How quickly and how much will energy storage transform the power sector? Four prime movers in the push to install batteries talked about where installation of batteries already makes economic sense and what is driving current adoption at the 29th annual global energy and finance conference in June. The panelists are Tom Buttgenbach, president of 8minutenergy Renewables, John Carrington, CEO of Stem, Ed Fenster, executive chairman of Sunrun, and John Zahurancik, former CEO of AES Storage and now COO of Fluence, a storage joint venture between AES and Siemens. The moderator is Caileen Kateri Gamache with Norton Rose Fulbright in Washington.
MS. GAMACHE: John Zahurancik, what is the business case for grid-scale storage?
MR. ZAHURANCIK: There are a few different business cases.
One problem we have in the storage business is storage brings a lot of benefits to the market, but they are not priced into electricity.
When storage is added to a system, in every case we have seen, it has lowered the cost of that system. We have a very fast responding technology. It is always connected and always on. No dispatch decision has to be made as to whether it is there. It does not have a minimum heat rate. It can stay on for five seconds and turn off for the next hour. It can be back on again for an hour and turn off for five seconds.
It can absorb power when the grid is in a period of over generation, and it does not matter whether the over generation lasts for one minute or two hours. Storage can be used economically to improve how everything else on the system is dispatched.
It is difficult to quantify the benefit from that kind of system optimization against upfront dollars per megawatt, which is what the industry has become accustomed to using for comparisons, or in terms of dollars per megawatt hour, which is the principal metric in the renewables space.
The key challenge for policymakers and electricity purchasers is how to do the math to compare alternatives.
Fortunately, in a lot of places in the world, people are starting to do the math the right way. Storage is finding a place in the market today mainly in support of things like grid stability, frequency regulation, very fast acting ancillary services. Those markets are usually where storage proves itself.
It started that way in the United States. We did the first project like that in 2007 and 2008. In almost every other market in the world, that is also where storage has started.
It then moves into things like peaking, where storage can avoid the need to build costly additional generating capacity that will be available sporadically for a few hours at a time, and then it moves into deferring the need to build costly additional transmission and distribution lines. We can put storage in places where it is nearly impossible to site other resources.
The bottom line is there are a few different business cases, and we see storage popping up all over the world in places to solve constraints, congestion and pricing issues.
MS. GAMACHE: Tom Buttgenbach, why does it make sense for a utility-scale solar developer like 8minutenergy Renewable to make part of its business model developing storage projects?
MR. BUTTGENBACH: Renewables, and particularly solar, are on the way to becoming the cheapest form of electricity generation. Power prices are declining 10% to 15% every year, and that trend will continue.
However, being intermittent as a resource, solar cannot power the country unless storage is added to it. We see storage as a necessary component of a renewable power plant.
Solar has a huge advantage over wind simply because you may have two weeks with no wind and it is hard to design a system around a generator whose output is that hard to predict. Solar even on cloudy days is predictable, and so you can operate a grid with solar plus storage. We believe that a large portion of the US power generation feed over the next couple decades is going to transition to solar plus storage. Storage is a must-have in terms of the transition to renewables.
MS. GAMACHE: Ed Fenster and John Carrington, what is the business case for deploying storage on a distributed basis?
MR. FENSTER: We see three benefits from distributed storage. One is managing the time of day that power is generated and dispatched.
Another benefit is the ability to use such storage facilities to provide backup power, thereby helping the grid with reliability and resiliency. The third benefit is alleviating local grid congestion. It is not uncommon on a summer evening in California to find wholesale power selling for $1,000 a megawatt hour in one place and two counties over for $50.
We are finding that homeowners are willing to pay for increased reliability. There is value in the time-of-day shift and then also from using storage to provide grid services. The latter helps the local utility to defer having to invest in new transmission and distribution lines.
Building new transmission and distribution infrastructure is like tunnel and road building; it is expensive, and it is getting more expensive. It is competing against solar panels and batteries, which are two technologies that are becoming less and less expensive.
The cost lines will cross over time. I don’t know how many of you drove over the Tappan Zee bridge to get here, but wouldn’t it have been nice not to have had to pay for that?
We think storage will eventually be everywhere. It will be what enables really high penetrations of renewables. There are a couple of problems that really only distributed storage can solve, and we are excited to be doing that.
If you ask homeowners why they go solar in the first place, freedom and independence from state-sponsored monopolies are at the top of the list. There are a lot of well-run utilities, but there are not a lot of loved utilities. There is a reason why the creators of The Simpsons had Mr. Burns own a utility.
