Navigant Research Blog

Applying Financing Innovation in Distributed Energy Storage to Make Battery Technology Bankable

— March 20, 2017

In a recent blog, I took a look at the importance of proper evaluation of the total cost of ownership (TCO) of battery energy storage systems (BESSs) from both a power and energy performance standpoint. Such an analysis reveals how extended battery lifetime and other battery performance factors can reduce the ultimate costs BESS owners would pay over the life of the system. This type of revenue and cost predictability is key to unlocking energy storage financing innovation anticipated to drive new technology deployments.

The Bankable Battery Challenge

Today, equity and debt providers and project developers looking to finance BESS have a limited choice of battery technologies. NGK Insulators has a proven sodium sulfur (NaS) battery technology that plays a role in certain long duration, utility-scale energy storage or microgrid applications. For other applications, lithium ion (Li-ion) technology backed by warranties from large, multinational conglomerates like LG Chem, Samsung SDI, BYD, and Panasonic are among the few technologies determined to have bankable BESS technology from a financing standpoint to date. This remains to be the case even though few of these Li-ion BESS installations have been up and running for extended periods of time.

Financing Innovation Enabled by Contracting and Technology Advancements

Many developers, systems integrators, and technology providers are focusing on creative ways to make BESSs bankable from a financing standpoint. Powin Energy is an Oregon-based energy storage systems integrator that recently developed and commissioned a 2 MW, 8 MWh battery energy storage system in Irvine, California under Southern California Edison’s (SCE’s) Alison Canyon emergency procurement. But there is more behind Powin’s efforts than just project development/systems integration.

Powin’s patented Battery Pack Operating System (bp-OS) is designed to enhance the monitoring of battery performance. Its software claims to do this by tracking battery system functions and lifespan at the cell level using its proprietary Battery Odometer and Warranty Tracker products. The Battery Odometer reportedly measures degradation and calculates remaining battery lifetime based on voltage, temperature, state-of-charge, and charge and discharge durations on a cycle by cycle basis. And the Warranty Tracker claims to express that status of battery performance relative to the specific warranty status in real time.

A technology package that truly enhances and simplifies the approach battery warranty monitoring would be compelling. Such clarity and simplicity from a battery performance standpoint could open up opportunities to standardize battery performance warranty insurance coverages across a variety of battery cell technology manufacturers, which would lower costs and provide additional comfort to project finance investors, thereby driving more financing activity.

A Promising Sign for Energy Storage Financers?

A proper turnkey financial TCO analysis should look at the total cost of operation for power and energy. However, projecting the cost of operation of the BESS at year 3 or 4 of a 10-year financing is uncharted waters. Technology such as Powin’s bp-OS coupled with battery performance insurance underwriting merits a careful eye in the journey by project developers to develop and finance BESS projects. As discussed in previous blogs, lower costs coupled with more predictable project revenue feeds the growth financing innovation that will drive the deployment of stationary energy storage technology.

 

Why Financing Innovation in Distributed Energy Storage Should Focus on Total Cost of Ownership

— March 15, 2017

In Part 1 and Part 2 of my recent two-part blog series on financing innovation, I focused on two new types of standardized contracts that have emerged to enable the financing of distributed battery energy storage systems (BESSs). But standardized contracts are only one part of the financing innovation story. Another key component is the proper evaluation of the total cost of ownership (TCO) of BESSs from both a power and energy performance standpoint.

Overview of BESS TCO

Purchasers of BESSs—such as utilities, project developers, and end users—are faced with an array of energy storage technologies from which to choose. By simply comparing these technology options on the upfront cost and nameplate performance parameters, many of the complexities that affect actual cost and performance over the life of a system will be ignored. Further, many of the stakeholders in this sector are under a constant barrage of media coverage about lower battery cell and or pack storage technology costs. The storage technology represents only a portion of the all-in installed capital cost associated with the hardware, software, and services required to develop, finance, and install a BESS.

