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26 | 2ND - 8TH MARCH 2018 | UTILITY WEEK Finance & Investment Market view G one are the days of returns guaranteed through government support, regula- tory support, or predictable market dynamics. Energy investments have become smaller and more commoditised. The system is more decentralised. And regulators are struggling to keep up. Increasingly, this is pushing companies into taking on merchant risk in an unpredictable market. To survive, they need to either accept lower returns or move away from long-term investments in generation and infrastructure and adopt a start-up mindset that focuses on building capabilities to react quickly to changes and staying ahead of the compe- tition. Nowhere is this clearer than in the development of flexibility – and battery storage in particular. Long-term planning issues The UK storage industry has expanded rap- idly over the past two years. This growth primarily has come from revenues from frequency response services procured by National Grid, combined with additional returns from Triad payments, the capacity market and – in cases where assets are posi- tioned behind the meter – savings on distri- bution network charges. It is a precarious commercial model, with returns neither regular nor predict- able. While an investment in storage lasts 10-15 years, prices from services procured by National Grid (which usually provide 60 per- cent or more of expected revenues) have only been guaranteed for 2–4 years. However, the real kicker is that storage developers are largely beholden to a single buyer of their services (National Grid), and that other avail- able revenue streams are reliant on a change- able policy and regulatory environment. This was brought into stark effect in 2017 when National Grid culled frequency response services, announcing it would no longer procure the fast-acting response that storage is so effective at supplying. Further- more, Ofgem's crackdown on embedded benefits threatens both Triad revenues and the potential to leverage distribution net- work savings behind the meter. As a result, the commercial model that storage devel- opers built their businesses on has to be reformulated, with major implications for where, when and how storage assets should be rolled out. The focus has now moved to behind the meter where returns can be better controlled via large commercial end users. Although this is not the first time storage providers have had to significantly rewrite their commercial models, 10–15-year finan- cial plans remain commonplace in order to attract external investment or push pro- jects through inter- nal decision-making channels. This sort of detailed financial modelling not only gives a false sense of security to investors, but also distracts from what should be the real focus: business planning and commercial assessment. Adapting to uncertainty It will continue to be possible to build a suc- cessful business on storage and other forms of flexibility, but the lifecycle of many prof- itable commercial strategies will be much shorter. Partly, this will be driven by the natural development of the market and cus- tomer preferences, but also because of exter- nal interventions of the type seen in 2017. As James Basden, co-founder of Battery Energy Storage Solutions (BESS), says: "You need to think on your feet and be prepared to adapt to the circumstances you're faced with. We've realised that the most important thing is to develop capabilities that enable you to pivot in the market while maintaining a com- petitive advantage." If you are a large company with deep pockets and significant market power, it may be possible to shape the world before it shapes you. By taking a committed posi- tion and pursuing it aggressively, you can create the market you wish to service before other competitors and external forces have a chance to set the direction for you. This could be a reading of Shell's bold move into the electric vehicle charging space at the end of last year. If Shell can deliver on its ambitious words and install charging points across its current service stations, then it could become a primary influence on determining which way the market for electric vehicle charging progresses. However, if you are not one of the largest companies on the planet, this option may not be open to you. Instead, your focus needs to be on capabilities and mindset. Companies, whether large or small, established or newly formed, all need to adopt a start-up mental- ity that can pivot and adapt to changing mar- ket dynamics. For example, by plac- ing new projects under continual commercial review you can ensure new services do not quickly become redun- dant because the market has moved on. Rather than trying to control the forces that shape the market, it is more important to build organisational capabilities that ena- ble adaptation and provide a basis for stay- ing ahead of the competition. Doing so will require strong market and competitor analyt- ics. This is not just about volume of data, but having the right data, presented in an easy- to-understand format, which enables people at every level around the business to make better decisions faster and in a joined up way. Armed with the best information and the ability to move rapidly, a business will no longer treat change as a threat that needs to be mitigated, but as an opportunity that leads to competitive advantage. Beyond batteries Regardless of whether they are utility provid- ers, infrastructure investors, or looking to move into the low-carbon space, companies that used to invest in energy on the basis of quantifiable, long-term business cases are now realising they need to take an alterna- tive approach. Change is now a constant. To be successful requires breaking away from long-term planning – because the future you expect may never become a reality. Andrew Perry, principal, Oliver Wyman's energy practice Forget the old certainties It's still possible to make money on energy investments, but companies must adopt a start-up mentality and be ready to move as the market changes. Adaptability is key, says Andrew Perry. "You need to think on your feet and be prepared to adapt to the circumstances you're faced with." JAMES BASDEN, CO-FOUNDER OF BESS