All of our new solar installations in Hawaii now have storage. We first launched storage in southern California a few quarters ago. We said in our last earnings call that we have more than a 50% take rate in southern California. Our take rate is 20% across California as a whole, up from 15.25% the quarter before, 10.25% the quarter before that and 5.25% before that. We hit 10% in the first quarter this year in Massachusetts. People want it, it is happening, and it is really exciting.
MR. CARRINGTON: For commercial and industrial customers, the use cases are remarkable. The Rocky Mountain Institute has a wheel showing 13 potential value streams that behind-the-meter storage can tap into.
They cannot all be monetized in every market, but a storage device that is being used solely for peak demand reduction, which is the most common use in California today, is effectively an iPhone that is being used as a telephone only. We look to drop as many apps into that storage device to help monetize all of the potential value streams that are available to storage.
C&I customers are looking for savings on their demand charges. They are doing energy efficiency plays. There is a big 15-minute peak every month that accounts for over half the electricity charge on their bills. They want something to avoid the peak charges without having to alter their business operations. We provide an answer.
We also give them the opportunity in places like California to participate in the wholesale market. We had more than 600 calls last year to help our customers participate in wholesale markets, both real-time and day-ahead. Storage is the fastest responding product that you can put into a building.
Our storage customers are also able to participate in a Southern California Edison contract that we have for 85 megawatts of storage capacity. A lot of utilities are starting to embrace similar arrangements.
So C&I customers can use storage for peak reduction and to participate in grid services. Chief sustainability officers and energy buyers at Fortune 500 companies want to be able to do that.
Meanwhile, the electric utilities look at this as an opportunity to have capacity very quickly, frequency regulation and a lot of other things that can be provided by storage.
Both commercial and industrial companies and the utilities are potential customers for us. The opportunities vary by market. Massachusetts is different than California. We are in Ontario. We are in Japan. We are in multiple states in the US. The uses vary by location, but the beauty of storage is the simplicity and the elegance is when you put the right software platform on top to enable these businesses and utilities to maximize value.
MR. BUTTGENBACH: Talking about Mr. Burns, I think he is a control freak, and I am not sure he is willing to empower his customers. That is probably something we see in the utility space as well.
MS. GAMACHE: The value of storage varies by geographic location. Fluence, for example, is in 17 countries. Where in the US is it finding the greatest traction and why? In which other countries and why?
MR. FENSTER: It is different in the distributed storage business because of reliability and resiliency. We had the good fortune of launching in Florida and Texas two weeks before the hurricanes last fall. Those markets ramped very quickly after the hurricanes. The number one question people ask is, “How far above the ground do you put the battery?”
Markets with lower reliability drive a lot of demand on the distributed side. Markets, like New York and California, that have congestion issues are also fertile ground.
Wherever you see high population density, power is expensive because building more generating capacity and power lines is expensive. Another good market for storage is where you start to see lower mid-day wholesale power prices relative to evening power.
MS. GAMACHE: I was at a conference last fall where an industry specialist said it is not a question of whether a huge reliability incident will occur in California, but rather when it will occur. Do you think storage will circumvent that?
MR. FENSTER: Absolutely. The California utilities have said that given state liability statutes and high summer winds, they are going to start proactively turning the grid off to avoid fires.
People obviously will want to buy batteries in such a market. That is already the case actually. The United States has the least reliable power in the OECD. There are more power outages here than in any other developed nation, and the number of such outages is increasing.
Those of you in the room who are from the New York City area probably know people who have been without power in three of the last 120 weeks. There is real demand to solve those issues.
MR. CARRINGTON: Hawaii, California, Massachusetts, Arizona, Texas and New York are the immediate growth states for us. The issue with New York, at least in the Manhattan area, is the New York fire chief does not want to burn his buildings down, and this will probably come as a huge surprise, but the LA fire chief does not want building fires in Los Angeles, either. We are working through a lot of policy and trying to get people comfortable with lithium ion batteries in buildings.
The power grid is constrained. Add a few Teslas in a parking garage underneath a building, and the problem gets worse.
Getting past the policy hurdle on which the fire departments are focused would open up tremendous capacity in urban markets like New York and Los Angeles.
MR. ZAHURANCIK: We see good markets in a variety of places. California has been very active for a long time. We put the largest battery system in the US into San Diego last year. We are building a 100-megawatt, 400-megawatt-hour facility for Southern California Edison that will replace peaking capacity there. That type of project is moving to larger and larger scale and is starting to require traditional project financing to be built.