Energy Storage Value Chain

(Source: Navigant Research)

Key Factors That Fuel a TCO Analysis

A proper turnkey financial TCO analysis should look at the total cost of operation for power, known as normalized TCO (expressed in $/kW), and energy, known as the levelized cost of storage (or LCOS, expressed in $/kWh). Such an analysis evaluates the factors that affect several different battery selection and deployment scenarios. This approach reveals how extended lifetime and other performance factors can reduce the ultimate costs that BESS owners would pay over the life of the system.

The required inputs incorporate several parameters that affect the construction and operating costs and revenue aspects of energy storage systems (ESSs). Some examples are summarized below.

(Source: Navigant Research)

Standardizing the Approach to Quantifying TCO

Navigant Consulting has developed a TCO model that combines detailed asset financing with technology-specific and application-specific performance considerations to evaluate normalized TCO and LCOS. The model leverages insights into ESS capital costs routinely gathered by the energy storage team here at Navigant Research.

I anticipate the continued growth and refinement of these analysis techniques as distributed energy storage markets mature. Such growth will enable developers to employ new business models to better quantify the flexible benefits of storage. This type of approach eliminates the “cheapest first cost is best” hurdle. And as that hurdle is overcome, the sector will see new business models with improved revenue prediction capabilities. As I’ve highlighted, these de-risked, predictable revenue streams will feed the growth financing innovation that will drive the deployment of stationary energy storage technology.

 

Distributed Energy Storage Deployments Driven by Financing Innovation, Part 2

— February 13, 2017

As highlighted in the previous post in this two-part series, the development of standardized power purchase agreement contracts by the National Renewable Energy Lab’s Solar Access to Public Capital Working Group has contributed to the continued growth of at-scale solar PV financing. Building on those solar PV standardization successes, Navigant Research is witnessing the development of new energy storage business models and financing instruments driven in part by contractual standardization. Navigant Research recently explored these new energy storage financing instruments in a recent research brief, Financing Advanced Batteries in Stationary Energy Storage.

A second type of standardized contract has emerged to help finance behind-the-meter distributed battery energy storage systems (BESSs). This new standardized contract focuses on aggregating BESS assets across multiple sites as a virtual power plant (VPP) to reduce energy demand.

Demand Response Energy Services Agreements

A demand response energy services agreement (DRESA) is typically executed with a local utility responsible for managing load on the distribution system by means of VPP technology. In this case, the utility compensates a third-party VPP owner for system availability (capacity) and actual DR energy storage services provided (performance). With a DRESA, the local utility can utilize the VPP for a defined duration for grid DR. But in most cases, the energy storage system owner or operator also promises to provide demand charge costs savings to hosts by means of a demand charge savings agreement (DCSA).

Advantages and Challenges for DRESAs

Key advantages of financing distributed BESS VPPs using a DRESA include:

  • The ability to deploy reliable DR assets in local power markets without upfront capital expenditures by either the local utility or the commercial and industrial (C&I) host facility
  • The ability for utilities to deploy reliable DR assets to optimize the local distribution system without the need to own and operate new storage assets

Key challenges facing the financing of BESS VPPs using a DRESA include:

  • The ability of BESS VPP software platforms to evaluate historical building load profiles and site-specific tariff requirements across large portfolios of C&I host sites to predict VPP deployment scenarios and project revenue.
  • The hardware/software complexity involved with integrating building load, onsite distributed generation, and building control across large portfolios of C&I host sites into VPP deployment strategies.

Standardized Approach to Quantifying Complexity, Risks, and Revenue

One can only imagine the complexity required to be addressed in these types of standardized agreements and technology deployment scenarios. For example, for a DRESA VPP application, the highest value will often be for the energy storage software system to leverage automated DR building efficiency technology to aid in reducing building load. Quite simply, installing and deploying this technology with some degree of battery energy storage capability will likely have a lower overall installed cost than deploying only larger batteries and inverters to do all the work.

