Month: May 2017

The 5 ingredients for success in the future stationary energy storage market

Through our day-to-day work around the globe, Apricum has gained deep insights about the dynamics of the energy storage markets and what it takes to be successful not only today, but also in a few years from now. Driven by the specific market characteristics, we identified certain “ingredients” of which an energy storage company’s business model should comprise to be one of the winning teams.

Let’s have a look at the five ingredients we at Apricum found most important:

Ingredient No 1: Remain flexible – be able to adjust swiftly to changing market conditions

One of the key advantages of energy storage is the vast amount of use cases it can serve. This is in contrast to, for example, solar, which is targeting basically one major use case – squeezing as much energy as possible out of the sun. But the high number of addressable use cases makes energy storage an extremely complex animal, as for each use case:

  • there is varying demand, depending on the individual challenges in each energy market

  • storage is competing with other alternatives mainly on a cost basis, and costs develop differently for a vast array of storage technologies available, and

  • dynamic regulatory frameworks add additional complexity

Therefore, it’s hard to predict which use case will be attractive in which market – and for how long. In fact, we see “pockets of opportunities” opening up – but also closing – rapidly. Take the Primary Control Reserve – or PCR – market in Germany for example, where stagnating demand meets an ever increasing number of utility-scale storage installations and also aggregated distributed storage units compete with traditional suppliers. This specific pocket of opportunity is closing, so better make sure your business is not closing along with it.

A flexible business model is a must. It has to be constantly reviewed and updated depending on what’s going on in the market.

To ensure this flexibility, do not lock in on a specific technology but keep a tech-agnostic approach. If you are a technology company, maintain a high “flexibility by design” at your interfaces to other components, for example, inverters.

Also, do not lock in on a specific use case or, in other words, a specific mode of operation of the storage unit. Accommodate remote software updates or allow easy modifications of your hardware.

Enter into flexible partnerships, make sure you have contracts that are easy to cancel or at least offer enough degrees of freedom, e.g., warranties that enable the mode of operation of the storage system to be changed.

Last but not least, you need to maintain an excellent market understanding, in order to know what needs to be adapted and when.

Ingredient No 2: Continue to reduce costs – there will always be multiple alternatives competing

For the storage installations we see today, cost competitiveness did not always play a major role: A lot of the utility-scale units are pilot plants to test what can be done with storage. And in the residential market, sales are rather driven by early adopters than return-maximisers.

In this current market stage, there is enough room for a plenitude of players even with very small volumes – for example, the German residential storage market has about 48 different suppliers at the moment.

But this is going to change. On the way to a mass market for energy storage, more cost-sensitive customers will have to be convinced by lower prices, leading to more fierce competition and consolidation.

And in most markets you not only have to compete against other energy storage players, but also against non-storage solutions. For each use case, you have “incumbent” and therefore well-tested alternatives to storage (e.g., gas peakers, grid extension…) that can be hard to beat.

So how does one become more cost competitive? When people talk about “decreasing costs of energy storage”, in most cases they mean capex. The most important way to get this down is to quickly boost volumes to take advantage of economies of scale. In parallel, in particular if you are a start-up in energy storage, you need to improve your product design, which could include using materials that are less costly or that increase the overall performance.

But capex is only one “influencer” of the lifetime costs of energy storage  (e.g., LCOS). There is more you can do. For example, by combining use cases, you can increase the number of cycles and thereby the utilisation of your energy storage unit. Hence, if the primary use case, the technology’s calendar lifetime and regulatory frameworks allow for it, benefit stacking is a good way to reduce LCOS. Another cost influencer is lifetime, which can be improved by optimising how the battery is run. For example, studies by French TSO RTE show that by optimising the operation of the battery the lifetime impact can be reduced by 36% with a minimal deviation from the optimal service delivery.

Plus, you should start thinking “outside the (storage) box”: There is more than just hardware. For example, the installation of a residential storage system in Germany can cost up to EUR 1,500 (US$1677.82). Finding ways to decrease installation times, therefore, can be a major cost advantage – outside of capex reductions.

Ingredient No 3: Tap into new revenue streams – and go to where the value is

Next to reducing costs, you should think about ways to expand your accessible market potential and revenue streams to drive up profits.

For example, a residential storage supplier with a “classic” business model sells energy storage units to its customers and thereby helps them to reduce the amount of energy purchased from the grid through increased self-consumption of rooftop PV power. The customer’s money available for purchasing energy is redirected from the utility to the storage company, which thereby captures a certain share of the “conventional” market potential for electricity supply.

If the company starts offering a full-service package and provides the residual amount of (green) electricity needed, this share can be further increased.

