Storage, Risk, and the Winds of Change

06 Jul 2016

The wind industry is no stranger to energy storage. Wind project developers were, in fact, some of the earliest adopters of energy storage, doing their best to prove out the case for renewables firming. Most of these initiatives occurred in 2008-2010 with the available battery chemistries at that time, such as sodium sulfur and advanced lead acid, and project developers were self-financing these experiments or leveraging stimulus dollars to execute them. While Li-ion was appealing, its expense often made it a showstopper, or at least a delayed opener. The utility industry was more highly focused on long duration peak shaving applications and the benchmark for cost effective energy storage was pumped hydro. 

Yet, as the wind industry observed the deployment of these battery projects, several things happened. The product tax credit (PTC), a signal of stability to the wind sector, underwent several expiration and extension cycles which reduced investment in the sector. The stimulus dollars after the 2008 market downturn began to slow down. The wind sector focused on the existing project pipeline and braced itself against the shockwaves from the PTC fluctuations. Investors were noticeably wary of a market where the policies behind it were unreliable. 

In the meantime, the Li-ion battery discussion began to change. The darling chemistry of Li-ion in 2008 was iron phosphate, promising lower cost, enhanced safety, thermal stability, and high power capability. Yet, a gradual shift occurred where nickel cobalt manganese (NCM) began its slow takeover of the market. Li-ion battery cell costs steadily declined from approximately $1,000 - $1,200/kWh in 2008 to somewhere near $350/kWh in 2016. If compounded over that eight year period, the cost reduction for Li-ion approximates to ~10-15 percent annually. Other battery chemistries were developed and flow batteries saw similar cost declines. These declines resulted from gradually increasing demand, economies of scale, refinement of production, and manufacturing processes, consolidation of supply chains and incremental advancements in energy density. 

In addition to these advancements, software controls were developed that have enabled the deployment of energy storage behind the meter in an aggregate form, integrated with distributed energy resources and performing virtual power plant functions for the grid. Distributed energy resources (DER) proliferated to the point where some utilities in California recently canceled distribution upgrades because DER has reduced load and met generation needs. Something else occurred during this time: solar PV costs dropped significantly and successful business models were created around third party financing, tax equity structures, and bundled resources into power purchase agreements. In the last 12-24 months, these solar business models have helped advance storage, which has been successfully financed in project structures; benefiting largely from tax equity strategies supported by the investment tax credit (ITC). Energy storage qualifies under the ITC as long as it can be shown that 75 percent or more of its charging energy comes from renewable sources.

Today, investors enjoy a temporary period of certainty for the PTC and the ITC, which gives the renewable energy sector some time to reflect on the market and consider new business strategies. Battery costs are low; energy storage capability is greatly enhanced with advanced software controls; and financing tools are available that support energy storage investment. The energy storage conversation has shifted away from long duration storage and is focused on “stacking” applications like frequency regulation, demand charge management and shared services with the meter customer and the grid. In fact, software algorithms can stagger the discharge of aggregated storage devices to achieve the long durations that were so desirable eight years ago. Wind developers have new challenges and opportunities in this dynamic environment where a reevaluation of former energy storage business models may produce new insights and there are new approaches to financing.

Investors now have a chance to refresh the perspective on storage and wind. Because tools are available to stack revenue streams for energy storage, it is now possible to look at energy storage to do more than just firm up wind energy production. While firming, storage devices can also help avoid curtailment losses, potentially perform frequency regulation, and perhaps take advantage of peak-peak price differentials. These multiple revenue streams make the project economics more diverse and resilient to project uncertainty. In many cases, all of these functions can be performed simultaneously with the advent of new software. 

In the near future, wind project developers are likely to build new teams that will include software and battery energy storage partners. Reevaluation of the tax equity strategy and the integration of storage to qualify for incentives creates new opportunities. Because policy risk is presently reduced and a precedent for financing storage exists from the solar sector, lenders have a new energy market to examine: wind + storage. 

 

Dr. Davion Hill is energy storage leader for DNV GL Americas. He has 10 years of experience testing energy systems and has managed battery R&D programs for NYSERDA and ARPA-e, and has authored or co-authored 30+ publications on the topics of materials testing and energy storage. Dr. Hill is 2016 Chairman of NAATBatt International.

 

DNV GL Americas | http://www.dnvgl.com


Volume: 2016 July/August