Navigant Research can point to two examples where these issues have been sufficiently addressed, resulting in BESS VPP financing commitments:

As referenced in the previous post in this blog series, Navigant Research anticipates that standardized contracts such as DCSA and DRESAs will lead to the kind of financing innovation necessary to drive the deployment of distributed energy storage technology.

 

Distributed Energy Storage Deployments Driven by Financing Innovation, Part 1

— February 8, 2017

This blog is the first in a two-part series that will focus on innovative financing instruments that are being applied to deploy new distributed battery energy storage applications.

The growth of solar PV has been fueled in part by lower equipment and project development costs, but also by the development of standardized power purchase agreement (PPA) contracts. Without a standardized PPA contract, each new project looked unique to investors. This type of contractual uncertainty made investors’ ability to evaluate and finance projects at scale next to impossible. The introduction of standardized PPA contracts as part of The National Renewable Energy Laboratory’s multi-stakeholder Solar Access to Public Capital Working Group enhanced investor comfort levels by standardizing key contract terms and the approach to project revenue streams. These efforts resulted in the growth of an at-scale financing asset class that continues to drive solar PV technology deployment today.

Markets for the deployment of behind-the-meter (BTM) stationary battery energy storage systems (BESSs) are beginning to grow. Navigant Research recently explored the development of new BTM energy storage business models and financing instruments in its recent research brief, Financing Advanced Batteries in Stationary Energy Storage. Similar to the financing benefits delivered by a standardized solar PV PPA, several new standardized contracts have emerged enabling BESS financing. One such standardized contract focused on tariff-specific demand charge savings at commercial and industrial (C&I) facilities.

Demand Charge Shared Savings Agreements

A demand charge shared savings agreement (DCSA) mimics the contractual approach employed by energy service companies (ESCOs) to finance energy efficiency projects. An ESCO uses the cost savings from energy conservation measures like lighting or heating, ventilating, and air conditioning system upgrades to repay debt and equity partners. With a DCSA, the host and a third-party energy storage system owner or operator agree contractually on how BESS and load management software will be deployed during peak energy use to reduce demand charges. The financing partners depend on a portion of the cost savings from tariff-specific demand charge reductions to be paid by the host to debt and equity partners.

Advantages and Challenges for DCSAs

Key advantages of financing distributed energy storage technology deployments using demand charge savings agreements include:

  • The deployment of a BESS with no money down by the C&I host, thus eliminating the access to capital challenge.
  • The ability to bundle O&M costs for the BESS into a single transaction, eliminating the need for the C&I host to add staff or resources to manage the system.

Key challenges of financing distributed energy storage technology deployments using demand charge savings agreement include:

  • The ability of the BESS software platform to accurately evaluate historical building load profiles and site-specific tariff requirements relative to future load to generate project revenues.
  • The effect of future changes in building load profiles and tariffs on battery deployment assumptions and project revenues.

Quantifying Complexity, Risks, and Revenue

These contractual hurdles are being addressed today, despite the complexity. Navigant Research points to Green Charge Network’s commitment from Ares Capital in early 2016 for non-recourse project finance based debt funding as an example of where these issues have been sufficiently addressed, resulting in DCSA financing commitments.

Now that the ball is rolling on energy storage financing, the roadblocks facing energy storage projects don’t look so difficult. Navigant Research anticipates that these types of standardized contracts will lead to the financing innovation needed to drive the deployment of stationary energy storage technology.

 

Blog Articles

Most Recent

By Date

Tags

Clean Transportation, Digital Utility Strategies, Electric Vehicles, Energy Technologies, Finance & Investing, Policy & Regulation, Renewable Energy, Smart Energy Practice, Smart Energy Program, Transportation Efficiencies

By Author


{"userID":"","pageName":"William Tokash","path":"\/author\/tokashw","date":"4\/23\/2017"}