Navigant Research Blog

Is DER Taking Off in China?

— November 7, 2017

Last month, the Chinese Photovoltaic Industry Association announced that the country had installed a whopping 24.4 GW of new capacity in the first half of 2017. That China broke its previous year’s record once again makes the announcement news in itself. What is interesting, however, is not the final figure, but how China reached it.

In the first half of 2017, ground-mounted installations (installations without any onsite electricity demand) fell 16% to 17.3 GW, while distributed PV—mostly rooftop projects—almost tripled, reaching 7.1 GW in the same period. Of the 7.1 GW, 3.0 GW of distributed PV was installed in June 2017 alone. By the end of June, China had 102 GW of PV capacity installed, of which 83% was ground-mounted and 17.4 GW was distributed.

A highly attractive incentive program drove this growth. China’s distributed PV users (rooftop plants of up to 20 MW) can access a feed-in tariff premium for 2017 of ¥0.42/kWh ($0.06/kWh) on top of the electricity price for 15 years. In addition, some provinces offer further incentives. For example, Hebei provides ¥0.15/kWh ($0.02/kWh) for the first 3 years of the plant (effective in 2015). Jiangsu Province offers ¥0.50/kWh ($0.08/kWh) for 5 years, and the City of Shaoxing gives an additional ¥1.00/kWh ($0.16/kWh).

The national incentive was left at the same level for the last 4 years while PV module prices fell about 40%, so distributed PV became economically attractive. In addition, late in 2016, China’s National Energy Administration proposed a 28%-52% cut to the distributed PV tariff, depending on the region where the system is installed. This was changed in the latest draft, which now proposes a national tariff of ¥0.30 ($0.05) per kWh on top of the electricity price that would take effect in January 2018.

The expected drop in the incentives created a rush to install distributed PV in 2017, but there are other factors in favor of the massive growth. Curtailment is a major issue faced by Chinese PV installations, and it has pushed the country to ban new ground-mounted installations in the provinces that have the most issues—like Xinjiang and Gansu, where 26% and 22% of all the potential generation is lost (at a cost to the system owner) due to curtailment, respectively. A key advantage of distributed PV installations over ground-mounted installations is the offtaker of the electricity produced onsite, as it limits the risk of curtailment.

Opportunities Beyond PV

Other distributed energy resources (DER) technologies are also poised to gain some ground, thanks to the deployment of distributed PV. In March 2017, the National Energy Board issued a draft paper with “guidelines for the promotion of energy storage technology and industry development,” creating some momentum for the country’s storage market. The local PV companies Trina Solar and Xie Xin have also shown interest in this market and have started to invest in storage to complement their product portfolios. China’s vehicle manufacturer BYD also has a long track record producing battery cells and recently launched energy storage systems for residential and commercial applications.

China’s Competitive DER Industry

The development of DER in China could easily reverberate in the rest of the world. Chinese PV OEMs already lead the world in production and are taking an important role in technology innovation in the renewable sector. If the large Chinese inverter and battery players like Huawei, Sungrow, and BYD create innovative DER products for their domestic market that can be adapted to the North American and European markets, this will be difficult to answer. Despite the import tariff, Asian-made PV modules have conquered the market. However, giving Chinese companies some control over energy assets might be too much for Western governments. Huawei, for example, has been blocked from selling to the US telecom industry. But one thing is certain: we can bet the Chinese player will try.

 

Customers Hold Keys to Growth of Turnkey Energy as a Service Solution Providers

— August 15, 2017

A recent Navigant Research blog highlights how corporate commercial and industrial (C&I) energy and sustainability managers are choosing to apply new technology and business model innovations to meet their energy management and sustainability needs. These new customer choices are giving rise to the growth of energy as a service (EaaS) solutions. Navigant Research’s recently released report on the evolution of EaaS defines specific solutions that make up a comprehensive EaaS solution offering:

  • Energy portfolio advisory solutions: Comprehensive, enterprisewide strategic guidance to help customers navigate their unique procurement, energy management, financing, business model, and technology opportunities across all energy management and sustainability needs
  • Onsite energy supply: Distributed generation solutions like solar PV, combined heat and power, diesel and natural gas gensets, microturbines, and fuel cells that improve energy supply
  • Offsite energy supply: Including electricity procurement options from offsite sources in retail choice deregulated electricity and gas markets and from emerging large-scale, offsite renewable energy procurement business models
  • Energy efficiency and building optimization solutions: Comprehensive energy efficiency assessment, business case analysis, financing, implementation, monitoring and verification, and building commissioning services to reduce energy spend and use
  • Load management and optimization solutions: Comprehensive, end-to-end energy management solutions to optimize energy supply, demand, and load at the site and enterprisewide, including demand response (DR), distributed energy storage, microgrid controls, electric vehicle charging equipment, and building energy management and building automation systems and software controls

Turnkey Solutions to Drive Growth

C&I customers that begin to take advantage of these new solutions will increasingly look to turnkey solutions providers that can provide not only strategic advice across their property portfolios, but execution expertise as well. The key driver to enabling the growth of turnkey EaaS solutions vendors will be the ability to deliver comprehensive financing solutions to help customers avoid spending capital on energy projects. However, there are two additional drivers that vendors who are considering creating and delivering turnkey EaaS solutions will need to consider:

  • Historically, C&I customers have needed multiple regional partners to manage even a portion of their energy management needs. Turnkey EaaS vendors seeking to address C&I customers’ portfolio-wide needs for EaaS will require widely trained and deeply experienced advisory capabilities to address their customers’ complex energy procurement, financing, and technology deployment needs. For example, in the United States, a turnkey provider will need to have the depth of regional expertise under one roof necessary to address customer strategic needs in diverse energy markets and climate zones like Texas, California, New York, the Southeast, or the Midwest.
  • Experienced C&I energy and sustainability managers have endured years of disappointment from energy use and cost reduction claims that never materialized. Moreover, many of these managers have still not yet even tried to reduce energy spend. What C&I customers truly want is guaranteed lower energy costs, whether from solar PV, energy storage, energy efficiency, or DR. Vendors that blend execution expertise across all EaaS solutions with financing tools to guarantee cost savings through a single point of sale will be best positioned.

To date, with customer-sited distributed energy resources, too much emphasis has been placed on trying to figure out where to sell technology outside of a focus on solving customer problems. For turnkey EaaS vendors, market growth will not necessarily be led on a technology-first basis. For at-scale revenue generation, these vendors should start with the customer experience and work backwards to the technology. Navigant Research anticipates that vendors that place a keen eye on how to bring turnkey, customer-focused EaaS solutions into the market through a trusted, single point of contact with a financed savings guarantee will be at a competitive advantage.

 

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.

 

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