As illustrated in the graph below, the residential player can now start aggregating its deployed devices and tapping into market potential beyond the conventional one, by offering ancillary services to the grid for example. Plus, certain premiums can be added for rather “sentimental values” such as autarky.

At the end of the day, all of these values add up and result in a much juicier market potential than the “classic” business model would have provided. As a prerequisite, you need of course to understand where the most value is allocated along your value chain – and adapt your business model accordingly. In our residential storage example, this means expanding downstream and becoming a service provider in addition to offering the hardware alone. This will allow you to also capture value from neighboring value chains and realise increased revenue streams as described before.

Ingredient No 4: Be proactive – don’t wait for opportunities to come to you

No one has really waited for energy storage; there have always been incumbent solutions that could do the job as well. Hence, do not rely on clients beating a path to your door to get it.

Instead, you might have to explain to your customers what benefits storage can provide for them. But first of all, you have to find these customers, or better still, find the problems you can solve with your storage offering, for example, reducing grid fees, which differ a lot across Germany.

If a commercial or industrial company manages to keep its peak load out of a certain peak window defined by the German DSO, it can save up to 80% on grid fees – hence, this storage use case is very attractive for customer segments paying expensive grid fees and who have a suitable load profile. Often, however, these customers are not even aware of this saving opportunity, so you need to find them and enlighten them. When reaching out to them, make sure you have a crisp way of explaining your value proposition. Behind the curtain, there can be extremely complex financial and technological architecture in place to make the claim happen, but what the client sees must be uncomplicated and easy to grasp.

If executed correctly, pro-activeness helps you to tap into new revenue streams that are less obvious and that are facing less competition in contrast to public tenders. And don’t limit yourself to your home market only – there are many problems to solve for other countries’ customers as well.

Ingredient No 5: Be bankable – ensure secure, sustainable cash flows

The Holy, and to date somewhat elusive, Grail of energy storage remains project financing. While there are various types of risk in an energy storage project that need to be mitigated, such as technology or construction risk, we see the market risk as the most critical for achieving bankability for project financing – and at the same time, the most difficult one to mitigate.

Looking at PV and wind markets in the past, a key reason for the huge success of feed-in-tariff schemes and hundreds of billions of unlocked project finance was that governments effectively eliminated the market risk by guaranteeing a fixed tariff under a take-or-pay structure, typically for at least 20 years. The market risk was substituted by the counterparty risk of typically highly creditworthy sovereigns.

Similar situations are still hard to find in the energy storage sector, even when including projects with corporate counterparties. With the exception of a few geographies, merchant projects are still dominant, with the specific market risk depending on the application. This renders nonrecourse project financing often impossible, or adds substantial risk premiums and puts stringent limits on leverage or coverage ratios, resulting in fairly high cost of capital. In many cases, some form of corporate balance sheet backing will be required for structured financing solutions.

Given the difficulties around bankability, unconventional, non-bank sources of capital such as specialist funds are currently still dominating the sector and need to be accessed.

That said, project financing should not be confused with schemes that amount to lease financing, particularly popular with C&I, but also increasingly with residential customers. In this case, the majority of the risks are assumed by the corporate or private end customer, and traditional tools from corporate and consumer finance can be employed, including the securitisation of lease portfolios.

In summary, financing for energy storage projects is available but requires careful structuring depending on the use case, underlying commercial arrangements and risk allocation. In fact, more than US$820 million was invested in battery projects in 2016, a massive increase from the year before. The bulk of this funding went to no-money-down, distributed energy storage offerings or projects based on a take-or-pay contract.

In summary, these are the key ingredients successful energy storage business models should reflect. As outlined above, they can be implemented in multiple ways. The optimal “recipe”, however, depends on the individual company’s situation and needs careful evaluation as it will impact various business-specific, interrelated elements such as customer channels, partnerships and resources.

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How California pulled off the world’s fastest grid-scale battery procurement – Part II

A close-up on the projects

‘World’s largest’

AES Energy Storage was the powerhouse behind the largest battery storage facility built to date. When combined with the other mammoth battery plants built by Tesla and AltaGas, the three constitute around 15% of the entire battery storage capacity installed across the planet last year.

AES executed two projects for SDG&E, the 30MW/120MWh Escondido project, just northeast of San Diego, and the 7.5MW/30MWh El Capon project. Both projects were sold under an EPC contract and used four-hour lithium-ion batteries in modular containers.

The 30MW project – the world’s largest grid-scale lithium-ion facility – was contracted in just three weeks, according to the company, with the entire system being delivered in approximately six months.