We see other places like the Dominican Republic where we are putting in storage as a way to displace expensive diesel backup systems that were being used to maintain a fragile grid. The path the hurricanes took last year is a path of opportunity for storage. The storage systems being installed along that path are some of the most stable units the Caribbean islands have. They allow some thermal units to be taken off line during big storms, but still maintain the grid.
I don’t know what to say about New York. I love New York. We did one of the earliest storage projects in New York in 2009. We eventually relocated one such project to the advanced state of Ohio because New York was not quite as advanced as we thought.
I put New York in the same category as Brazil. It is the Brazil of the US. It is very large. You can’t ignore it. It has great promise in the future, and we keep hoping the future will come someday.
MR. BUTTGENBACH: California is clearly a good market for us because it has a regulatory environment that requires storage. The regulatory environment is everything from the storage requirements for the investor-owned utilities to SB 801, which requires LADWP, the largest municipal utility in the country, to provide 400 megawatt hours of storage.
The regulator is driving storage, but there is also a market need because California has a lot of renewables. California will hit the 33% mark, and possibly even exceed it, by 2020. The state has already adopted a new target of 50% renewables. Storage will be needed to integrate that massive amount of new, mostly solar power generation coming on line. We may even see a 100% renewables target from the next governor. That is on top of local initiatives. For example, the Los Angeles city council asked LADWP basically to be 100% carbon free as a utility within the next 10 years.
There is a lot driving this market. On the other hand, coming back to Mr. Burns, his employees are not necessarily the most educated and advanced thinkers. Everybody here on the panel agrees that storage has a lot of value and can address a lot of problems. The utilities hear about that, but their senior engineers who make the decisions were in engineering school 30 years ago when there was no storage. For them, it is a new technology that is scary by nature because they don’t understand it. It is complicated. It is not like a gas plant that you can turn on and off and look at how long it takes to ramp it up and down.
They understand intuitively that there are lots of advantages, but they are very slow to adopt new technologies. We should already be seeing utilities moving to replace gas peakers with storage since doing so already makes sense at today’s prices. But the utilities are not doing it because it will take them a few years to study the problem before approaching their regulators to educate them.
You saw the same pattern with smart phones. It took a long time for people to adopt them, but then one day everybody had one. It just took a lot longer than what the experts predicted.
MR. ZAHURANCIK: I think that is partly why we are seeing activity built on activity. Once a utility becomes familiar with storage, it tends to procure one round of storage after another. Once they have educated themselves, they see value in it.
Pretty much universally every independent system operator to whom we have talked gets the value of storage quickly. To have that level of control and management in the system is of obvious benefit. The challenge has been working it through the procurement processes of utilities.
Where it is purely a commercial decision, customers are moving very quickly to make those decisions because they see the benefits from storage.
There is a great deal of interest today in integrating solar with storage. We are focused currently with a number of people on ways to connect at the direct-current level to get additional benefits out of the solar output by retaining electricity that has typically been lost in the past because it is above the interconnection cap. We can now retain that value as well as mold and shape the rest of the solar output. A lot of new things are coming.
MR. FENSTER: There are some rules that need to be reworked first since the existing legal framework never envisioned storage. A good example is Hawaii, where almost all of our installations for some time have had storage. With 40% renewables penetration in Hawaii, the grid cannot function without it.
The batteries store 20 kilowatt hours during the day. They bleed it out at 3 or 4 a.m. That is like having a thoroughbred locked up in the barn. What should happen is HECO should call us at 7 p.m. at the time of peak demand and say, “Please empty all the batteries.”
That is still off in the future. The rules and contracts to make better use of storage do not exist yet. We are working closely with the unregulated side of National Grid to propose rules to deal with the complexities of net metering and storage and capacity, and how to put that all together in a scalable way. The fundamental underlying unit economics are already in place.
I am confident that if there will be a constraint in storage, it will be the supply. It is not going to be anything else. We just have to work as an industry to get the right rules in a place so that we can realize the value that exists currently.
MR. CARRINGTON: Let me give you one quick timestamp of 24 hours ago on the utility side. I was at a breakfast yesterday morning at the Edison Electric Institute meeting in San Diego. There were about 25 people, including 12 CEOs of major utilities: Duke, PG&E, Southern, all represented. It was evident to me for the first time, more than at any time in the past, that they are really trying to figure this out.
Storage was a huge discussion. For now, they are laying the challenges off on their regulatory commissions, but I think they also need to become more educated themselves.
Unfortunately, the domain expertise level on energy at many of the commissions is a little low. We are working on education. I was 16 years at General Electric. I do not have the policy team that I had then behind me now, so it is a long, arduous process, where you have to get everybody in the industry around this.
