Category: Blogs

Navigant on energy storage as ‘non-wires’ alternative for utilities and grid operators

One of the ‘value of energy storage’ questions that was being asked a lot two or three years ago was around the use of batteries and decentralised system architecture instead of traditional “poles and wires” grid networks.

It has been said for some time that spending huge sums of money on transmission and distribution (T&D) architecture buildout and upgrades could, in some cases, be deferred by the use of strategically-located energy storage systems, coupled with distributed energy resources like solar and wind.

However, aside from a handful of case studies and real-world examples, this potentially game-changing rethink of grid network planning has largely been less of a priority as a driver for energy storage deployments than might have been expected. Navigant Research’s recent ‘Energy Storage for Transmission and Distribution Deferral’ report sought to fill the knowledge gap.

Andy Colthorpe took the opportunity to ask the report’s lead author Alex Eller, a research analyst interested in areas including energy storage, distributed renewables and microgrids, three of the most burning questions he could think of.

The use of energy storage in T&D spending referral has been long talked about – but until now it has been rare to see figures put on it, or accurate cost-benefit comparisons made. Why is that and is this now changing?

Much of the challenge when considering T&D deferral projects is that the specific economics of each project can be very different. The costs and time required to build new T&D systems, peak to average demand ratios, projected load growth, and availability of capital are all key considerations for new T&D projects or using storage to defer them. Due to the multitude of different factors involved, it has been very time consuming for storage developers to evaluate individual opportunities to defer T&D investments. 

Now that storage costs have come down and the industry is maturing, utilities are much more familiar with the technology and are identifying opportunities to defer upgrades using storage themselves. Furthermore, developers have gained sufficient experience to be able to streamline their process for working with utilities to evaluate these opportunities and propose solutions.

Could you offer examples of why a regulator, utility, transmission or distribution grid operator might recognise energy storage as a cheaper alternative from a technical standpoint – and explain what the drivers might be for doing so?

[Broadly speaking] there are seven main criteria that we identified in the report that will determine the viability of energy storage to defer T&D investments:

  1. High T&D upgrade costs
  2. High peak-to-average demand ratio; a shorter peak demand period only needs a shorter duration ESS, which may have considerably lower costs
  3. Modest projected load growth rate over the coming years – a relatively small storage system could be used to meet peak demand rather than a large capacity increase through traditional T&D.
  4. Uncertainty regarding the timing or likelihood of major load additions. [Energy] storage can be added incrementally as needed, unlike large infrastructure upgrades.
  5. Delays in T&D construction or construction resource constraints. There can also be local community opposition to new power lines and infrastructure.
  6. Limited capital available for T&D projects that must compete with other important investments
  7. An energy storage system (ESS) used for T&D deferral will be able to provide additional benefits or avoided costs, such as frequency regulation, renewable energy ramping/smoothing or energy shifting.

Will we see examples of behind-the-meter assets being used to provide what are more traditionally considered front-of-meter services, to benefit networks and reduce the required spend on T&D infrastructure?

Yes, we expect to see more projects utilising behind-the-meter (BTM) assets as part of “non-wires alternative” projects for utilities and/or grid operators. 

However, there are challenges in coordinating the operation and ensuring the reliability when using a network of hundreds or even thousands of BTM assets. As aggregation and management software continue to improve, this will become a more reliable form of load reduction and will be utilised more by utilities. 

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How Tesla and Vivint are taking different paths to the ‘one stop shop’ destination

What does it mean to be all things to all people? Does it overstretch resources to breaking point, or does it give you a chance to cast a wider net and capture market share, if your core offering gradually expands to encompass almost every available product and service in your chosen sector?

When Tesla ‘merged’ with (i.e. bought out) SolarCity in late 2016, consensus was that it created a clean energy behemoth of the likes never seen before. The longstanding close relationship between the two entities was obviously already in evidence, from the makeup of the executive board including Elon Musk in top roles at both (CEO and chairman of the board respectively), to SolarCity’s immediate enthusiasm for Tesla’s Powerwalls on their launch in May 2015.

Having now taken ownership of the US’ biggest residential solar PV installer and begun the softly-softly launch of its solar roof tiles, not to mention expectations placed on the PV module Gigafactory 2 in Buffalo, New York, it could be argued that Tesla’s not-so-subtle play for market domination now encompasses so much of the distributed energy system architecture that the company is a “one-stop-shop” for home clean energy solutions.

The appeal of the “affordable” Model 3, new strategies for selling stationary energy storage including virtual power plants and no-money-down options, not to mention the pair’s large-scale dispatchable solar-plus-storage projects in Hawaii and American Samoa mean that, as predicted by analysts at the time of the merger, Tesla-SolarCity is well-placed to address individuals’ and businesses’ distributed energy needs across a plethora of technologies.

Meanwhile Vivint, also in the top three of residential solar installers in the US, launched its first ever “Fully Integrated Solar” solution in September. Following tie-ups with smart meter and thermostat makers, Vivint’s rooftop solar projects can now be sold alongside EV chargers from ChargePoint and home batteries, for which Vivint is partnered with Mercedes-Benz Energy. CEO David Bywater claimed this made Vivint the first residential solar “one stop shop” for customers.    

Both of these providers have created “one-stop-shop” or “all-in-one” solutions. So, which is likely to prove the more successful strategy? Will it be the extended value proposition of bundling products and services from all the partnerships taken on by Vivint, or do the acquisitions and new product lines coming from in-house at Tesla-SolarCity represent the simplest and quickest way to scale up an all-in-one offering?

