By Davion Hill, DNV GL Americas
Solar + storage is presenting a shape- shifting opportunity in the electricity grid enabled by technology flexibility, software scalability and cost reductions. The market has an undeterred upward trajectory. Whether in aggregate or consolidated, solar + storage solutions can address peak demand, grid instability, locational constraints and other services like frequency regulation simultaneously. Distributed solar and storage can defer distribution upgrades and replace the function of gas peakers. It has become apparent to the project finance community that the technologies are bankable and there is a market precedent for deploying capital with an expectation for good returns.
Low Costs
In 2008, lithium-ion (Li-ion) cell costs were $1,000-$1,200/kWh. As Figure 1 illustrates, today’s cell costs are frequently cited below $300/kWh, with announcements from General Motors and Tesla stating that $145-$195/kWh is possible in high volume. Costs have been consistently dropping from 8 to 15 percent each year since 2008. Continuing with that trend, it is realistically conceivable to see $100/kWh at the cell level by 2020. Assuming a cost multiplier of 1.5-3x for systems integration and engineering, procurement and construction (EPC) services, which is consistent with recent bids for large energy storage projects, the installed system cost in 2020 could range from $200-$700/kWh at large scale (Figure 1). At these prices, long duration storage from Li-ion is highly feasible. The storage projects awarded to address the Aliso Canyon (Orange County, California) gas leak have demonstrated that energy storage projects can be designed, deployed and operating in less than nine months, while a gas peaker might take two to four years to permit and build.
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| FIGURE 1 Battery Cell and System Costs |
Business Models
The business model for solar + storage is generically illustrated in Figure 2. The project developer meets the need of the offtaker (a utility or other commercial entity). The offtaker and the site are sometimes the same entity. In California, however, the offtaker is the utility (via the capacity contract) and the optional site might be an independent commercial and industrial (C&I) location benefitting from demand savings, which offers an additional upside to the business model.
The control software can be as simple as time-triggered on/off signals, or it can be highly complex signals driven by weather predictions, historical demand probabilities, battery life estimation and optimization of stacked value streams that are prioritized to meet the offtaker obligation. The EPC contractor might offer support for operations and maintenance (O&M) or warranties or both. Sometimes the EPC or the system integrator (SI) can provide controls solutions. In most cases, the controls provider is a separate, software-only company.
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| FIGURE 2 Solar + Storage Business Model |
The SI supplies a battery solution that might or might not be its own. In addition, sometimes the EPC and the SI are the same entity; but in many cases they are not. Many EPCs and SIs prefer to be “battery agnostic” in the same way that solar EPCs prefer to be technology agnostic because it allows them to address a larger market.
The upstream lender finances the entire project based on reliable, stable and credit-worthy project participants. The lender also relies on the low or backstopped technology risk that is supported by technical due diligence and validation testing of performance claims.
The controls entity should be able to maximize project revenue. Sometimes the project developer is a utility-financed independent entity created from a regulated utility. The expected returns are lower than projects with a commercial or institutional lender. In either scenario, the lending entity is deploying capital, seeking high returns or stable cashflow.
Viable Markets
In 2016, Massachusetts passed an energy storage mandate-the Energy Storage Initiative (ESI)-that is kickstarting project funding with subsidies. The state sees potential for a 600 MW energy storage market under viable cost-effectiveness scenarios.
In parts of Manhattan, storage projects are slowly being permitted to cut 52 MW of demand from the 10-12-hour peak in Consolidated Edison’s Brooklyn-Queens Demand Management (BQDM) program. The peak duration is so long that aggregated, staggered and optimized demand response and storage are the most practical solutions. The BQDM program highlights the value of storage in a congested urban environment, in which extensive distribution system upgrades due to limited land area and access are not practical or affordable. The BQDM program addresses only a sliver of the market implied by New York’s Reforming the Energy Vision (REV) initiative.
