Risk
Why contracted revenue beats merchant exposure
A battery earns money in one of two broad ways. It can sell its services into the market at whatever price prevails — "merchant" revenue — or it can lock in payments in advance under a long-term contract with a creditworthy buyer. Both are legitimate. But they produce very different risk profiles, and the difference has been visible, at scale, in the public markets.
The lesson from the listed funds
The clearest natural experiment sits on the London Stock Exchange, where several pure-play battery-storage funds are publicly traded. Over recent periods, these funds have traded at steep discounts to the value of their assets, and one delivered a sharply negative net-asset-value year, driven substantially by volatility in the merchant revenue their portfolios depend on. One has been taken private below its stated asset value. The market's message is not that storage is a poor asset — it is that merchant-exposed storage is a volatile one, and investors discount volatility.
What contracting changes
A long-dated power-purchase agreement or capacity contract with an investment-grade counterparty replaces an uncertain price with a known one, for years at a time. That does three things. It makes cash flow predictable, which is what investors are ultimately buying in infrastructure. It makes the project bankable, because lenders will advance conservative, coverage-based debt against contracted cash flows in a way they will not against merchant hopes. And it shifts the residual risk from unpredictable market prices to the credit and performance of a known counterparty — a risk that can be diligenced, documented and managed.
How we apply it
Our preference is for contracted or contractable revenue from creditworthy offtakers, supported by conservative project debt with reserve accounts, and by real-time control of the asset to preserve its condition and value over the hold. Where we pursue markets with a merchant or ancillary-service component, we require a higher underwritten return to compensate for that exposure. The objective is not to chase the highest possible headline yield; it is to build a return profile that survives a bad year — which, as the listed funds have shown, is the difference that matters.
This article is general market commentary and is not investment advice, nor a description of the terms of, or returns targeted by, any investment. References to third-party funds are drawn from public reporting and are illustrative of revenue-model risk only.