Avoid this storage revenue car crash – Plan for optionality
Published December 2016
In the race for early mover advantage, there’s a risk that storage developers fail to futureproof their business model, leaving them locked into a single revenue stack. Get your gameplan ready now.
Wow, energy storage is moving quickly. Everyone seems truly desperate to seize first mover advantage, motoring on at rapid pace.
It’s amazing. And also a little alarming – because in this great storage race, there’s a risk that crucial details are being overlooked.
Here’s what we’re finding: storage developers often hope to reset their revenue stacks partway through project life (or at least retain this as an option). But they may be trapped into making decisions during procurement and at financial close that prevent such revenue agility – sometimes without them even realising it.
Let us explain…
Revenue stack resets are core to the strategy of many storage developers
Our story begins with a linguistic observation. You see, there’s a term that’s quietly crept into the storage world’s lexicon: ‘revenue agility’. Here’s the Everoze definition:
Revenue agility: the ability to move quickly and easily between revenue streams.
Revenue agility can occur on multiple timescales – from minutes or half-hourly periods through to years. At the extreme end of the revenue agility spectrum is a full ‘revenue stack reset’. Again, a definition:
Revenue stack reset: a reboot to a storage project’s targeted revenue stack, resulting in substantial change to the storage unit’s operating profile.
For instance, a developer might say ‘if frequency response prices collapse in a few years’ time, we’ll reset our revenue stack to target DSO services instead’.
Language lesson over. Now here’s the important point: long-term revenue agility is normally a core feature of storage developers’ business plans. There are good reasons for this: contract lengths are short, and the relative economics of providing different services will likely flip given disruptive market developments and regulatory reform. The option of revenue stack resets helps mitigate against these external risks – as well as empowering owners to access new revenues that emerge in future.
The problem: decisions at financial close may prohibit revenue stack resets
The problem is, through our work as technical and commercial adviser, the Everoze team is becoming concerned that developers may be trapped into making decisions that constrain their ability to pursue revenue stack resets in future.
Here are three sample pitfalls:
- Failing to build optionality into site selection and design: In the procurement process, Employer’s Requirements drafted with just the initial revenue stack in mind – with limited consideration given to adopting low-cost measures which might facilitate the flexing of project energy-to-power ratios in future.
- Restrictive warranty terms: Battery manufacturers offering warranties based on a specific (constrained) energy throughput – deviation from this in future could jeopardise your warranty.
- Unclear allocation of revenue upside/risk between multiple offtakers: For behind-the-meter projects in particular, revenue-sharing agreements written for a specific revenue stack – leading to one party being short-changed in the event of a reset.
The implications of this are severe. Without forward-planning, storage operators are locked into their initial revenue stack, even as the value associated with that stack is eroded.
Form your gameplan
So how do you avoid this lock-in blunder? It’s simple: you need a gameplan.
You’ll need your best people on the job – pulling together the brightest commercial, technical and legal minds. You’ll need the creative problem-solving types, not the ‘here’s a barrier’ type. And, although it’s depressingly hard to find a gender-balanced photo, this team may in fact include women (shock, horror).
Then task this killer team with scoping out the full breadth of services that your storage unit might realistically provide over its project life. Collectively explore how you can (cost-effectively) build optionality into both your site and contractual commitments. It’s all in the detail; from what we’re seeing, there’s no single ‘right’ futureproofing solution.
And if this strategizing means that you lose a month or two in the great storage race? Well, so be it. It beats a revenue car crash.
That’s our view – but as always we look forward to learning from your questions, comments and challenges. Happy gameplanning!