Energy Storage Business Models in the Energy Transition
The energy transition encompasses three broad market trends: decarbonization and decentralization of energy production, vehicle electrification. All of them have, to different extents, BESS (Battery Energy Storage Systems) in common.
Energy storage has been the long-awaited "Holy Grail" for intermittent, distributed renewable energies, eventually making them dispatchable and able to compete on a level-playing field with conventional, fossil-fuel fired power plants. Additionally, energy storage offers the benefit of being intrinsically flexible, scalable, efficient and expeditious with its modular deployment.
However, energy storage business models are complex and multifaceted from both a technical and commercial as well as regulatory perspective, very much depending on the local market values of the energy commodity being traded.
The purpose of this post (attached you find the full version in .pdf) is to shed light on the business models currently being developed and deployed across different electricity markets on both side of the Atlantic.
Broadly speaking, energy storage business models can be grouped into two large markets: front-of-the-meter (utility-sided, central application) and behind-the-meter (customer-sided, distributed application).
Real-world applications may blur those clear-cut segments, as hybrid business models have the advantage of higher capacity factors and multiple revenue streams, making energy storage a more compelling value proposition.
This distinction also addresses the paramount issue of whether incumbent vertically-integrated utilities/TSOs-DSOs should own energy storage assets or grid infrastructure (front-of-the-meter) or generation (behind-the-meter) purposes, since the latter is equivalent to other DERs (Distributed Energy Resources) commercially available. The long-established opportunistic and mixed business model of energy arbitrage and peak shaving/shifting is the perfect example of such potentially arising conflicts of interest.
Utility-sided business models
Among the numerous front-of-the-meter business models, (primary) frequency regulation has been taking the spotlight both in the US and European markets.
In particular, the early-adopter "Energiewende" Germany features at the end of the 2015 the following large, pure commercial (no PPA), utility-sided, both operational and in construction energy storage projects.
With a current total of around 120 MW power and 180 MWh energy capacity, the German market sends a clear signal to investors that battery storage provides a value-creation opportunity in the regulated ancillary services market.
Of course, compared to other much less favorable EU-countries, Germany benefits from a more market-based and pro-energy-transition regulatory framework. Indeed, weekly auctions for frequency regulation remunerate power capacity made available by third parties with 2015 spikes up to 4000 €/MW per calendar week.
The first key takeaway from those business cases is that battery storage value-proposition is not exclusively tied to renewable energy plant co-location, which adds further to its flexibility.
There is also evidence that although frequency regulation is the targeted primary application, there is a great deal of secondary applications (black-start, renewables integration, peak shifting, capacity reserve/peaking, off-grid/islanding) that can provide additional revenue streams, further increasing the net present value of these investments.
Perhaps, these incremental benefits are even more important for the longer-term viability of such projects.
Frequency regulation is an energy storage application based on MW (power) capacity rather than on MWh (energy) capacity, while the contrary applies to other applications such as capacity/reserve peaking distribution grid upgrade deferral and renewables integration.
This can have an impact on the life expectancy of the battery (in particular lithium-ion based ones), as battery degradation goes hand in hand with higher levels of cycling and greater depth of discharge (DoD). For instance, limiting DoD to 50% doubles the required battery capacity other things being equal, leading to a proportional CAPEX increase. Those technical issues adversely affect the bankability of the projects as well, which is greatly enhanced by at least a 10-year warranty backed by a larger corporation, an O&M contract of same time length, and a performance guarantee.
Customer-sided and hybrid business models
Among the different behind-the-meter business models, offsetting demand charges has been taking so far the lion's share in electricity markets where demand charges require a significant premium like in certain US states.
The market for demand charges offset is strongly dependent on the tariff structure and load profile of the customer site where storage is going to be located. Unfortunately, demand charges are not that high across Europe to make these investments financially feasible yet.
Nevertheless, a favorable regulatory framework in Germany allocates a premium to the normal EEG-feed-in-tariff (FiT) for smaller residential solar PV installations with higher amounts of self-consumption. This has prompted some highly complex commercial offers at the end of 2015, which feature a nationwide energy trading, "P2P sharing" platform for DERs, with the potential upside of providing aggregated, utility-scale frequency regulation services.
The critical issue for these business models to be meaningful is having to deal with a potentially extremely high number of Points of Delivery (PoD), its related dispatching and distribution costs, and - outside Germany - its compatibility with existing FiT and net-metering regimes.
In the US the utility ConEdison is piloting a similar scheme, but on a pure commercial basis and only in New York City. The value proposition of this commercial offer for storage to residential customers is going to be tested with SunPower along the following guidelines:
- value to the customer for resiliency/backup power;
- development of new electricity retail market rates for time-of-use tariffs, critical peak and demand response pricing;
- aggregation of solar PV with storage into a Virtual Power Plant (VPP) to offer ancillary services to the local DSO. Battery storage co-located with DERs.
Conclusions and recommendations
In the electricity retail markets battery storage should provide increased convenience (such as back-up, resiliency, peak and load shifting) for users/prosumers, and hedging against adverse regulation changes in, e.g., net- metering and time-of-use rates.
Hedging against upcoming climate regulations and retiring fossil fuel-fired power plants should provide investment guidance for upstream investors.