Global LNG Outlook 2020
Nick Prowse and Penny Cygan-Jones, Norton Rose Fulbright, UK, take a look at what’s on the horizon for the year ahead.
This article first appeared in Project Finance International’s April 2016 issue.
The electricity systems we have developed over the last century are now facing an urgent need for redesign. The increasing share of intermittent renewable energy sources like solar and wind, the increased ‘electrification’ of society, the rise of prosumers and distributed generation all pose challenges to existing electricity systems globally. In many countries, the volume of electrons (and molecules in the case of gas) being transported through the wires and pipes has fallen and utilities and network operators are having to re-evaluate their long term business models. The Paris Agreement concluded at the UNFCCC COP21 conference in December 2015 will accelerate the transition to a low-carbon future and put additional pressures on the existing systems.
Disruption has now come to the electricity industry. This presents challenges to incumbents and offers a world of opportunities to new players and traditional industry players and suppliers. In his annual letter to Berkshire Hathway shareholders Warren Buffett outlined the risks posed by distributed generation to traditional power companies and commented "There will be disruption but more opportunity than disruption’.
Energy storage technologies, demand response mechanisms and technological developments in data management and remote monitoring and controlling, are all part of the solution as we move from central design and dispatch to a more diverse decentralised system.
The energy storage industry isn't a completely new industry and there have been short lived booms before. The difference now is that developments are not being led solely by the suppliers, inventors and VC investors but by the buyers and users. Large utilities and retailers are supporting the roll-out of energy storage devices and governments are looking to kick start the industry in the same way as they fostered solar and wind power generation. Consumers are demanding more options. Expert commentators like Navigant Research estimate that energy storage will be a US$50 billion global industry by 2020 with an installed capacity of over 21 Gigawatts in 2024.
There are many issues to consider when developing and financing energy storage projects, whether on a standalone or integrated basis. We have highlighted some of key regulatory considerations and trends we believe utilities, developers and financiers should take into account in assessing energy storage projects.
Electricity transmission and distribution infrastructure is changing from a one-way, centralised system to an increasingly decentralised system that necessitates two-way communication between producers and consumers to balance supply and demand of electricity. High penetration of intermittent renewable energy sources will make balancing the system more complex, as low demand for electricity in times of high winds and abundant solar may not match the supply and vice versa. Back-up capacity from traditional power producers is considered vital to ensure a stable and uninterrupted supply of electricity, although this is also considered inefficient as basically two energy systems are simultaneously operational whereas one should suffice. Energy storage is considered a promising alternative to such traditional back-up capacity. It may be stating the obvious, but focussing on fossil fuel back-up generation as the only way to successfully integrate increased levels of renewable power is a backward looking view when we are trying to achieve a low carbon future.
Technologies for energy storage range from established, proven concepts to highly innovative and conceptual technologies that are still at the design and proof of concept stage. The available technologies are generally categorised as either chemical (e.g. hydrogen), electrical (e.g. capacitors), electrochemical (e.g. batteries), thermal (e.g. molten salt) or mechanical (e.g. pumped hydro), each with their own range of applications and specific uses within the energy system.
Applications include peak-shaving, minimisation of curtailment, network investment deferral and avoidance and providing ancillary services to network operators.
Stability and long term predictability and foreseeability of revenue streams, a prerequisite for project financing, all differ depending on technology, application and whether it is applied ‘behind’ the meter or connection to the public grid or whether it is applied at grid- or utility scale. The latter also impacts the cost base for a specific energy storage project, for example in respect of transmission and system services tariffs payable to network operators or taxes - all relevant for the assessment from a financing perspective.
This needs to be taken into account in building a storage business case and is highly dependent on the national or regional market design and relevant regulatory framework.
Disruptive developments often leave policymakers and legislators struggling to develop the right policy and regulatory framework to mitigate potential adverse effects of such developments (e.g. system instability), but also to reap the full benefits through technologies that enable system optimisation more efficiently than for example network expansion. According to a study by the International Energy Agency into potential barriers to the implementation of energy storage projects, the ‘regulatory and market conditions are frequently ill-equipped to compensate storage for the suite of services that it can provide’. Such ‘conditions’ widely differ around the world, with substantially diverging views on the exact role of this technology in the energy system of a specific jurisdiction. Some of the common issues being faced in different jurisdictions include:
Risks to assess when considering the development and financing of energy storage projects include:
An important factor to take into account when assessing storage projects is the high cost of installing new or expanded high voltage or low voltage transmission lines. It isn't just the construction cost but the planning and land acquisition costs. This pushes utilities, regulators and governments to look for cheaper and, in some cases, more politically palatable options.
