How to manage NEM battery revenue risk under weather and outage volatility
How to manage NEM battery revenue risk under weather and outage volatility
The merchant battery business case is very sensitive to weather and outage volatility. Modo Energy’s forecasting shows that these factors can change a year’s earnings by up to $400k/MW for a 4-hour battery. Importantly, the system conditions that drive volatility are changing as the NEM transitions to a greater renewable energy mix with stronger interconnection. Modo Energy’s NEM battery revenue forecast pairs a fixed bankable reference year with a full Monte Carlo distribution. This allows forecast users to quantify merchant risk and test for optimal debt and contract sizing.
Following Yallourn West’s 2028 retirement, 4-hour battery revenues in Victoria become increasingly susceptible to volatility caused by different combinations of weather, demand, and outages. In the most extreme scenarios, battery revenues reach up to $600k/MW/year; however, under the worst-case scenario, revenues fall to $200k/MW/year.
Executive summary
- Modo Energy's synthetic reference year is the bankable central case. It preserves the median whilst remaining auditable back to a specific historical reference year.
- Extreme revenue day drivers continue to shift from summer to winter. Multi-day winter wind droughts are becoming the dominant volatility driver by the late 2020s.
- Monte Carlo sampling quantifies merchant risk. The full distribution of weather and outage volatility is the basis for stress-testing debt and pricing offtake structures.
What is a reference year?
Forecasting battery revenues requires assumptions on anything that changes from day to day: namely, weather, demand, and outages. In our forecast, each of these inputs is defined at a 5-minute granularity, enabling us to forecast prices through to 2055. A reference year is one complete year of these profiles drawn from history.
We have analysed the impacts of running our forecast against the last 10 reference years, 2016 to 2025. This spans a wide range of system conditions, including wildfires, coal plant explosions, and wind droughts. What is important to note is that conditions that drove volatility historically do not always drive volatility in future.
