Episode 163 | Battery Business | PowerGen ’23 (Live)

Click here for Slides from panel.

Storage projects can capitalize on energy price fluctuations (“arbitrage”), such as evenings when solar wanes and demand increases.

Many energy storage projects today make money from ancillary services like spinning reserves and frequency response, where they are able to provide energy on demand much faster than peaker plants.

My guest says storage projects should “value stack” services ranging from arbitrage to ancillary services to make the highest return.

My guests says his banking team wants to be early movers on new storage technology, but not so far ahead to avoid risk.

Energy curtailments from too much renewable energy have a few solutions, and storage could play a major role.

My panelist, Juan Arteaga, Ph.D., Senior Intelligence Associate – ENVERUS

My panelist, Andrew Chen, Managing Director - CIT Group (First Citizens Bank)

My panelist, Mark Scherluebbe, Managing Director - EY Parthenon

Energy storage is critical for more renewable energy on the grid. The big question now is, how do storage developers make money? That was the topic of my panel at this year’s PowerGen International show in Orlando.

The principal business models for storage are:

• Arbitrage—Charging when energy prices are low and discharging power when prices are high.
• Frequency Response—Controlling AC frequency on the grid as close to 60 Hz (U.S.) as possible. Typically accomplished by adding/subtracting conventional generation.
• Spinning Reserves—Additional capacity required of all utilities in case the largest power plant on the grid fails. This is essentially wasted energy for conventional power plants. Non-spinning reserves are no synchronized to the grid and take even longer to ramp up.

Frequency Response and Spinning Reserves are commonly referred to as “ancillary services.”

My panelists were:

• Juan Arteaga, Ph.D., Senior Intelligence Associate - ENVERUS
• Mark Scherluebbe, Managing Director - EY Parthenon
• Andrew Chen, Managing Director - CIT Group (First Citizens Bank)

Juan and Mark laid out the business environment in Texas and California, respectively, while Andrew covered the financing side of these projects.

In Texas, Juan says ancillary services make up the most of the storage project out there, but that market is expected to be saturated by 2024. He believes that projects should combine ancillary services with arbitrage to get the best internal rate of return (IRR).

“We think that storage needs to change their strategy from being a price taker—and taking high prices set by [natural gas]—to change into a price maker,” says Juan.

Mark addressed the incredible rise in both renewable energy and storage over a few short years. Now at 35% capacity, California is seeing more frequent renewable energy curtailments.

“When we don’t need a lot of energy is exactly when we’re getting a lot of it,” says Mark. California’s grid manager has recommended several solutions for this (i.e. more transmission), but storage has come to the forefront as a way to eat excess renewable energy capacity.

Andrew provided several insights into the financial sector’s feelings on storage. As a veteran of early wind a solar projects, Andrew says storage projects have entered the picture in the last five years. While the early storage projects had a dedicated customer (Power Purchase Agreements—PPAs), his most recent deals have been almost exclusively merchant power projects—sold on the open market.

“We’re always looking to try to stay ahead of the market, just enough so that we can capitalize as an early mover, but not too much where the technology really hasn’t caught up with the financings,” says Andrew of his team.

I was curious how much appetite there was for arbitrage. Juan says short-duration storage projects (2-3 hours) are best-positioned to capitalize on this. Long duration for arbitrage is still a ways away, though both Andrew and Juan agree that Texas’ Winter Storm Uri would have been an excellent case.

“It created a huge mismatch that caused a lot of these [short duration] storage systems to suffer some significant financial issues,” says Andrew.

“If a long duration battery would have been there, it would have made tons of money. You would have it paid off in like, those two days,” says Juan. “But normal operations? It’s questionable.”

Mark says legislation like the Inflation Reduction Act could bridge the gap between the need for long duration (even seasonal) arbitrage in the future and market conditions now.

Questions from the panel included financing permitting risks, markets outside Texas and California, and even the best energy storage solution for Mozambique. My last audience question asked which storage solutions my guests liked best. I gave my answer, too…but you’ll have to listen to the episode to find out!

Useful Links:

• "Energy storage financials: What model makes the most sense?" - PPT
• CIT Group (First Citizens Bank - Official Sites
• ENVERUS - Official Site
• EY Parthenon - Official Site