“It makes sense to compare this [Vivint’s launch] to the Tesla-SolarCity merger because it’s pretty clear that Tesla’s long-term strategy is to become a “one-stop energy shop”. So an ideal customer for them would be someone who would buy EV, solar and also energy storage,” Brett Simon, energy storage analyst at GTM Research, says.

“It looks to be that Vivint is pursuing a similar strategy. The advantage there is that you [can] either a) have a customer who loves everything, buys everything and you get a big sale upfront, or b) they buy one thing and you can create an existing customer relationship and down the road potentially upsell them on an additional product.”

Partnerships versus in-house vertical integration

“The advantage of vertical integration is that you can have much more certainty in supply and whatnot, but on Vivint’s side the advantage of not necessarily having a specific house model and in-house manufacturing for storage is that they could really go with anyone as the market matures,” Simon says.

According to Simon, the selection of Mercedes-Benz as Vivint’s partner is an interesting one. The luxury car brand enjoys unparalleled brand recognition – albeit for its (non-electric) cars rather than for clean energy. The German company’s “reputation for making high-end products that perform reliably” is an important cornerstone to the installer’s strategy, giving Vivint credibility in a new and unfamiliar market.

“One of the big challenges for Tesla is that they are betting very heavily on some newer products that haven’t necessarily made as big a splash in the market, whereas for someone like Vivint to come at it the way they are – they are trying to think strategically about how they want to move into this market, how they want to add storage as a piece of their overall solar offering.”

Solar as a gateway to DERs

Part of the advantage of selling a holistic solution could be that while the value proposition for solar remains excellent in many parts of the US for homeowners, energy storage, despite rapidly falling costs, remains one of the more expensive distributed energy resources (DERs) available on the market.

Ditto EV chargers, but perhaps less so for thermostats, smart meters and other small components. So are Vivint and Tesla-SolarCity using solar as a “Trojan horse”, to get all of these other technologies deployed, so the industry can start building scale on an unprecedented… scale? How much customer ‘pull’ does each component have? According to Simon, it is without doubt that solar will remain the primary focus of each company’s offerings.

“Things like EV chargers and storage are more of an add-on. So the ideal customer would purchase everything, but I would say that most customers that they’re getting are still, for the foreseeable future, drawn by the solar piece of the equation and then might be saying, ‘Hey, I’m also planning to get an EV, so why don’t I add the EV charger’, or ‘I’m in an area where there are time-of-use rates so maybe I want to add the storage on as well’. But I still see solar being the main thrust of this piece and the other parts of this equation as add-ons.”

As for the appeal of solar cross-subsidising more expensive items like batteries, Brett Simon said it is hard to tell to what extent Vivint might be doing this, as pricing has not been disclosed publicly.

“[Whether] some of these companies might try to undercut the cost a little bit to gain market share – I would say that certainly, especially in a market like storage that’s trying to get off the ground, to get their name out there, I wouldn’t be surprised if some of the initial system pricing for storage is lower than it should be – from what things like the economics of a full system price would bear out.”

Starting the energy storage market off from a small wedge

Vivint, Tesla and rivals like Sunrun are aggressively pushing residential energy storage forward into the regional markets where it makes the most economic sense. In Sunrun’s case this means a head-on focus on California and Hawaii, two states which combine incentive and support programmes with utility business models that value the benefits of energy storage to integrate solar and shift peaks to match supply with demand.

“With the residential storage market today, it’s still quite small in the US. So even being targeted on Hawaii and California is probably sufficient for the near term, given that those are the two hottest residential storage markets.”

Brett Simon believes that those full-service package offerings will eventually span the US, as battery prices continue to fall and markets and regulation are reconfigured to better accommodate energy storage and other cleantech. Part of this could be the creation of subscription plans, third-party ownership or energy storage-as-a-service business models to match the success of such offerings in the solar PV market.

“I would think that, as there is this shift going on in the solar market, that there would also be this shift overall for the package to have some kind of a monthly payment where at the end of the whole arrangement, the customer would own the system, even if they’re paying in some sort of instalment plan.”

Parallel lines

So two parallel strategies for delivering an “all-in-one” solution. It sounds like a neat way to get energy storage in houses that hadn’t perhaps thought about it before, or a great way for vendors to bundle up their products and those from partners at scale. It could also be a great proposition for their customers. One company in Germany, Beegy, actually offers heat and electricity packages for homeowners on a monthly subscription basis, including PV, batteries and heat pumps, all for less than the price of utility power. Making things easier for the customer and putting the customer experience at the forefront needs to be a key part of this type of ‘holistic’ value proposition.

“When you go shopping, if you have a clothing store you like, you’ll buy your shirt, pants and shoes all from the same store,” GTM’s Brett Simon says.

“You might go to multiple stores to get a better deal, but if you can make as few trips as possible, that’s ideal and companies across the world do this. Again I think this integrated strategy has that advantage that you can build these customer relationships and long-term, continue to sell them products and services – assuming that you can demonstrate value.” 

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How to field questions from billion dollar investors, with Jigar Shah

Solar entrepreneur and financier Jigar Shah probably requires little introduction. The SunEdison founder and former CEO is now president at Generate Capital, a project financing venture for sustainable infrastructure investment. A passionate climate change campaigner and the first CEO of Richard Branson’s Carbon War Room non-profit, Shah spoke with Andy Colthorpe about Generate Capital’s latest solar-plus-storage projects for a school district in California, as well as sharing his thoughts on the economics of energy storage today.

