Here at VPP Partners we are always thinking about all things energy. The energy transition and all the moving parts are complex and looking for ways to demystify the challenges and help overcome them is one of our key drivers. Recently, VPP Partners's Energy Specialist Lachlan Ryan built a model to answer a question that he had been toying with for some time. The question was along the lines of “There must be a way to create a graph that would show the required spread between charge and discharge for a BESS in the wholesale electricity market for different capital costs to meet a desired financial metric”. It was believed that this would help to demonstrate a few different aspects relating to batteries in the NEM: Understanding Capex Requirements: Enabling the quick identification of the capex ranges required to get reasonable project returns based on expected charge and discharge prices. Highlighting Value Stacking: Highlighting that value stacking with other value streams is likely needed to meet the required financial returns. Value streams and contracting: Understanding your value streams and the potential importance of contracting your assets to firm up revenue. Trading capabilities: The requirement for competent trading capabilities to realise as much value as possible from the market. Key Assumptions The model itself had several assumptions that are highlighted as follow: Target internal rate of return (IRR): 12%, 15%, 18% Round trip efficiency (RTE): 85% (losses applied to charge cycle) Annual degradation rate: 3% Depth of discharge (DoD): 90% Cycles per day: 1.5 Project duration: 15 years Interest rate: 0% (self-funded model) The Challenge of Real-World Charging Prices A critical assumption in this model is that the battery charges at $0/MWh, which means the spread is equal to the discharge price. However, in real-world scenarios, the battery won't always charge at $0/MWh, and due to the round-trip efficiency (RTE), the actual required spread isn’t straightforward. For example: A 1MWh BESS charging at $0/MWh and discharging 0.85MWh (with 85% RTE) at $100/MWh results in a margin of $85/MWh. If the battery charges at $100/MWh and discharges at $200/MWh (maintaining a $100/MWh spread), the margin drops to $70/MWh. To achieve the same $85 margin, you would need to discharge at $217.6/MWh. This led to a redefined the problem: Instead of calculating the required spread, the result was required profit per MWh for all discharged energy. This model created the graph ‘Required Profit vs Cost of BESS’, where the x-axis is the capital cost of the battery system, and the y-axis is the required $/MWh profit required for all the discharged energy.