“Obviously the short time frame was challenging,” Kate McGinnis, AES market director for the Western US told Energy-Storage.News. “We were able to overcome those challenges through our collaborative working relationships. We had actually started working with our suppliers early in the spring when it looked like there was going to be the possibility of a procurement. That early work helped to shape our knowledge of how much and how fast we’d be able to deliver a project.”

‘World’s fastest’

Energy storage software and solutions specialist Greensmith Energy secured the title for the world’s fastest grid-scale energy storage deployment. Its 20MW/80MWh project was deployed in a record four months – a couple of months earlier than any of the other projects’ impressive feats.

Greensmith handed over the regulatory process to Canada-based energy infrastructure company AltaGas, who was the project developer and owner of the San Gabriel facility.

“The process was just condensed from a timing perspective. Keep in mind, Greensmith has delivered 18MW sites in about 6 months in the past,” explained company CFO and COO Jim Murphy. “For Aliso Canyon, the construction subcontractors required significant amounts of overtime as AltaGas had the teams operating on a 24-hour basis to meet the deadline.  At one point there were over 200 electricians working on the project, completing wiring and battery installation.”

Key takeaways

Largely thanks to California’s energy crisis, but also improving economics and state and federal level policies, the business case for US energy storage has never been stronger.

“Energy storage is still a relatively nascent industry when it comes to grid-side or front-of-the-meter applications,” said GTM Research senior storage analyst Daniel Finn-Foley. “So to be able to demonstrate several different capabilities at once during a capacity shortfall that was clearly unpredicted, that was really a big deal.”

One of the biggest achievements of the entire process is obviously timing. There were, between the initial RfO and commissioning of projects, as little as just a few months. That is the kind of timeline it takes to merely get an environmental permit for a new natural gas peaker plant. The fact that such large-scale projects were able to get in the ground successfully under such high-speed time frames proves that energy storage can be a very flexible grid solution in a very short order.

Further, it readied a solution that utilities did not even have before. Using batteries on this scale was an idea that has always held far-reaching potential, but the execution was not something that engineers and policymakers had ever attempted.

“It all just really adds up to shattering that concept of needing years to build an asset that actually will have a really big and positive impact on a larger electrical system,” said Powin’s director of engineering applications Stephan Williams. “That coupled with how fast the price of energy storage is dropping is starting to make heads turn.”

Longer-duration storage

This emergency storage procurement was evidence of batteries being able to participate in longer-duration applications, as traditionally the large-scale battery storage market has been dominated by frequency regulation applications, which typically use shorter-duration systems.

“Now, because of the significant cost reductions that we’re seeing for batteries, longer-duration systems are making economic sense,” Sam Wilkinson, senior research manager of solar & energy storage at IHS told Energy-Storage.News. “That’s why we get the four-hour systems like this that are providing peaking and systems like those that have been announced in the UK recently for capacity auctions as well.”

Competitive pricing

Such longer-duration projects were only possible due to aggressive pricing, which demonstrates the ability for storage to be cost-competitive and effective from a commercial business standpoint.

“It comes down to cost – as battery pack prices decline, it is going to be a lot easier to justify longer-duration, higher-capacity projects,” said Finn-Foley. “The more capacity you have, the more solutions you can provide. I do think that we are going to be seeing fewer 2-5MW projects.”

The cost of batteries on a kWh basis has been falling very quickly; with prices of battery system costs dropping 10-14% in the last year alone, according to GTM Research. “Every time you add an hour, you add another number of MWh of batteries, and therefore that US$/kWh is very important,” explained Sam Wilkinson. “As that US$/kWh number has fallen something around 50% in the last two-three years, it is much more affordable to buy longer-duration systems.”

A new blueprint?

All that being said, did the massive grid-scale deployment provide a blueprint for how procurements should be done in the future?

What it did prove is that storage can be deployed at that pace, which makes it different from many of the other typical electrical generation resources that have been deployed in the past.

“This probably gives the industry a test case that this is something that can be used in these emergency situations but also in the normal course can be deployed with a shorter planning horizon than is typically used,” says Gerber. “I don’t think that it is going to be the norm right away, but I do think that we’ll see more like this in the future.”

Whilst this might be ideal, there are however some complexities with the proposition that procurements of this kind should be the new norm. With energy storage, there has to be both a need and a sound business case for it. It is not necessarily for the industry to do anything other than demonstrate that the technology is viable, and that will play a part in it being increasingly accepted and asked for by grid operators and utilities. The latter will procure storage when the value proposition makes sense in comparison to the other options available – and that is when at-scale deployments will be seen across the country and around the world.

Read Part one of this blog here

Cover image credit: Powin Energy.

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