Fitch Outlines Threat of Battery Storage System Degradation

by Paul Ciampoli
APPA News Director
July 20, 2023

Battery energy storage systems, especially those used for arbitrage, could face faster degradation and higher capital expenditures volatility than renewables and thermal peaking plants, according to Fitch Ratings.

In a July 13 article on Fitch Wire, the ratings agency said, “we may raise our metrics thresholds” for battery energy storage systems to reflect risks related to volatility of arbitrage margins, use profiles and capex.

Battery energy storage systems can combine revenue streams from arbitrage, capacity and ancillary services under merchant schemes, long-term offtake agreements and regulated frameworks, Fitch said, noting that arbitrage strategies, such as buying energy when prices are low and selling it when they are high, are riskier and require active management, implying “margin volatility and less visibility over when and how much the asset will be charged and discharged.”

Batteries are subject to fast degradation with the useful life of utility-scale lithium-ion versions far below the estimate for solar panels, Fitch explained.

It said that degradation rates and life expectancy of battery storage mainly depend on how a system is used, especially with respect to frequency, depth of discharge and mode of operation, as well as battery chemistries and external conditions, such as temperature. In addition, in order to mitigate potential under performance, batteries require more frequent replacement than other energy technologies, Fitch said.

The ratings agency noted that battery degradation is affected by use. So, batteries that provide ancillary services for short-duration grid frequency regulation may face a different degradation rate than those that provide capacity for longer periods. And battery systems that have a high reliance on arbitrage revenue could also face even higher levels of degradation because optimal charging and discharging intervals often do not coincide with optimal arbitrage opportunities.

Overall, therefore, battery energy storage systems are exposed to higher levels of capital expenditure volatility compared with renewables or thermal peaking plants, Fitch concluded.

In terms of operational risks, battery systems, like renewable generators, can achieve high availability levels because they are relatively simple to operate. Thermal plants also can achieve high availability levels, but they are more complex to operate, Fitch said.

In terms of revenue risk, however, conventional thermal generators operate on a price-taker model when they sell in the spot market because they dispatch if prices exceed their variable cost of electricity generation, Fitch said. Renewable generators are less sensitive to market prices because they sell power when wind or solar resources are available and have low or no marginal costs.

Battery system operators, however, face a more difficult challenge because they need to consider both merchant sale and purchase prices in order to optimize margins, according to Fitch.