What got this project up and running? What were the key value propositions for the school district that will be getting these solar-plus-storage solutions?

Well, as you can imagine, at the end of the day we like to talk about how solar is cheap and solar saves money. But it doesn’t actually save that much money for that particular customer [Santa Rita School District]. For a school district that has a US$50 million-a-year budget, US$40,000 a year in savings is not a big deal, even if it’s [a] 20% [saving].

What’s really amazing about this story is that the school is saying, “…the reason we went solar is for the energy storage. For us, we have kids here and we have real resiliency problems and when that happens, if we can run the school for 2-5 hours, we can actually evacuate the school or do what it needs to do to make sure the kids are well taken care of. That’s worth a lot of money to us”.

With residential or even some commercial energy storage, it’s been hard to put a value onto the backup. For a public body or a school with mission critical functions and a duty of care to the kids, does that make it a bit easier for the project to put an economic value on it?

That’s the trick! I’m still not sure that I can actually put a number on it. But they’re willing to trade the savings from the solar for the resiliency. So the school is still saving money on the solar-plus-storage system, they’re just not saving as much.

It that because you need to add the longer duration storage for backup and extra capacity?

Right. And from the school’s point of view, they’re saying, “we get this essential service for our kids and we can now double as an emergency shelter if something were to go wrong in the community because of this capability,” that’s priceless. Being able to trade dollars they didn’t have in the budget – the savings they created out of the solar – for this priceless public service, that’s a big deal

So at this point in California, the vast majority of the early adopter environmentalists have gone solar. And so now, we’re going after the mass market to get even more solar installed in California so we can get to 100% renewable energy, as set out in the legislature’s aspiration.

To do that, we need the decision makers to see the value of what we’re providing. And a lot of them are far more compelled by the energy storage [than by the solar].

Did California’s SGIP (Self-Generation Incentive Program) help to realise this project?

Well, SGIP is certainly useful but it’s [overall value proposition is] honestly more about the savings on the solar. We’re asking people to trade some of the savings from the solar to get the resiliency from the storage. So if the solar is really tight, if you’re in a market where solar barely saves the customer any money, then it’s tough to make things work. So the SGIP is useful but not vital.

Ultimately, this is about getting people to be passionate about the solution. This stuff doesn’t sell itself. There’s some sales person that has to be reallocated to sell this stuff. And if the installer isn’t excited about the margins that they make from the solution, they’re not going to tell their sales person to sell the next system.

Finding trillion dollar niches

We’re talking about the value of the backup power, but the peak demand and bill reduction is obviously a component too. Going forward, would you guys look at commercial projects in the way Stem or Green Charge does and see peak demand reduction as a bigger portion of your business model? Or is it really backup power as a sweet spot?

Both are available. If you do a battery-only system, of which we fund many, then today you really do need a subsidy from SGIP. The demand charge savings alone don’t cover the cost of the battery. So that subsidy can come from SGIP or in the future it could come from the solar savings. The customer can contribute the solar savings to subsidise the battery because they want the resiliency.

[The commercial providers] are getting additional money from utility companies. In Stem’s case, AMS (Advanced Microgrid Solutions), they get contracts from the utility companies to pay for half the battery. In exchange the utility has the ability to call on the power from the battery when they need it to manage the network.

We’re the largest owner of behind-the-meter storage assets in California, so that is an investment strategy that we believe in. But I think that the solar-plus-storage breakthrough here is really about [sales]. This project, being the largest coming out of the SGIP programme, actually can be replicated and there are thousands of solar sales people looking for something to sell right now. So this is something they can sell to their public sector and other clients.

Back in 2015, in an interview you said not scaring banks away was the key to financing energy storage. Is it really a question now that it’s easier to get a sense of what the risks are, to mitigate them, and so on?

Well, the technology risks are still there. We’ve put in a lithium-ion battery solution here which is quite well understood and respected but had we been asked to put in a brand new technology that came out of the lab last week, we may not have financed that. So you still have to worry that you’re not going to scare the banks away!

It always seemed that while there is an evangelical slant to how you talk about clean energy and decarbonisation, as a financier is there a practical sense of initially finding those niche markets where things are first working?

My ‘niches’ are a trillion dollars in size, so they’re not so niche! What I’m trying to do with my money at Generate Capital is to get a solution that I know can attract a trillion dollars – to be done at the five million dollar-scale. You start at the five million-scale, then 20 million and a hundred and so on.

The risks along the billion dollar-scale are amplified from the five million dollar-scale. So I have to be just as tough at the five million-scale, because we’re going to be tougher at the billion dollar-scale. So when people say I’m evangelical or very one-minded about technology and so on, it’s because I’m speaking on behalf of the questions I think I’m going to be getting from the billion dollar investor.

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Investment masterclass Q&A: Nancy Pfund, DBL Partners – Part II

Welcome to Part 2 of our in-depth talk with Nancy Pfund, managing partner at DBL Partners, a venture capital firm specialising in companies and start-ups that offer both rewarding financial returns and positive social impacts. There have been some serious clean tech companies in DBL’s portfolio. As well as being one of the earliest backers to Tesla and SolarCity, to utility-scale solar tracker company NEXTracker to Off-Grid Electric, which deploys solar in rural Africa; to others in energy storage like Advanced Microgrid Solutions and Primus Power.

