It comes a week after the Energy Storage Summit at the Battery Show Europe, hosted by Energy-Storage.news publisher Solar Media and co-located with parent company Informa’s The Battery Show Europe in Stuttgart, Germany. See all our content related to that event here.
Energy-Storage.news: Talk us through Second Foundation’s energy into deploying own-operate BESS projects?
Second foundation is at its core a trading business and, like others, it is starting to build an asset base around the trading, for multiple reasons. We didn’t buy these assets outright, but we have marketing contracts with them. We became interested in batteries and wanted to trade them, but at that point there were no batteries to trade in the same way as PV and wind through direct marketing. So we started talking to developers and decided to take a stake in one developer, work with another, and invest in their projects. But ultimately it’s about trading those assets. The best way to do that is to bring those projects to market and sell part of the assets to co-investors.
In all cases now, we still have skin in the game—we own a stake in the asset, do the trading, and handle O&M and other admin, but we have a co-investor who typically owns 50% or 80%. The ownership structure varies. We’re doing this at the moment in Germany, Czech Republic, Finland, Poland, Romania and Benelux.
Why move from trading into asset ownership?
I think from a trading perspective, Glencore is a good example—it’s a big mining company that started out as a trader and began buying stakes in different mines and logistics operations. If you look at large commodity trading houses, you’ll find more stories like this. It makes sense from a fundamental point of view that just being a trader makes you quite vulnerable as a business case. Having assets fortifies your position, whether it’s electricity, mining, oil, or anything else. With assets you’re much more resilient—your balance sheet grows, regulators take you seriously, and there are lots of other advantages.
The downside is it’s not capital-light anymore. You need to be careful where to invest and what bets to take. The appeal of generating strong trading results with a relatively small balance sheet or smaller capital investment is gone. But I think the advantages are much bigger than the downside for a typical successful trading company.
Three years back, who else had batteries? The UK was pretty advanced, but everybody else was trying to catch up. If you wanted to enter the market at that point, you needed to go into the development stage, and that’s what we did.
So what does your move to becoming an owner-operator look like in terms of strategy?
We’re building and diversifying our BESS asset base across geography, across the country, for different balancing zones, and at different voltage levels—110 kV, 380 kV—with an investor group behind us. The idea is that we’ll leverage our trading capabilities in marketing those batteries and maximising their returns. By now we’re also bringing deep knowledge about the regulatory environment, how to work with grid operators to make projects successful, how to speed up commissioning, and we have our own technical team with BESS expertise to help in those critical phases between RTB and COD and get those batteries to market as fast as possible.
What does the revenue mix look like for BESS in Germany?
It’s already a mix today, but the very high returns originate from the balancing markets—from reservation and activation fees.
In Germany, how are BESS traded in the electricity market and much variety is there in approaches?
On a high level it’s the same for everyone. The biggest difference between the UK and Germany is that the UK is super transparent in terms of trades—Germany is not. But on a high level, it’s all the same. Everybody is using a multi-market strategy, meaning you bid the battery into balancing energy markets—FCR, aFRR, primarily—and then you trade it in the day-ahead and intraday market.
We’re still in the phase where balancing energy is very attractive and not oversaturated with batteries. That’s a process that has obviously started. This market is about five gigawatts in size, and it will eventually be saturated with batteries. What we believe—and I think everybody else in the market—is that because of this saturation, the amount of money you can make with batteries will come down, and the new price floor will be what you can make on the day-ahead and intraday trading market. And this is our home turf.
Our competitive advantage is that we’re a good trader. What you do in the day-ahead and especially intraday market is a different type of game. It’s a lot about trading strategies, about better understanding what’s the fair value of any contract at any point in time, and trying to make money with the optionality that the battery gives you to act and trade in this market. A lot of the more traditional balancing energy providers are more focused on the balancing markets and less focused on day-ahead and intraday trading. What’s going to be key in the coming years is really this intraday capability.
In the details, there are very big differences in how the optimisation between those markets works and how dynamic it is. But again, it’s still those markets. On a high level it’s all the same, but you need to decide for every hour what to do with your battery capacity. Think about it as a dynamic optimisation problem.
The FCR auction is at 8 o’clock, aFRR is 9 o’clock, minute reserve is 10 o’clock, the day-ahead market closes at 12 o’clock, the day-ahead auction is at 3 o’clock, the intraday market opens—you need to think and decide where to bid at what price into all those auctions. You should educate your bid in the aFRR auction at 9 o’clock by your expectation of how much money you can make in the intraday market a couple hours later. This is driven by understanding and modelling what’s going on in the energy markets.
The volatility in the energy market is very much driven by renewables, so you need weather teams and experts with models to give you as good a prognosis on what the volatility in those intraday markets will be a couple of hours later, depending on sun, clouds, wind patterns, and so forth. And not only how the weather will be, but also how predictable the weather is—because if everybody’s right, it’s boring. It only gets interesting when some people are wrong about what’s going to happen.
The art really is in being able to process this vast amount of data and information, and make an educated guess on what’s the winning bid into the balancing energy markets—what’s the minimum you need to get in order to make more money in the balancing markets than what you could make in the other markets later on. Our head of flexibility optimisation has a whole team of 20+ people who do nothing else than battery optimisation. Most of them are PhDs in maths and can explain what exactly they’re doing in much better words and much more detail than I can.
And how much variation is there in optimiser performance?
I would love to know the answer about how much variation there is in optimiser performance. We hear things from potential customers and people we know about how much they’ve made last year with their battery. What I hear is relatively diverse. It’s all still very nice returns, don’t get me wrong, but the difference seems to be quite diverse. But then again, you never really know in the end how many cycles they were allowed to do, is it exactly a two-hour battery or a 2.2 or 2.3-hour battery—there are a lot of differences which makes it quite difficult to fully compare.
There are a couple of institutions as well as other traders trying to introduce benchmarks. The University of Aachen is publishing something on a regular basis, some market makers are publishing stuff regularly, but the benchmark that you can really use to benchmark yourself on battery performance really hasn’t arrived from my perspective yet. It would be great to have.
What about tolling, I assume you’d never use this?
No, we would never toll it out, because if you toll it out, you lose control of the battery—you hand over the keys. What we are looking into and believe in is day-ahead hedges or day-ahead swaps. If you think about the different income streams of a battery, there’s this day-ahead swap or day-ahead income stream, and that’s something you can separate out and contract out. Especially in order to get financing for third-party projects, this is something we are doing.
I personally am a strong believer in this day-ahead component, because there’s a real need for this day-ahead flexibility. Just imagine you are Deutsche Bahn, the biggest signer of PPAs. If you think about the PPA market for PV and wind, Deutsche Bahn and some of the other industrials have signed huge volumes. Now if you’re in the shoes of these guys, you get the electricity sometime in the middle of the day, but you might want to move this electricity to the evening. What you’re missing is a virtual battery to do that work. So I personally think we will see more and more deals where this day-ahead component is cut out and sold to industrial users, or will be bundled with PPAs in order to go from an as-produced PPA to some type of structured product.