New business models may be the next frontier in lower energy storage costs
Often overlooked in discussions about the declining price of energy storage are business models that aim to lower capital expenses.
As the markets for energy storage continue to grow and companies in those markets mature, business models and financing mechanisms are getting more attention.
Those models can involve alternatives to a traditional asset sale approach that can reduce the cost of entry for potential customers and lower the cost of capital for energy storage companies.
The trend was highlighted last week when Younicos announced its energy storage rental service. Renting energy storage equipment was an obvious step for Younicos, given that its corporate parent, Aggreko, rents power generation equipment on a global scale.
Younicos hopes that by lowering the cost of energy, it will be able to expand the market for its energy storage services. The idea is that in many cases renting storage equipment is cheaper than buying and owning it.
The main driver in that business model is “to help the economics a little bit by lightening the capital expenditure for the customer,” Tim Grejtak, an analyst with Lux Research, told Utility Dive. A lot of businesses use a discounted cash flow model and “any payment you defer into the future helps your cash flow,” he explained.
For the first phase of its marketing efforts, Younicos says it is targeting hybrid systems and microgrids in the commercial and industrial market, rather than large scale utility energy storage installations.
Younicos’s new business model is part of a wider trend under way in the industry, Grejtak said. Energy storage companies previously differentiated themselves with technology, especially before lithium-ion batteries became dominant. Then, they highlighted the control software for their energy storage systems. Now, companies are increasingly highlighting their financial and business models, Grejtak told Utility Dive.
In addition to Younicos, several companies are taking a different approach to the traditional model that calls for the customer to buy a storage system outright. Even though costs have been declining, energy storage is still expensive. And the higher the initial cost of a storage system, the higher the hurdle to earning an acceptable return on investment.
In locations where electricity rates are high or in jurisdictions with energy storage mandates, a return on investment is less of a concern. But those markets are relatively few and far between. Finding multiple sources of revenue for a single storage asset is one much talked about solution, but layering on or “stacking” multiple revenue sources is often easier said than done.
Learning from solar
In some respects, the financial differentiation going on in energy storage mirrors what happened in the solar power industry about a decade ago. Sales of rooftop solar panels took off when solar power companies offered customers alternatives to buying their solar panels outright.
It is not a direct comparison, however. It is hard to offer the same compelling cost reductions from a solar installation for a residential energy storage system. But the solar financing model has found more fertile ground in the commercial and industrial (C&I) market for energy storage.
In addition to Younicos, Advanced Microgrid Solutions (AMS), ENGIE Storage (formerly Green Charge Networks), Stem and Power Edison all have business models that do not require the outright purchase of a storage system. Instead, they all offer customers the ability to reduce their demand charges through some form of energy storage as a service. For those customers, who often have a keen focus on cash flow, that simplifies the investment decision, Grejtak said.
“We reduce customers’ bills and generate savings, and we get a service fee,” Vishvesh Jhaveri, director of project finance and strategy at AMS, told Utility Dive. And that model also allows AMS to “optimize its financing structure,” Jhaveri said.
In addition to offering devices that provide demand charge reductions to customers, AMS also aggregates those devices and sells the capacity under contract to Southern California Edison. The model allows AMS to offer both C&I customers and the utility a lower cost product because they do not have to pay what could otherwise be high capital costs to own an energy storage system.
Expanded financing options
The model has another important benefit that might not be as readily apparent. It gives AMS predictable, contracted revenue streams that the company can use to secure financing. That has allowed AMS to transition from a business funded by relatively expensive venture capital funding, to a business funded by lower cost options, such as non-recourse project financing.
One year ago, for example, AMS closed non-recourse project financing with CIT Bank, backing the buildout of a 50 MW fleet of behind-the-meter storage systems at C&I sites. The CIT deal is part of a wider deal AMS signed in the summer of 2016 with Macquarie Capital to jointly develop and build a fleet of the energy storage projects. The result, said Jhaveri, is a lower cost of capital for AMS that allows it to price its product competitively.