Following a discussion about the gradual spread of energy storage and related cleantech across the US, from initial progress concentrated in leading regions such as California – From a manufacturing point of view as well I guess because Tesla assembles cars in California and they’re producing batteries out of the Gigafactory in Nevada. I guess it’s another nice social benefit of this technology to foster that manufacturing side of things?

We really care about creating quality jobs here in the US and that was one of our main motivations, for our first investment in Tesla many years ago, is that we thought there’d be an opportunity to revitalise and grow the car manufacturing industry in the US for 21st Century needs. That has turned out to be the case, so with storage in the early days, of course everything came from Asia, that’s where the battery market was thriving and continues to thrive. We will increasingly see domestic production because of the ability to do it in a cost effective way, with all kinds of savings relating to transportation and international regulatory obligations so there are a lot of reasons to build the domestic US battery manufacturing business and it has a huge positive impact in terms of employment and migrating people from the 20th Century energy job profile to a 21st Century one.

There’s going to be so much demand for energy storage between electrification of transport and stationary storage that we’re going to need plants in a lot of different places, which is good news. This is going to be a full employment act for battery manufacturing.

When you first invested in Tesla, you knew there was this aim to turn around transportation but could you see them coming this far, both in transport and in energy storage?

With every investment you make you hope it’s going to be a gamechanger and make great returns but also change the world. We had that belief going in, we knew it was risky and we went through many years, it was a very difficult evolution for the company but of course now it’s legendary. We did believe very firmly from the get-go, not only in the electrification of transportation vision that Tesla had, and we wanted our company to be successful but we also wanted it to change the industry in terms of its social impact. We want Detroit, Germany, Japan and China to make EVs and so that took a little longer than the immediate rise of Tesla but it’s happening in a very emphatic way. So that’s been a huge win but really the combination of solar and storage was part of the original plan! I know people may find that hard to believe but we invested in SolarCity very soon after investing in Tesla, we’d been in the solar market, we knew that storage was going to be important and the companies started working on this many, many, years ago.

So while it looks like this is a new idea, a new vision on the part of Tesla, it really isn’t. It’s been part of the plan from pretty much the beginning of the company.

Once you electrify transportation and people have electric cars and are charging them, then it sets up a huge incentive to green grids, to power your car off solar and put in storage to optimise your energy footprint from the roof to the garage.

We’ve seen a big portion of the success of US solar has been in the Investment Tax Credit (ITC) mechanism, which gives buyers a form of subsidy. Other countries like Germany, the UK and Japan boosted their solar industry with feed-in tariffs (FiTs). There seems less expectation that there will be a subsidy-driven market for energy storage in most territories, but are things like ITCs and FiTs crucial, or just nice to have?

Certainly the ITC has played a critical role in growing the solar industry in the US by creating the ability in the first five to seven years to use tax equity to finance the leases. And it’s brought in billions of dollars of private capital to finance the growth, it’s a huge success story. Now that the industry is bigger and more mature, we’re moving to loans, banks are coming in, there are other ways to finance now but there certainly weren’t in the first years. It’s not a coincidence that the places that do have supportive policies for storage are going to be the early adopters. California has significant storage mandates, there’s the SGIP rebate, Massachusetts is doing similar things, Hawaii has some programmes. So you will see supportive policies driving the industry in those regions.

Now, a lot of people feel it would be great to have something like an ITC for storage and there have been discussions about that. In this political climate it’s very unclear if that would be feasible, but the good news is that it’s not 100% necessary because you’ve got huge states like California with supportive policies that create the model and then as you’re scaling – and this is assisted by the growth of the EV industry that’s driving down battery prices – you’ll get costs in line over the next few years so that they become compelling on their own vis a vis alternative approaches. We do need supportive policies that show the true cost of the peaker plant approach, for example, and it’s becoming widely known that we’re seeing a lot more methane leaks from gas infrastructure than we thought. While it’s been viewed as a bridge [to lower emissions], it’s not as solid a bridge as we thought. As that becomes known and it becomes harder to build and justify more gas peaker infrastructure, it will help storage as well, because the comparison will be more favourable.

For companies like DBL it’s like looking at those innovations from an early stage investor interest but will we see more institutional investors get involved?

Absolutely. We have visitors from all of the big finance firms all the time wanting to know more about these companies and where will they go next. So I think that there’s a huge amount of interest in this and you’ll see this become – I mean, even now the investment firms are writing reports about it and visiting the companies so it’s all going to be good.

You can follow Nancy Pfund on Twitter: @NancyPfundDBL

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Energy storage investment masterclass: Q&A with Nancy Pfund, DBL Partners

Nancy Pfund is managing partner at DBL Partners, a venture capital firm which specialises in investing in companies and start-ups that offer both rewarding financial returns, and positive social impacts. There have been some serious clean tech companies in DBL’s portfolio. As well as being one of the earliest backers to Tesla and SolarCity, to utility-scale solar tracker company NEXTracker to Off-Grid Electric, which deploys solar in rural Africa; to others in energy storage like Advanced Microgrid Solutions and Primus Power, Pfund is extremely well-placed to offer a quick Q&A ‘masterclass’ in energy storage investing.

What were some of your key takeaways from 2016 in energy storage?

It was a seminal year for energy storage. Energy storage really moved from dream to reality. The hard work that lots and lots of companies have been doing for several years to get battery storage into primetime, they flipped the switch and while we don’t have widespread energy storage yet, we definitely took the important first steps toward that reality. I think you see it through the very high profile merger of SolarCity and Tesla, which was a statement about energy storage and its role not only in transportation but most importantly in greening the grid and pursuing consumer personalisation and choice, as well as utility use of storage to avoid the need for peaker plants and such.