California set a storage market precedent by mandating that 1,325 MW of energy storage be procured by 2020. The state’s three major utilities, San Diego Gas & Electric, Pacific Gas & Electric and Southern California Edison, have a resource adequacy obligation that allows them to procure storage via a capacity contract. Aggregated or consolidated resources apply to the utility request for offer and are paid by the capacity contract, but additional upsides of demand savings for behind the meter customers are driving a behind-the-meter market.
Hawaii is perhaps the only state where solar + storage can be a cheaper long run solution than buying electricity from the utility. This so-called “self-consumption” paradigm is supported by power purchase agreements and has created a third party financed solar + storage market in the state.
In addition to the states mentioned, Oregon is looking for 5 MWh by 2020. Since the resource adequacy constraints in California are measured in four-hour increments, the storage market in California is 5.2 GWh. The New York market is at least the size of California, and the long duration of the peak in New York City implies a multi-GWh market alone. It is easy to conceive that an 8-12 GWh market could be established in the U.S. as 2020 approaches.
While the U.S. Federal Investment Tax Credit (ITC) is still attracting tax equity investors, storage can be wrapped into a solar project and benefit from the ITC if 75 percent or more of the charging energy is solar-sourced. Meanwhile, the PJM marketplace is addressing saturation of the frequency regulation market, but the upside is not yet eliminated. FERC issued a Notice of Policy Rulemaking (NOPR) via Docket Nos RM16-23-000; AD16-20-000 to revise tariffs to capture the value provided by distributed energy resources and storage. While the ISOs in the U.S. are not yet obligated to comply, FERC has sent marching orders.
In the UK, energy storage is meeting up to 3.2 GW of capacity market auctions. In addition, the Australian energy storage market has projected growth exceeding 240 MW, in both consolidated storage and behind the meter solutions. Australia’s market is one of the top five in the world among the U.S., UK, Japan and Germany.
Dropping prices in Li-ion battery cells and the lower lifetime “fuel” cost (via recharging) demonstrates that today’s energy storage solutions are competing with gas-fueled peaking power plants in many markets. Energy storage as a peaker is an economically driven opportunity independent of state policy.
Project Risks are Being Mitigated
The industry is gradually sorting out project risk complications. There are, however, still project risks for a developer and lender to consider as they build a team. Some traditional EPCs or SIs in the market that are not yet comfortable with some energy storage technologies will shy away from a warranty unless they can pass risk down to the SI or battery manufacturer. Insurance can provide a backstop, though it adds cost to the project. The battery provider or SI must provide strong evidence that it can meet the lifetime or warranty, and their longevity or experience in the market should allow them to provide a realistic warranty or O&M support or both.
Because Li-ion has a bankability precedent, developers often choose it, not because it is the best technical solution, but because it is flexible and easier to finance. This trend is likely to continue and increase.
The controls space also is highly variable from simple to advanced solutions. The controls must maximize the economic opportunity during the project life and demonstrate that the project is not vulnerable to controls failures due to errors or security risks.
The insurance industry is beginning to understand the solar industry and is developing products for storage and controls, which is another way in which the solar industry is paving the way for storage. Harnessing the ITC and adding another asset to the inverter are logical and incremental advancements toward a larger solar + storage market. It is only a matter of time before a solar + storage solution is considered among the first options in any electrical distribution system upgrade.
Davion Hill, PhD., is DNV GL’s Energy Storage Leader for North America, a member of the Board of Directors for both NAATBatt International and New York Battery & Energy Storage Technology Consortium (NY-BEST). Dr. Hill has more than 10 years’ experience as a contract R&D consultant, serving as principal investigator on Advanced Research Projects Agency-energy (ARPA-e), New York State Energy Research and Development Authority and the California Energy Commission technical R&D programs related to battery energy storage performance and safety. Dr. Hill won and led DNV GL’s first ever ARPA-e award, as well as its second. Dr. Hill also created DNV GL’s first hybrid power for oil and gas operations program in North America. In his tenure with NAATBatt, Dr. Hill founded and led the creation of NAATBatt SD, a strategic development program allowing NAATBatt members to seed-fund precompetitive R&D efforts. Dr. Hill has led, chaired or participated in multiple panels on the topics of battery safety with NYBEST, NAATBatt, and Energy Storage Association.