Stem uses a similar model, providing energy storage as a service. It is now taking that model to markets on the East Coast where it has entered into a partnership with Constellation that will allow C&I customers to reduce their capacity charges.
However, the storage-as-a-service and rental models can depend on a favorable regulatory climate. They may work in restructured markets with mandates for energy storage such as California and New York, but they could face regulatory barriers in other jurisdictions.
Being able to provide services in the wholesale market and the behind-the-meter distribution market from the same device is a relatively new phenomenon, one that has not been fully tested or vetted by regulators. It raises a multitude of complicated questions, such as how to devise rules that allow owners of energy storage devices to tap multiple revenue streams while not allowing them to be paid twice for the same service. Grejtak said that is likely one of the reasons why the Federal Energy Regulatory Commission delayed a decision on distributed energy resources when it issued its February order on energy storage.
One approach to that problem is to avoid the potential jurisdiction conflicts by not trying to tap resources in different markets, such as the wholesale market and the distribution market, but to focus on a single jurisdictional market segment.
Renting to utilities
Power Edison also looks to provide a business model that lowers the cost of capital by offering energy storage customers rental and storage-as-a-service models, as well as an ownership model. But the company has focused its attention on a single market segment.
Instead of bridging the “regulatory barriers” between the utility services market and the customer services market, Power Edison focuses on a particular application in the utility market, CEO Shihab Kuran told Utility Dive.
“The most valuable use for stationary storage is T&D deferral,” Kuran said. But "deferral does not last forever. Permanent storage is a stranded asset once it is not needed.”
Many energy storage applications rely on energy arbitrage to make the numbers work, but generally wholesale power prices are so low that “arb is not in the cards for energy storage," Kuran said. "We did the analysis. It does not pencil out,” he added. But for a utility with an obligation to serve, reliability creates a compelling value proposition, he said.
Power Edison’s business model calls for the rental of storage equipment. It is a model that grew out of a project announced about a year ago in which NRG Energy and Consolidated Edison are partnering on a $7.6 million plan to put batteries on trucks that can be moved to where they are needed. If ConEd is not using the batteries to relieve congestion or provide emergency power, for instance, NRG can connect them to the grid and use them to provide ancillary services.
“Younicos’s announcement is a validation of our work with NRG and ConEd,” Kuran said. “We created Power Edison around renting. We believe it is the way to go.” Rather than looking to cross the regulatory barriers between market segments by selling storage services concurrently, Kuran said his company will sell services from the same asset on a consecutive basis multiple times.
The mobile nature of the systems also aids in Power Edison’s financing model, Kuran said. Because the systems are mobile, they are cheaper to finance because they can be repossessed, he noted. In addition, an asset does not end up stranded when regulatory or market conditions change.
Kuran cited the PJM Interconnection market for frequency regulation which boomed when PJM created a new category for fast responding resources. Developers rushed into the market to put battery storage systems in place and for a short time did very well. But eventually the market was flooded and collapsed.
“We like to anchor our projects with utilities,” Kuran said. “They are buying the most [storage] and have the reliability [issues].”
It is a business model that can work in a market such as New York where the governor’s Reforming the Energy Vision initiative aims at creating a new utility paradigm that could reward a utility for saving money. But in more traditional markets, Kuran admits that a utility may prefer to use an ownership model that earns it a return on investment.
Kuran said Power Edison has several utility customers lined up and developing financing solutions, fueled in part with funding from private equity and infrastructure funds. “We need to find economic cases for energy storage that do not require incentives or mandates,” he said.
New business models and financial structures could aid that effort by bringing down capital expenditures and capital costs, making energy storage more affordable and more attractive in more jurisdictions.
This post has been updated to remove reference to Advanced Microgrid Systems as the first company to pursue non-recourse financing for energy storage projects.
Follow Peter Maloney on Twitter