Interview: Dario Hernandez explains how batteries enhance NESF’s portfolio
Clean electricity sources such as solar and wind are a key part of future energy. But to ensure a stable, reliable 24/7 grid, these technologies must be accompanied by storage.
Battery energy storage systems (“BESS”) have evolved into a critical part of the growing renewables market, because they bridge the gap between when energy is produced and when it’s needed. As the battery industry has matured, NextEnergy Capital (NEC) has positioned itself to become a leader in integrating BESS into solar portfolios, helping boost return prospects for the funds it manages, including NextEnergy Solar Fund (“NESF”).
The UK urgently needs more energy storage as renewable energy capacity expands in line with the UK Government’s targets around a significant increase in renewable energy capacity by 2030. As the fastest-growing energy storage technology, BESS can meet these targets and help the country achieve its power transition goals. Dario Hernandez, head of energy storage at NEC, says that developments in the battery sector are providing a huge boost to the clean energy transition and energy security.
BESS delivers a more stable energy system by storing wind- and solar-generated power and releasing it at times of demand, often capturing higher prices when consumer use peaks, typically in the evening. By balancing out supply and demand spikes, they also make prices more predictable. As more batteries come online, they are helping keep prices down for consumers by reducing the UK’s reliance on expensive gas supplies to fill the gap when renewables are not generating power.
Another advantage of BESS is that they stabilise grid frequency or voltage, preventing outages. And they store, then distribute excess wind and solar energy that would otherwise be wasted – known as curtailment – increasing system efficiency.
How batteries enhance NESF’s portfolio
In the UK, solar revenues come mainly during summer. But batteries make a significant portion of their money in winter, as their flexibility allows them to benefit from the higher price volatility caused by a more stressed energy system. This seasonal combination provides more stable, balanced set of income streams for NESF’s portfolio across the year.
Flexible storage also opens commercial opportunities by, for instance, shaped PPA’s enabling supply of solar energy to corporate customers in the evening to match their demand.
For NESF, the ability of batteries to access multiple revenue sources is another benefit. BESS can trade in the long-term reserve capacity market or directly with the grid (ancillary trading), while solar alone typically has just one income stream – the wholesale market.
There are great synergies in the storage supply chain as many companies that manufacture solar components also offer storage. Those synergies are even greater when batteries are co-located next to solar panels.
Diversifying co-location and standalone
BESS can either be co-located with an energy generator, such as a utility-scale solar asset, or standalone i.e. an individual asset in its own right. Co-location increases sites total volume production, allows the site to access peak price demand for the energy it trades, alongside bringing major cost benefits, as batteries can use the existing site infrastructure, such as transformers, cables, and grid connections. Standalone is not tied to a specific asset, so is more versatile in location, size, and the different routes to market that it accesses.
NEC’s strategy is to co‑locate where possible while also developing standalone projects. “NEC has many solar assets,” explains Hernandez. “Not all can accommodate batteries because of space or other constraints, but many can. We plan to use these to reduce our costs significantly and boost returns for investors. To increase battery storage to the levels we want in our fund, we will also develop standalone projects. This combined strategy diversifies the portfolio and opens more revenue opportunities.”
Overcoming sector challenges
NEC has been active in battery storage since 2018 and, through its funds such as NESF and international private, has successfully built a number of BESS assets.
“We’ve been growing at the right times as the technology evolves,” says Hernandez. “Now it has reached greater maturity, we plan to keep growing exposure.”
He says competition for storage sites is increasing, and it is harder to deploy capital due to grid constraints and planning delays. It can also be challenging to find the right projects in the right locations and steer them through planning and connection to become cash-generating assets.
“Delivering quality projects is our top priority, and we analyse four or five potentials a week,” says Hernandez. “As a large specialist investment manager, we have the depth and expertise to find the right ones.”
NEC has also strengthened its battery team, so it has the right mix of technical and commercial experts. “We’re an active manager operating our own assets,” says Hernandez. “We use our hands-on expertise to maintain performance by looking at every detail such as price, location, and trading strategies.”
A maturing battery market
Increasing competition, mass manufacturing and technology improvements have revolutionised BESS in recent years, helping the combined cost of solar power and battery technology to fall by 87% between 2013 and 2023. This, alongside renewable energy mandates and fossil fuel supply insecurity, has driven increasing penetration of renewable generation and storage.
Regulation is maturing too as the UK Government and authorities have strengthened standards and frameworks across the battery market, from technology to trading.
“Among Europe and the OECD countries, the UK has the most advanced energy storage regulation,” says Hernandez. “From development to construction and operation, services have liberalised, fuelling innovation, and increasing competition from traders to developers.”
Other signs of the market’s maturity are manufacturers offering warranties of up to 25 years for their products, large financial institutions arranging debt facilities for BESS projects, and the cost of insurance coming down, showing confidence in the technology and revenue streams.
Bright future for battery investments
Hernandez says returns from BESS will continue to rise alongside the increasing penetration of renewables.
The technology will continue to evolve with, for example, battery duration lengthening from the current two hours for most units to four hours or more. And BESS will also become more power dense, occupying less space, cheaper to build and more access to additional revenue streams alongside better energy trading capabilities.
“In contrast, other technologies like gas and nuclear will continue to face challenges with cost and implementation time,” he says. “Standardisation and professionalism in BESS will keep increasing, bringing more stable revenue opportunities. And increasing support from debt providers will allow us to build ever bigger projects. As a cheaper and better service, renewables and storage will start to dominate over the next 10 to 15 years. It’s a fast transformation that will continue for years to come.”
Disclaimer:
This document is issued by NextEnergy Capital Limited (“NEC”), which is authorised and regulated by the UK Financial Conduct Authority (“FCA”) with registered number 471192.
This document is not an offer to sell, or a solicitation of an offer to acquire, securities of the NextEnergy Solar Fund Limited (the “Fund”) in the United Kingdom or in any other jurisdiction. Neither this document nor any part of it shall form the basis of or be relied on in connection with or act as an inducement to enter into any contract or commitment whatsoever.
The information contained in this document has been prepared in good faith but it is subject to updating, amendment, verification and completion. This document and any terms used herein are a broad outline of the Fund only.
The Fund is incorporated in Guernsey, Channel Islands and is a registered closed-ended investment scheme under the Protection of Investors (Bailiwick of Guernsey) Law, 1987, and the Registered Collective Investment Scheme Rules 2008. The Fund is not an Authorised Person under the UK Financial Services and Markets Act 2000 (“FSMA”) and, accordingly, will not be registered with the FCA. The Fund will therefore only be suitable for professional or experienced investors, or those who have taken financial advice.
