Energy storage devices and systems will not be available as cheaply as once thought, according to a storage executive, and "that's a good thing."
At the IQPC 6th Annual Energy Storage Summit in San Francisco on March 27-28, utility officials, financiers, regulators and storage system manufacturers debated the economics of storage, from markets to financing.
Steve Pullins, president of Horizon Energy Group, said prices in recent years had declined to unsustainable levels, and a recent upward trend is a return to reality and predictability. "What we saw, we think, was a market correction. That's a good thing," he said. Referring to a graph that showed lowest and highest installed system costs declining then, to a lesser degree, rising over time, Pullins noted that in recent years the highest and lowest costs are getting closer to each other. "The band has gotten smaller," he said, "and that's a good thing too. If you're pinning some of these things down you can make a better business case."
A key part of the business case for storage generally is the fact that generation asset utilization is decreasing at a rate of about 1% a year and is at 45%. "That is not economic or sustainable," Pullins said.
Picking the right projects
The key to a project that makes economic as well as operational sense is picking the specific "application" - Pullins' example was a big engineering campus with a large difference between daytime and nighttime loads - and the right technology for that specific location and situation. In the case of the engineering campus, that was a combination of battery storage and on-site solar.
The type of battery chosen also has to do with the specific application, said Stephen Vechy, senior director of engineering and quality for Enersys, which specializes in storage systems for industrial applications. Those considering a battery application have to look at the site characteristics, the up-front and operating budgets, and what functionality is expected from the storage system.
Lead-acid batteries, for instance, are proven and quite a bit less expensive to buy than some other types of battery applications, but are big and heavy and may need to be replaced more frequently than other kinds, he said. The different types also perform differently as the battery ages, Vechy said. Lithium-ion types tend to perform at a steady rate over the life of the battery, he said, while the performance of a lead-acid battery declines sharply at the end of its life.
How and when to finance
Panelists talking about financing storage said that the storage sector, by a wide margin, is overpaying for capital. Société Générale's director of energy project finance, Chris Moscardelli, said that the average combined-cycle natural gas plant is financed with 80% debt and 20% equity. A recent average for renewable energy projects showed 40% debt to 60% equity.
The picture is more stark for storage projects, said Lee Burrows, managing director for VantagePoint Venture Partners, who had an associate pull up financing information for 25 to 30 recent storage projects - twice, because Burrows did not believe the results the first time. "Only one was done off balance sheet," he said. "That shows how difficult it is for private companies to develop a storage project because they are using the most expensive kind of capital there is, ours, instead of tax-equity financing or another kind."
"The venture community is basically carrying these projects for longer and longer periods of time," Burrows said. "We need to work with policymakers and debt providers to get these projects financed, so the venture community is not carrying the full load."
Moscardelli said he looks for projects with proven technology, low risk, operability, "constructability," and a revenue stream. For the most part now, he said: "Energy storage just does not have the revenue construct."
Moscardelli and other lenders "love" storage projects that are bundled with power purchase agreements, and he thinks more deals like that will happen once federal policy comes into focus. "When we have incentives at the FERC level then you'll see PPAs and then you'll see financing. It will happen. Unfortunately we just are not there yet."
Both financiers agreed that some smaller projects are better suited for loans from smaller regional banks. A lender or investor spends an equal amount of time on a small project as they would on a larger project, they said. "Size is one of the reasons we say no more than we say yes," Moscardelli said, with a minimum of about $75 million for energy projects in general and $25 million to $50 million for storage projects. "There are specialty lenders that have no size constraints."
The question of when to transfer a project from venture capital to bank capital is easy, panelists said: as soon as the bank will take it. "As a lender, we have very inexpensive capital compared to venture," Moscardelli said. "If I said I'm comfortable with a project under development, they'd happily take my money."
If a customer is interested in buying or leasing a commercially available system, financing gets considerably easier. Vendor financing may be available, Vechy said. He said payment plans can be set up for purchases or leases, and though leasing plans can come with smaller payments and provide more options at the end of the lease term, purchase plans have in his experience been the more popular choice.
Market participation and its discontents
California is considering some sort of mandated storage requirement, but nothing is clear yet, said Jon Eric Thalman, director for regulatory strategy and support at Pacific Gas and Electric Co. State and national interests, including FERC, are working to design and/or refine market products that can reflect all the values a given storage asset can provide. Thalman said it is crucial to ensure the markets themselves can adapt to the reality of storage as the technologies mature and are deployed more widely.
"Market participation is inevitable because [storage devices] have to charge and discharge. There has to be a market," he said, especially if there is going to be a mandate. "We don't know what markets are going to look like, but know we need markets, and we need them to be robust enough to withstand the changes that are coming."
There is also the question of how assets are classified. Classification is not an academic question, Thalman said. It affects who can own storage assets, whether they can participate in markets and whether the asset qualifies for inclusion in utility rate base.
The PG&E Corp. subsidiary's solution for two pilot storage projects was to include them in rate base, classified as distribution assets. When the projects generate a benefit from participating in a market, those benefits flow back to ratepayers. "That's an easy answer from the utility's perspective," Thalman said, but could be more complicated when the participant is not a regulated utility.
Copyright 2012 SNL Financial LC. All Rights Reserved.
(Originally published April 2, 2012, in SNL Power Daily with Market Report.)