Similarly other chemistries that will be important made some very significant moves into pilots and flow batteries, different chemistries, nickel-zinc, zinc bromide. I’m not the person to ask for all the different battery types but we’ve seen uptake on the part of utilities, corporate customers and in certain locales, residential when paired with PV. For all of those reasons we saw 2016 as a huge inflection point for energy storage.

We’ve seen significant growth in the various different use cases for energy storage. It’s not just households with PV, or just utilities doing more to make grids resilient – would you say it’s been an “all of the above” kind of year?

I would but with the underlining emphasis that corporations are becoming significant storage customers. As we see the move towards 100% renewables on the part of massive companies like Apple and Google and Microsoft and Amazon, they are now becoming, as they build that renewable infrastructure for their servers and operations, not surprisingly, some of the earliest storage customers. One of our companies Primus Power that has a zinc bromide flow battery has an installation at Microsoft HQ for example which is very significant in terms of signalling that part of the toolkit for corporations to reduce costs by going renewable and achieve their sustainability goals, a big part of that toolkit is the battery or the storage architecture.

A huge part of DBL’s raison d’etre is positive social impact – if corporations are choosing to do this is that a good marriage of business sense with social benefits?

You don’t have to sacrifice financial return to deliver a positive social result and I think storage epitomises that because you’re seeing significant companies in their early days being built that will bring returns to investors at the same time that you’re addressing a critical need. If we electrify everything – which we’re moving towards doing – we need to do it in a way that uses green resources and the nature of those resources will require storage. So it’s a virtuous circle.

And it’s not just the batteries or the storage architecture, it’s also the integration. There’s some really interesting work being done, like Advanced Microgrid Solutions [is doing] to develop a virtual power plant at a commercial building or office park by integrating storage assets with renewables, with the grid, with software to manage demand and reshape load. Saving the customer money, strengthening the grid reliability by applying locational strategies, putting storage in areas where it’s needed – so helping the utility and the end use customer and the overall grid. So that’s really where we’re heading and using storage both in front of and behind the meter.

Is energy storage in the US still concentrated in leading regions, such as California, where around 100MW was deployed in six months to deal with the shortfall created by the Aliso Canyon gas leak? And have developments in those leading regions sent shockwaves around the rest of the country?

 A lot of energy innovations happen in California first because there’s a history here of good policy and utility and innovative new entrants pushing the envelope – and there’s a consumer will for it. I can tell you that every battery company, every battery integration effort is being affected by what’s going on in California. AMS just announced that they’ve got a Texas utility to do this [take up energy storage]. Hawaii is of course active in PV and storage.

So it’s happening and just as with solar where California is head and tails above others in terms of PV installations, you’re going to see other states catch up and in some ways storage has less of a headwind because you don’t need the elaborate policies that solar needed to get started with. I would signal that Massachusetts has a storage mandate they’re working on and it’s just a process that we’ll see dissemination of across the board. In Hawaii residential PV-plus-storage is cost effective given that they have extremely high utility rates so it’s natural they would look at it there too. The numbers will start to work out in California over the next two to three years, so you’ll see a steady rise in the customer solution architecture for storage as well, as prices come down.

The fact that California is leading, it’s the sixth largest economy in the world – so it’s not like it’s some tiny state that doesn’t have anyone living there. Even today, a huge percentage of US solar is in California, so it’s a terrific place to start. It’s like this is a really good place to hatch the next generation of the clean grid infrastructure.

Part II of this interview will follow later this week.

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The 5 ingredients for success in the future stationary energy storage market

Through our day-to-day work around the globe, Apricum has gained deep insights about the dynamics of the energy storage markets and what it takes to be successful not only today, but also in a few years from now. Driven by the specific market characteristics, we identified certain “ingredients” of which an energy storage company’s business model should comprise to be one of the winning teams.

Let’s have a look at the five ingredients we at Apricum found most important:

Ingredient No 1: Remain flexible – be able to adjust swiftly to changing market conditions

One of the key advantages of energy storage is the vast amount of use cases it can serve. This is in contrast to, for example, solar, which is targeting basically one major use case – squeezing as much energy as possible out of the sun. But the high number of addressable use cases makes energy storage an extremely complex animal, as for each use case:

  • there is varying demand, depending on the individual challenges in each energy market

  • storage is competing with other alternatives mainly on a cost basis, and costs develop differently for a vast array of storage technologies available, and

  • dynamic regulatory frameworks add additional complexity

Therefore, it’s hard to predict which use case will be attractive in which market – and for how long. In fact, we see “pockets of opportunities” opening up – but also closing – rapidly. Take the Primary Control Reserve – or PCR – market in Germany for example, where stagnating demand meets an ever increasing number of utility-scale storage installations and also aggregated distributed storage units compete with traditional suppliers. This specific pocket of opportunity is closing, so better make sure your business is not closing along with it.

A flexible business model is a must. It has to be constantly reviewed and updated depending on what’s going on in the market.

To ensure this flexibility, do not lock in on a specific technology but keep a tech-agnostic approach. If you are a technology company, maintain a high “flexibility by design” at your interfaces to other components, for example, inverters.

Also, do not lock in on a specific use case or, in other words, a specific mode of operation of the storage unit. Accommodate remote software updates or allow easy modifications of your hardware.

