Distributed Energy Storage Deployments Driven by Financing Innovation, Part 2

As highlighted in the previous post in this two-part series, the development of standardized power purchase agreement contracts by the National Renewable Energy Lab’s Solar Access to Public Capital Working Group has contributed to the continued growth of at-scale solar PV financing. Building on those solar PV standardization successes, Guidehouse Insights is witnessing the development of new energy storage business models and financing instruments driven in part by contractual standardization. Guidehouse Insights recently explored these new energy storage financing instruments in a recent research brief, Financing Advanced Batteries in Stationary Energy Storage.

A second type of standardized contract has emerged to help finance behind-the-meter distributed battery energy storage systems (BESSs). This new standardized contract focuses on aggregating BESS assets across multiple sites as a virtual power plant (VPP) to reduce energy demand.

Demand Response Energy Services Agreements

A demand response energy services agreement (DRESA) is typically executed with a local utility responsible for managing load on the distribution system by means of VPP technology. In this case, the utility compensates a third-party VPP owner for system availability (capacity) and actual DR energy storage services provided (performance). With a DRESA, the local utility can utilize the VPP for a defined duration for grid DR. But in most cases, the energy storage system owner or operator also promises to provide demand charge costs savings to hosts by means of a demand charge savings agreement (DCSA).

Advantages and Challenges for DRESAs

Key advantages of financing distributed BESS VPPs using a DRESA include:

• The ability to deploy reliable DR assets in local power markets without upfront capital expenditures by either the local utility or the commercial and industrial (C&I) host facility
• The ability for utilities to deploy reliable DR assets to optimize the local distribution system without the need to own and operate new storage assets

Key challenges facing the financing of BESS VPPs using a DRESA include:

• The ability of BESS VPP software platforms to evaluate historical building load profiles and site-specific tariff requirements across large portfolios of C&I host sites to predict VPP deployment scenarios and project revenue.
• The hardware/software complexity involved with integrating building load, onsite distributed generation, and building control across large portfolios of C&I host sites into VPP deployment strategies.

Standardized Approach to Quantifying Complexity, Risks, and Revenue

One can only imagine the complexity required to be addressed in these types of standardized agreements and technology deployment scenarios. For example, for a DRESA VPP application, the highest value will often be for the energy storage software system to leverage automated DR building efficiency technology to aid in reducing building load. Quite simply, installing and deploying this technology with some degree of battery energy storage capability will likely have a lower overall installed cost than deploying only larger batteries and inverters to do all the work.

Guidehouse Insights can point to two examples where these issues have been sufficiently addressed, resulting in BESS VPP financing commitments:

• Advanced Microgrid Solution’s financing partnership in July 2016 with Macquarie Capital for $200 million in customer-sited, utility-focused DR energy storage projects.
• Stem’s new $100 million round of customer-sited, commercial energy storage system project finance support from Starwood Energy Group this past August. This latest tranche brings Stem’s total energy storage project financing commitment to $350 million over the past few years.

As referenced in the previous post in this blog series, Guidehouse Insights anticipates that standardized contracts such as DCSA and DRESAs will lead to the kind of financing innovation necessary to drive the deployment of distributed energy storage technology.