Energy storage costs need to continue to drop in order to compete head to head with these alternatives. Some experts expect the costs for battery storage to decline as dramatically as they did for solar panels, but whether this becomes a reality remains to be seen.
Many storage technologies and applications are already economically viable and operational in various jurisdictions. Examples include regions with a high penetration of renewable energy or network adequacy issues. Battery storage has been the most topical of storage technologies in the last year, especially for behind the meter applications and arbitrage or ancillary services application.
The combination of renewable energy projects combined with (battery) storage technologies is promising around the world, as energy storage enables the project developer to ‘internally hedge’ the risk of curtailment or low or even negative power prices in times of abundant supply or network restraints. For renewable projects in remote, off grid areas or microgrid scenarios, storage is being seen as a necessary feature in order to deliver stable and reliable supplies of electricity.
For various States in the US, for example in California, targets are ambitious and part of wide-scale grid modernisation efforts. For markets where incentive schemes for the installation behind the meter battery storage is combined with high network tariffs or demand charges, new service providers are offering shared savings and energy efficiency agreements. By managing electricity off take and storage, the goal is reduce total energy costs for both households and businesses alike.
In Europe, the ancillary services market is growing, with network operators contracting for frequency control services through public tenders. In the UK there was a number of successful project financings for STOR (Short Term Operating Reserve) projects. These were small scale flexible generation projects, which received a capacity payment under a long term arrangement with the transmission operator. This type of structure is very easy to project finance, particularly if there is low technology and operational risk. The National Grid's current tender for frequency response has seen intense interest from battery suppliers and developers and is likely to lead to project finance solutions.
Large scale onshore pumped hydropower projects are often subject to various spatial and environmental concerns, but detailed studies have been conducted in, for example, Belgium and the Netherlands to assess the viability of large scale offshore pumped hydro facilities. Such ‘energy islands’, combining storage and large offshore wind developments with climate adaptation and coastal protection projects offer a serious alternative for large scale onshore projects, especially in densely populated countries. Onshore this may also be a viable option for countries with large hydropower capacity, for example Norway, where a consortium including Statkraft has recently announced the construction of the largest onshore wind farm in the world, with a capacity of 1000 MW. One new concept is using abandoned mines for pumped hydro. Why spend millions drilling holes in hills and creating reservoirs for pumped storage when there already is a useable "hole" which may have existing shafts which can contain different bodies of water? One of the leading projects globaly is the Kidston pumped storage project in Australia which is being developed by Genex Power in an historic gold mine.
Energy storage technologies will be a key enabler for the decarbonisation of global energy systems. There is great potential for the non-recourse financing of energy storage projects.
However, like the first wave of renewables projects, we are going to need different structures when compared to traditional large scale thermal power plants or networks. Export credit agencies and development banks will play a key role in proving the bankability of the technology and business models.
One of the challenges will be deal sizes, as many storage systems will be relatively small and not well suited to the rigours and costs of project finance. We expect that we will often see projects bundled together with financing provided for a pool of assets.
From a project finance perspective, it is important that changes to market designs and regulatory frameworks result in stable and predictable revenues streams that properly values the various sources of flexibility, including the energy storage technologies. While annual auctions of capacity and flexible generation solutions may appeal to economists, it means that you can't bank long term revenues and you can't obtain project financing.
We predict that during 2016 we will see project financings close for standalone storage facilities in several markets such as California and the UK. Like the first days of wind and solar PV this will only be the beginning, and over time we will see the development of a wide range of financing options including leasing and securitisations.
By Simon Currie, partner and global head of energy based in Sydney and Matthijs van Leeuwen, of counsel energy in Amsterdam at global law firm Norton Rose Fulbright.
Nick Prowse and Penny Cygan-Jones, Norton Rose Fulbright, UK, take a look at what’s on the horizon for the year ahead.
Companies globally are being impacted by the coronavirus outbreak, through both the labor market and their supply chain.