Enter into flexible partnerships, make sure you have contracts that are easy to cancel or at least offer enough degrees of freedom, e.g., warranties that enable the mode of operation of the storage system to be changed.

Last but not least, you need to maintain an excellent market understanding, in order to know what needs to be adapted and when.

Ingredient No 2: Continue to reduce costs – there will always be multiple alternatives competing

For the storage installations we see today, cost competitiveness did not always play a major role: A lot of the utility-scale units are pilot plants to test what can be done with storage. And in the residential market, sales are rather driven by early adopters than return-maximisers.

In this current market stage, there is enough room for a plenitude of players even with very small volumes – for example, the German residential storage market has about 48 different suppliers at the moment.

But this is going to change. On the way to a mass market for energy storage, more cost-sensitive customers will have to be convinced by lower prices, leading to more fierce competition and consolidation.

And in most markets you not only have to compete against other energy storage players, but also against non-storage solutions. For each use case, you have “incumbent” and therefore well-tested alternatives to storage (e.g., gas peakers, grid extension…) that can be hard to beat.

So how does one become more cost competitive? When people talk about “decreasing costs of energy storage”, in most cases they mean capex. The most important way to get this down is to quickly boost volumes to take advantage of economies of scale. In parallel, in particular if you are a start-up in energy storage, you need to improve your product design, which could include using materials that are less costly or that increase the overall performance.

But capex is only one “influencer” of the lifetime costs of energy storage  (e.g., LCOS). There is more you can do. For example, by combining use cases, you can increase the number of cycles and thereby the utilisation of your energy storage unit. Hence, if the primary use case, the technology’s calendar lifetime and regulatory frameworks allow for it, benefit stacking is a good way to reduce LCOS. Another cost influencer is lifetime, which can be improved by optimising how the battery is run. For example, studies by French TSO RTE show that by optimising the operation of the battery the lifetime impact can be reduced by 36% with a minimal deviation from the optimal service delivery.

Plus, you should start thinking “outside the (storage) box”: There is more than just hardware. For example, the installation of a residential storage system in Germany can cost up to EUR 1,500 (US$1677.82). Finding ways to decrease installation times, therefore, can be a major cost advantage – outside of capex reductions.

Ingredient No 3: Tap into new revenue streams – and go to where the value is

Next to reducing costs, you should think about ways to expand your accessible market potential and revenue streams to drive up profits.

For example, a residential storage supplier with a “classic” business model sells energy storage units to its customers and thereby helps them to reduce the amount of energy purchased from the grid through increased self-consumption of rooftop PV power. The customer’s money available for purchasing energy is redirected from the utility to the storage company, which thereby captures a certain share of the “conventional” market potential for electricity supply.

If the company starts offering a full-service package and provides the residual amount of (green) electricity needed, this share can be further increased.

As illustrated in the graph below, the residential player can now start aggregating its deployed devices and tapping into market potential beyond the conventional one, by offering ancillary services to the grid for example. Plus, certain premiums can be added for rather “sentimental values” such as autarky.

At the end of the day, all of these values add up and result in a much juicier market potential than the “classic” business model would have provided. As a prerequisite, you need of course to understand where the most value is allocated along your value chain – and adapt your business model accordingly. In our residential storage example, this means expanding downstream and becoming a service provider in addition to offering the hardware alone. This will allow you to also capture value from neighboring value chains and realise increased revenue streams as described before.

Ingredient No 4: Be proactive – don’t wait for opportunities to come to you

No one has really waited for energy storage; there have always been incumbent solutions that could do the job as well. Hence, do not rely on clients beating a path to your door to get it.

Instead, you might have to explain to your customers what benefits storage can provide for them. But first of all, you have to find these customers, or better still, find the problems you can solve with your storage offering, for example, reducing grid fees, which differ a lot across Germany.

If a commercial or industrial company manages to keep its peak load out of a certain peak window defined by the German DSO, it can save up to 80% on grid fees – hence, this storage use case is very attractive for customer segments paying expensive grid fees and who have a suitable load profile. Often, however, these customers are not even aware of this saving opportunity, so you need to find them and enlighten them. When reaching out to them, make sure you have a crisp way of explaining your value proposition. Behind the curtain, there can be extremely complex financial and technological architecture in place to make the claim happen, but what the client sees must be uncomplicated and easy to grasp.

If executed correctly, pro-activeness helps you to tap into new revenue streams that are less obvious and that are facing less competition in contrast to public tenders. And don’t limit yourself to your home market only – there are many problems to solve for other countries’ customers as well.

Ingredient No 5: Be bankable – ensure secure, sustainable cash flows

The Holy, and to date somewhat elusive, Grail of energy storage remains project financing. While there are various types of risk in an energy storage project that need to be mitigated, such as technology or construction risk, we see the market risk as the most critical for achieving bankability for project financing – and at the same time, the most difficult one to mitigate.

Looking at PV and wind markets in the past, a key reason for the huge success of feed-in-tariff schemes and hundreds of billions of unlocked project finance was that governments effectively eliminated the market risk by guaranteeing a fixed tariff under a take-or-pay structure, typically for at least 20 years. The market risk was substituted by the counterparty risk of typically highly creditworthy sovereigns.

Similar situations are still hard to find in the energy storage sector, even when including projects with corporate counterparties. With the exception of a few geographies, merchant projects are still dominant, with the specific market risk depending on the application. This renders nonrecourse project financing often impossible, or adds substantial risk premiums and puts stringent limits on leverage or coverage ratios, resulting in fairly high cost of capital. In many cases, some form of corporate balance sheet backing will be required for structured financing solutions.

