What it Takes to Finance an Energy Storage Project in 2021’s Evolving Marketplace
“Multiple companies are bundling solar-battery systems to earn revenue from their flexibility as wholesale energy market capacity or utility grid services.” — Solar News, Swell Readies $450M in Financing for Solar Plus Battery Virtual Power Plants
Scaled and distributed energy storage is a clear component of the future energy grid. Storage drastically improves peak load management, maximizes the output of renewables, and offers greater resiliency in case of emergencies. Because of this, many governments have introduced energy storage goals, and the proliferation of energy storage is a critical step on the path to a clean energy future. However, at this nascent stage it is difficult to value and pay for these projects. Fully mapping the value that these systems offer as well as the financing mechanisms to enable their deployment are critical challenges to achieving widespread energy storage.
Revenue stream definition for battery projects has been “a heck of a journey,” said Ben Guest, Gresham House Energy Storage Fund managing director, at the 2021 Energy Storage Summit. The unique ability of batteries to generate value in a variety of ways has made energy storage a complex investment. In December 2020 Swell Energy announced plans to invest $450 million in a solar plus storage project that will give home and business owners solar systems and batteries at no cost, and make back the money by turning those systems into virtual power plants that serve grid needs when additional capacity is demanded. Announcements like this are becoming increasingly common and point toward the energy storage market’s increasing viability, but the implementation is still challenging, and understanding how companies can generate returns on these investments is critical.
“The annual revenues of the US energy storage market will be over $1 billion in 2020 even after taking COVID-19 into account, which is more than double for 2019.” — Morgan Lewis, Financing Energy Storage Webinar
While some of the considerations for investing in an energy storage system are as simple as looking up the various incentives provided for these projects (usually in the form of tax credits), understanding the basics of how these projects first create value, and then capitalizing on those value streams requires an in-depth understanding of the energy grid.
Ancillary Services and Energy Storage
Ancillary services support the transmission of electricity from the generation site to the end user and help maintain its usability throughout the electricity system. Think about the outlets along the walls in your house: all of them need to transmit exactly 120 volts when something is plugged in, and one of the uses of energy storage systems is to help regulate and provide that exact voltage when necessary. This is known as voltage support.
Batteries can help the grid in four key ways: contingency planning, regulation, flexibility, and frequency control[MM1] . Grid operators are required to maintain a certain contingency reserve to protect their grids from outages in case of demand spikes. These reserves could be equal to roughly 4.5% of the average energy load, and are also known as spinning reserves. Battery storage is the ideal technology to provide reserves, since not all generators can offer reserves based on their existing technology, specialization, or necessary equipment. Additionally, batteries can help systems with flexibility and regulation as solar and wind systems produce variable amounts of energy throughout the day. Finally, the grid can be destabilized by shifting frequencies as millions of devices connected to the grid are turned on and off throughout the day. Batteries can respond quickly to meet these demands and are able to discharge and charge efficiently, and maintain the stability of the grid.
Battery systems are expensive to install, so the returns need to justify this expense. If a residential customer has an on-site solar or wind system that produces excess energy, a battery storage system can help them save that energy for later use, thus reducing their need to buy as much power from the grid. Property assessed clean energy (PACE) financing has become a controversial tool for homeowners to kickstart their climate-friendly home projects more affordably. The PACE program utilizes local taxing authorities to cover the high upfront cost that these systems require, yet some customers who have not fully researched the program and all that it entails have fallen into serious debt if they cannot pay the steep interest rates on the financing. Situations like these underscore the complexities associated with financing an energy storage or on-site solar project, and highlight the need for extensive due diligence collection before taking on a project.
To illustrate some of the considerations on the investor side we can look at a simplified case where the project involves selling a storage system to a customer to provide emergency power during outages. In a behind the meter situation where net metering is available (e.g., a solar panel on-site that charges battery) the customer has no expense except lost income from the energy used to charge the battery. However, if there is no distributed energy resource on site then the battery will charge through the grid, and the customer will pay for the energy used to charge the battery. The developer can account for this additional cost by lowering the subscription price for the battery. If the project is larger and serves utility scale systems, the energy for the battery needs to be purchased through a power purchase agreement. If the batteries will be serving a utility, then the utility will pay a capacity payment and an energy payment to keep the battery online to charge or discharge for the utility.
Utility scale energy storage systems do not generate value in typical ways; they cannot raise behind the meter income. Instead, they must rely on ancillary services, like voltage support, frequency regulation, and spinning reserves, which are all difficult to monetize due to a lack of structure in the wholesale electricity markets. At its core investing in an energy storage project is similar to any other project: it involves the precise calibration of risk. There are technology, regulatory, and security risks associated with the newness of the technology, the uncertainty of constantly changing regulations, and the amount of access given to the software needed to pilot these programs. However, as new revenue streams continue to be developed, there is vast opportunity for profit, as well. Part of what makes these opportunities so attractive for investors is that the current market for ancillary services is undersubscribed, and first movers in the space may be able to capitalize on these emerging revenue streams. As companies develop software and technology that better identify the various arbitrage opportunities within the ancillary service market, we are sure to see exponential growth in investment in energy storage.
