen their balance sheets.
One way to gain access to the co-location story is through a collective fund, like the Gore Street Energy Storage Fund PLC [LON:GSF] which The Armchair Trader covered recently.