Given the difficulties around bankability, unconventional, non-bank sources of capital such as specialist funds are currently still dominating the sector and need to be accessed.

That said, project financing should not be confused with schemes that amount to lease financing, particularly popular with C&I, but also increasingly with residential customers. In this case, the majority of the risks are assumed by the corporate or private end customer, and traditional tools from corporate and consumer finance can be employed, including the securitisation of lease portfolios.

In summary, financing for energy storage projects is available but requires careful structuring depending on the use case, underlying commercial arrangements and risk allocation. In fact, more than US$820 million was invested in battery projects in 2016, a massive increase from the year before. The bulk of this funding went to no-money-down, distributed energy storage offerings or projects based on a take-or-pay contract.

In summary, these are the key ingredients successful energy storage business models should reflect. As outlined above, they can be implemented in multiple ways. The optimal “recipe”, however, depends on the individual company’s situation and needs careful evaluation as it will impact various business-specific, interrelated elements such as customer channels, partnerships and resources.

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How California pulled off the world’s fastest grid-scale battery procurement – Part II

A close-up on the projects

‘World’s largest’

AES Energy Storage was the powerhouse behind the largest battery storage facility built to date. When combined with the other mammoth battery plants built by Tesla and AltaGas, the three constitute around 15% of the entire battery storage capacity installed across the planet last year.

AES executed two projects for SDG&E, the 30MW/120MWh Escondido project, just northeast of San Diego, and the 7.5MW/30MWh El Capon project. Both projects were sold under an EPC contract and used four-hour lithium-ion batteries in modular containers.

The 30MW project – the world’s largest grid-scale lithium-ion facility – was contracted in just three weeks, according to the company, with the entire system being delivered in approximately six months.

“Obviously the short time frame was challenging,” Kate McGinnis, AES market director for the Western US told Energy-Storage.News. “We were able to overcome those challenges through our collaborative working relationships. We had actually started working with our suppliers early in the spring when it looked like there was going to be the possibility of a procurement. That early work helped to shape our knowledge of how much and how fast we’d be able to deliver a project.”

‘World’s fastest’

Energy storage software and solutions specialist Greensmith Energy secured the title for the world’s fastest grid-scale energy storage deployment. Its 20MW/80MWh project was deployed in a record four months – a couple of months earlier than any of the other projects’ impressive feats.

Greensmith handed over the regulatory process to Canada-based energy infrastructure company AltaGas, who was the project developer and owner of the San Gabriel facility.

“The process was just condensed from a timing perspective. Keep in mind, Greensmith has delivered 18MW sites in about 6 months in the past,” explained company CFO and COO Jim Murphy. “For Aliso Canyon, the construction subcontractors required significant amounts of overtime as AltaGas had the teams operating on a 24-hour basis to meet the deadline.  At one point there were over 200 electricians working on the project, completing wiring and battery installation.”

Key takeaways

Largely thanks to California’s energy crisis, but also improving economics and state and federal level policies, the business case for US energy storage has never been stronger.

“Energy storage is still a relatively nascent industry when it comes to grid-side or front-of-the-meter applications,” said GTM Research senior storage analyst Daniel Finn-Foley. “So to be able to demonstrate several different capabilities at once during a capacity shortfall that was clearly unpredicted, that was really a big deal.”

One of the biggest achievements of the entire process is obviously timing. There were, between the initial RfO and commissioning of projects, as little as just a few months. That is the kind of timeline it takes to merely get an environmental permit for a new natural gas peaker plant. The fact that such large-scale projects were able to get in the ground successfully under such high-speed time frames proves that energy storage can be a very flexible grid solution in a very short order.

Further, it readied a solution that utilities did not even have before. Using batteries on this scale was an idea that has always held far-reaching potential, but the execution was not something that engineers and policymakers had ever attempted.

“It all just really adds up to shattering that concept of needing years to build an asset that actually will have a really big and positive impact on a larger electrical system,” said Powin’s director of engineering applications Stephan Williams. “That coupled with how fast the price of energy storage is dropping is starting to make heads turn.”

Longer-duration storage

This emergency storage procurement was evidence of batteries being able to participate in longer-duration applications, as traditionally the large-scale battery storage market has been dominated by frequency regulation applications, which typically use shorter-duration systems.

“Now, because of the significant cost reductions that we’re seeing for batteries, longer-duration systems are making economic sense,” Sam Wilkinson, senior research manager of solar & energy storage at IHS told Energy-Storage.News. “That’s why we get the four-hour systems like this that are providing peaking and systems like those that have been announced in the UK recently for capacity auctions as well.”

Competitive pricing

Such longer-duration projects were only possible due to aggressive pricing, which demonstrates the ability for storage to be cost-competitive and effective from a commercial business standpoint.

“It comes down to cost – as battery pack prices decline, it is going to be a lot easier to justify longer-duration, higher-capacity projects,” said Finn-Foley. “The more capacity you have, the more solutions you can provide. I do think that we are going to be seeing fewer 2-5MW projects.”

The cost of batteries on a kWh basis has been falling very quickly; with prices of battery system costs dropping 10-14% in the last year alone, according to GTM Research. “Every time you add an hour, you add another number of MWh of batteries, and therefore that US$/kWh is very important,” explained Sam Wilkinson. “As that US$/kWh number has fallen something around 50% in the last two-three years, it is much more affordable to buy longer-duration systems.”

