Waiting for the Dough

The federal government’s recent surge of support for energy storage in the American Recovery and Reinvestment Act of 2009 (Recovery Act) has been warmly welcomed by those in the storage community.

The Recovery Act itself is designed to help jump-start the economy and modernize our Nation’s infrastructure. Even better, these awards will have a secondary benefit for the energy storage industry. By designating the funding for demonstration projects of commercially ready technologies, the Recovery Act will advance the industry by addressing a key impediment: a lack of widespread commercial deployments so that the growing number of prospective customers can evaluate competing technologies in a variety of applications and conditions.

The Recovery Act’s timeline is compressed. This requires developers not only to expedite their application, but also to quickly develop the remaining funding resources and complete all of the remaining contract details. As intended, project developers that have been diligently putting together a project but were languishing for lack of a utility partner commitment stand to benefit–assuming they can actually line up everything in the time allotted. For a variety of reasons, alternative financing options may play a larger role in these projects than first envisioned. Whatever happens, this rush of interest towards energy storage will be a beneficial long-term outcome for the industry.

Within the $615 million Smart Grid Demonstration Program is $200 million for energy storage demonstration projects. The anticipated award size ranges from $5 million to $50 million, depending upon the type of technology and application. Five project areas are envisioned:

  1. Battery storage for utility load shifting or wind farm diurnal operations and ramping control ($40-$50 million for one or two projects)
  2. Frequency regulation and ancillary services ($40-$50 million for one or two projects)
  3. Distributed energy storage for grid support ($25 million for four to five projects)
  4. Compressed air energy storage ($50-$60 million for as many as four projects)
  5. Demonstrations for promising energy storage technologies ($25 million for five to six projects).

Applications were due by August 26th, with selection expected in September and final contracting to be completed by the end of December. Disbursement of the awards will generally be made as costs are incurred, with funding available to a maximum of 50 percent of the project.

So what is in store for those applying for Recovery Act funding? Thankfully, the Recovery Act timeline is far more rapid than previous federal programs–but first you have to get your application in and accepted. As many know all too well, developing any utility technology demonstration project can be difficult; marrying it to an accelerated government application timeline promises to make it doubly so. Since having a utility or independent system operator involved is strongly encouraged developers who have been pursuing a project for some time should benefit from the Recovery Act’s structure.

Other challenges await those selected, with a major hurdle being to produce the remaining financing resources needed to complete the application by the end of this year. Not all of the developer’s cost share must be in cash, of course, but a significant amount will be. Naturally, the goal will be to have the utility partner provide this support, but this assumes navigating the utility funding cycle within the allotted time.

Some developers are reporting hesitancy by utilities to fund a demonstration project without a guaranteed rate of return–difficult to do on a technology demonstration project. Therefore, a number of developers are looking into self-funding their project.

Equity financing for project development is an expensive choice but may be necessary as the debt market for unfamiliar technology will remain difficult for some time and many firms lack readily available lines of credit. Adding a wrinkle to everyone’s funding plan is that energy storage is far from the only program where the applicants may need to seek alternative funding sources. This possibly could lead to a scramble for available resources. Traditional wind and solar projects funded by the Recovery Act should find their fundraising easier as their technology risk is lower.

To date, the Recovery Act has already had some unintended consequences as the lure of free money has delayed some technology deployments that were hoped to have been accomplished earlier this year. Undeniably, the Stimulus Act has generated interest for deploying energy storage facilities, bringing far more people into the industry to investigate and evaluate their usage; a random poll at the Storage Week conference in July confirms there will be many times the number of serious applications as there are slots for the available awards.

As many of these developers–and their potential utility partners–realize that they may not win one of these awards, interest is growing in finding state funding and support for additional projects in 2010 and beyond. In the end, the Stimulus Act will help fund a number of projects needed to showcase these flexible technologies; even better, it will have helped bring many more utilities and developers together to talk seriously about deploying energy storage facilities in the market.

The views expressed in this article are those of the author and do not necessarily reflect the opinion of Charles River Associates or its Energy & Environment Practice.


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