I am bullish, especially coming out of the breakfast yesterday. The utilities seem more interested and more willing to push this than they were at the same event last year.
MS. GAMACHE: The Federal Energy Regulatory Commission issued Order 841 in February to require all regional transmission operators to allow energy storage to participate in every market in which it is capable of participating. The order also eliminated some other perceived barriers to storage. Will it be a game changer by allowing storage owners to tap into more potential revenue streams or are we already there?
MR. ZAHURANCIK: The order was helpful. It is probably not a game changer. We are already seeing the game change because the basic economics of storage are improving.
We are seeing spinning reserves disappear in a lot of places. They have to be replaced with something. Flexibility and grid resilience have become a common theme. They are what storage really speaks to.
We have to continue to get the policy environment in line so that it does not become a barrier. It is an inadvertent barrier because no one expected to have a technology like this when the current rules were written. The more we can do to put things on a level playing field, the faster storage will advance.
Three or four years ago when Keith Martin invited me to participate in a similar storage discussion, lithium ion batteries had already emerged as the favored technology. Things have been scaling up. Factories are being built at larger scale all over the world. The challenge has been getting the kinds of suppliers that can stand behind guarantees over the long term.
MS. GAMACHE: Why is all the attention on lithium ion rather than other technologies?
MR. CARRINGTON: The strong demand for lithium ion in the transportation sector is driving it down the cost curve. The power industry is a beneficiary of what is happening in that sector.
You need to add cobalt today to lithium ion for transportation because it improves energy density. Batteries that do not have cobalt actually do better for stationary storage, but only a few manufacturers make such batteries. They are a little bigger and weigh a little more, but they last longer, dispatch faster and are less likely to catch fire.
I think we will continue to see innovation, but scale is the key, and while there may be technologies that emerge that are slightly better-suited or might theoretically be lower cost than lithium ion for stationary storage, lithium ion has the advantage because it is reaching scale in transportation.
MR. BUTTGENBACH: It is also important to note that lithium ion batteries can do a lot more than a flow battery, which can do energy shifting, which is valuable, but all of the other services we talked about today — frequency regulation, for example — can only be done cost-effectively with lithium ion batteries.
MS. GAMACHE: Let’s open the floor to audience questions.
MR. STURCKE: Blake Sturcke, COO of Encore Renewable Energy. We are a C&I developer based in Burlington, Vermont. I have two questions. The first is for John Zahurancik. I am curious what percentage of your batteries are being financed today by customers as opposed to by third-party equity investors? The other question for the panel as a whole is what percentage of deployments is being driven by readily quantifiable considerations like return on investment as opposed to other perceived benefits that might be harder to quantify, like reliability?
MR. ZAHURANCIK: Let me take the second question first. Everything we have ever sold to a customer or deployed on behalf of someone has been justified on economic terms. We have not seen a big market for feel-good projects or maybe we are not very good at winning them.
Fluence is a technology supplier. We sell storage units and help to deploy them. We can do a full turnkey installation or just a system supply. Some customers bring their own financing. Not all do. Some storage systems are being sold to utilities that put them into rate base. In such cases, the financing is at the corporate level rather than specific asset finance.
As we sell more to independent power-type developers, we expect to see more project financing. In some cases, we have done it by packaging the storage with another asset. However it ends up being done, the financiers will require independent engineering reviews, evaluation of the longevity of the technology and so on.
The mix is shifting toward independent storage projects as the projects get larger.
MR HOWES: Walter Howes with Verdigris Capital. I just came back from Asia, and the Chinese seem to be making a major investment in graphene batteries. Entire cities, transportation systems, mobile, stationary, are wrapped around graphene, while they seem to be cornering the lithium supply so we can’t have it. What about graphene? The performance of graphene seems to put lithium back in the buggy era.
MR. ZAHURANCIK: We have already seen graphene used in some large-scale projects. We continue to look at it. We are agnostic to the technology we use for the underlying battery cells. As long as the material is highly efficient, has a reasonable life and can ultimately be financed with some guarantees around it, we will continue to evaluate it.
MR. HESSE: Balduin Hesse, CEO of Frontier Renewables. What do you see in large-scale battery storage deployment as the commercial pole mechanism? Is it a PPA? Is it a combination of ancillary services and three or four other revenue sources? What is the commercial mechanism that will drive the mass deployment of large-scale storage?
MR. ZAHURANCIK: It will be a PPA in some cases. It is becoming more common to see all-source RFPs for power, and storage is competing effectively in those.
There is usually some triggering event, like congestion or the inability to put something into a local area. It may be flexibility. Just the speed of response is starting to get valued appropriately, and that tends to move storage to the front.