A new blueprint?

All that being said, did the massive grid-scale deployment provide a blueprint for how procurements should be done in the future?

What it did prove is that storage can be deployed at that pace, which makes it different from many of the other typical electrical generation resources that have been deployed in the past.

“This probably gives the industry a test case that this is something that can be used in these emergency situations but also in the normal course can be deployed with a shorter planning horizon than is typically used,” says Gerber. “I don’t think that it is going to be the norm right away, but I do think that we’ll see more like this in the future.”

Whilst this might be ideal, there are however some complexities with the proposition that procurements of this kind should be the new norm. With energy storage, there has to be both a need and a sound business case for it. It is not necessarily for the industry to do anything other than demonstrate that the technology is viable, and that will play a part in it being increasingly accepted and asked for by grid operators and utilities. The latter will procure storage when the value proposition makes sense in comparison to the other options available – and that is when at-scale deployments will be seen across the country and around the world.

Read Part one of this blog here

Cover image credit: Powin Energy.

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Blackouts & batteries: How California pulled off the world’s fastest grid-scale battery procurement

In the summer of 2016, Southern California descended into a state of emergency. After the four-month Aliso Canyon natural gas leak that began the previous October, power generators in the region were bracing the threat of blackouts as long as 14 days as a result of the power shortages.

According to the California Energy Commission, the Aliso Canyon shutdown was forecast to affect power plants providing nearly 10,000MW for the Los Angeles Basin, most of which are called in to provide electricity on hot days or during power outages.

Time was of the essence as California governor Jerry Brown declared a state of emergency with the California Public Utilities Commission (CPUC), California Energy Commission and California Independent System Operator (CAISO) clubbing together to address the energy shortages triggered by the methane leak.

In order to mitigate against predicted power disruptions, regulators called for alternative measures to aid in offsetting the lost gas supplies, with energy storage at the forefront of those plans, alongside solar PV, solar thermal, energy efficiency and demand response.

Brown handed over the reins to utilities and regulators, allowing them to calculate what, and how much of what, needed to be procured to fill the projected shortfall in peak energy capacity. Peaking capacity is a service that has historically been provided by thermal generators, but in this instance utilities needed to act much more quickly, and batteries were a solution that could be deployed quickly enough. This freed up utilities to start procuring batteries. And procuring lots of them.

The big battery test

In a landmark resolution, the CPUC expedited direction to utility Southern California Edison (SCE) to procure energy storage projects on an emergency basis. In fact, SCE released a Request for Offer (RfO) the day after the resolution. Likewise, San Diego Gas & Electric (SDG&E) issued an RFO to expedite energy storage projects that they had already had in development, in the interest of rapidity.

“Around May 2016 is when the CPUC asked us via a resolution to expedite projects that we already had in development through an RfO,” says Josh Gerber, SDG&E energy storage and smart grid expert.

“We had already pre-qualified a number of those bidders and as a result we could move very, very quickly. We still had to get the contracts completed and we still had to get projects identified and ultimately built, but it was really because we already had that RfO in process that we were able to mobilise things so quickly.”

In a similar vein, SCE was already running a procurement, and was able to reach out to involved bidders with ‘shovel-ready’ projects to ask if they could meet the timelines proposed. Initially, SCE made plans to buy at least 16.3MW of connected energy storage capacity of no less than 0.5MW in capacity each. These projects would have to be commissioned in record-timing; with SCE imposing a 31 December 2016 deadline and 31 January 2017 in SDG&E’s case.

It was no easy feat as utilities were constrained by the amount of physical space that they had; being limited by substation locations and the electrical interconnection capacity. Once SCE and SDG&E had settled on the project locations, they aimed to maximise the amount of power and energy storage that we could fit there, based on what was available.

Rapid procurement

“In between May and July 2016 we identified the sites and selected the contracts,” said Gerber. “We ultimately submitted that to the regulators by 18 July and got approval to proceed one month later on 18 August.”

In total, the two utilities sought to procure just over 100MW of storage (250MWh+) through projects ranging in size from 2MW-30MW – with the vast majority of it being longer duration, 4-hour systems, spread across eight projects. The main system suppliers were AES, Greensmith Energy and Alta Gas, TeslaPowin Energy, GE and Western Grid Development.

Therefore, contractors were given just a few months to expedite their projects and have them grid-ready, putting significant pressure on a process that under normal circumstances, could take years, according to Powin Energy president Geoff Brown.

“One of the most impressive challenges that we were able to overcome was that from the date the RfP came out in late May to when the batteries and inverters were fully installed and ready to go in December, the entire project took less than six months from start to finish. And if I can brag on that for a second, it was the work of our director of engineering applications Stephan Williams, to be able to get the project through the permitting process, the land leasing process and get it through the engineering and construction process and that includes the contracted phase.

“Any of those typical processes should take six months alone, and to do all of them simultaneously shows a lot about what the technology is capable of.”

The Aliso Canyon storage procurement did show indeed what energy storage was capable of; setting records for both the fastest grid-scale storage deployment and the world’s largest lithium-ion battery facility, and with the four-hour duration projects, also demonstrating energy storage is capable of offering economic capacity products, in addition to shorter duration products. Further, the procurement exemplified that storage has the ability to be cost-competitive and effective from a commercial business standpoint and provide valuable functions for utilities in the electricity market. 

Part II of this blog will examine some of the record-breaking projects in the procurement, as well as the anaylsts’ comment on what this all means for the US energy storage industry at large and can be read here

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