Is this the start of the battery era?
Dan Mikulskis
Partner
Rajiv Gogna
Partner
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LCP clarity:
Batteries could become a new asset class, much like solar and wind renewable energy assets have over the last decade.
LCP insight:
We are already seeing these form a part of "future infrastructure" funds looking to invest in things like renewable energy, charging points, broadband etc as opposed to the traditional ports, roads and fossil-driven energy. If you are interested in understanding more about these ideas ask your investment consultant.
Demystifying the complex
That might seem like a silly question, given we have all been obsessing over our smartphone battery life since at least 2010, the fear of running out before getting home is very real as many readers can no doubt relate. But batteries are going big. Really big. They are set to be an integral part of our energy grid, becoming as familiar as the solar-panel or the gas-fired power station. Why?
To understand the need and the case for batteries we need to dig into what happened during an incredibly eventful year in the UK energy market in 2021.
What happened in 2021?
In 2021 wind power was “curtailed” on many days – meaning excess power was effectively “going spare” which, in a system with more storage, could have powered houses and reduced household bills.
We saw very volatile energy prices – a series of records in the “balancing market” – the last minute market for electricity supply which the National Grid is tasked with balancing by paying whatever they need to in order to bring to market enough energy supply to balance demand at any given moment. The prices being paid in this market give a clear indication that there is a place, and a business case for battery storage.
Batteries make money in energy markets by shifting energy from low to high price periods. The greater the difference in prices the larger the profit for a battery. Whilst batteries can charge and discharge multiple times a day, the high levels of cycling will impact the performance and lifetime of the asset. Typically, battery cells require replacement after 6,000 – 10,000 full cycles. A strategy involving high levels of cycling may yield greater profits in the short term but limit the expected lifetime of the battery.
Do batteries already exist?
Yes, to some extent but most only offer storage for 1-2 hours. What we’re seeing the potential of is batteries that can store over a greater time period, ideally between days.
Decarbonisation of the power sector is gathering pace following the COP26 conference, with the UK government committing to Net Zero in the GB power sector by 2035. The system will become increasingly dependent upon intermittent generation and must operate with much lower levels of inertia than seen in previous years. With its ability to respond quickly, by shifting and smoothing demand, battery storage will be crucial to this transition.
Currently, gas generation provides the vast majority of balancing mechanism volume (78% of energy action volume in 2021). In effect this means that it is gas power stations being called upon to make up any last minute shortfall in supply compared to demand, and sometimes getting paid handsomely to do so. But it also makes the market particularly exposed to high gas prices, as anyone who has looked at an electricity bill in the last few months can tell you. This has meant there has been the potential for large profits for battery storage in the balancing market recently, with intraday spreads of over £1,500/MWh.
More batteries are coming. The 2025/26 T-4 auction saw 3.3GW of battery storage capacity secure contracts, it seems likely that the competition seen is going to dramatically increase.
What might this asset class look like?
Today on the National Grid there is roughly 2GW of battery storage, we believe could comfortably increase by 5x by the end of the decade. This equates to roughly a £5bn potential asset class in the UK.
Interest in batteries is high, they are a relatively easy to deploy zero carbon technology which can operate across multiple markets, have shown fantastic returns for investors so far (mainly energy companies) and have a compelling story for their future growth.
To date, most investment has come from energy companies (like SSE and Scottish Power), this means that expected returns are likely to tend toward the cost of capital for these companies – around 5-6% PA. But just as with renewable power assets like wind and solar, there could well be a route for asset owners to deploy capital into the space as well.
Recent experience suggests returns could actually be a lot higher for a period, perhaps well into the double-digits returns PA.
We would expect to see institutional investor interest for operating battery projects, which are largely de-risked and offering stable income perhaps with government support mechanisms to ensure consistency of revenue. We are starting to see some asset managers start looking at these assets as part of broader diversified “future infrastructure” mandates that focus on funding the buildout of the 21st century infrastructure of the future such as broadband, EV charging points, storage and renewable energy generation.
The question here is whether managers and funds will only look at the less risky operational assets, or also look to shoulder a little construction risk for extra returns – but the technological risks of this approach are high at the moment. The prospect of co-locating batteries with existing or newly established solar or wind assets may also be attractive for managers.
The de-risked, secure income nature of the income streams from renewable assets could even make them interesting to maturing defined benefit pension schemes.
Right now, the market for batteries is nascent but shows a lot of signs of developing. Wind and solar assets have gone from a niche idea a decade ago to a fairly mainstream de-risked asset class today, and batteries could easily do the same over the next decade, especially with elements of the successful wind/solar playbook that has already been followed.
LCP viewpoint
Wind and solar assets have gone from a niche idea a decade ago to a fairly mainstream de-risked asset class today, and batteries could easily do the same over the next decade, especially with the successful wind/solar playbook that has already been followed.
Dan Mikulskis, Partner, LCP
Learn more about battery storage on the Investment Uncut Podcast series
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