Did you know over the last decade energy storage has become a mainstream adoption rather than a niche technology? The declining costs of storage with supporting policies help in increasing deployment. Moreover, adding storage to renewables like solar, power, or wind is becoming an ideal strategy. It helps to increase the factors of capacity, optimize revenues, and provide dispatchable generation.
For corporate and institutional renewable buyers, this presents great opportunities as well as challenges. Furthermore, storage can reshape project economics, risks, and delivery schedules. Nevertheless, traditional PPA frameworks need evolution. It will help to properly value, monetize, and also allocate the benefits/ risks that storage presents.
This article provides an overview of the key drivers catalyzing the energy storage boom. Moreover, it will then do a deep dive into how growing storage adoption is impacting PPA pricing mechanisms, performance guarantees, risk sharing, and contract structures. So, let’s get started.
Key Developments Driving the Energy Storage Boom
The rapid scaling of energy storage is owed to various aligned forces. The future growth of them can be better understood if their dynamics are clear. So, let’s understand it in this section.
Plunging Hardware Costs
The major driver of the growth has been the declining costs of lithium-ion batteries and other technologies. Furthermore, battery pack prices have nearly 90% over the last decade. The reason for it stands to be the economies of scale from giga-factory investments from players like Tesla as well as supply chain improvements, and technology innovations.
Moreover, an even more drastic decline is expected as manufacturing is expanding globally. Additionally, material efficiencies are rising along with new battery chemistries. The U.S. Department of Energy has set aggressive cost targets including a 75% reduction by 2030. Realizing these goals would drop battery prices toward $50-100/kWh, making storage even more cost-competitive.
Favorable Policy and Market Rules
The implementation of policies and electricity market rules provide clear value streams and compensation mechanisms for storage. So, In markets like California, retail breakpoint tariffs enable storage project owners to capitalize on peak/off-peak wholesale price arbitrage. Moreover, Wholesale capacity and ancillary service market participation in ISO/RTO regions provide additional revenue-stacking value streams for storage. Additionally, streamlined interconnection standards and fair, cost-based grid access/use charges help support behind-the-meter commercial storage.
Such transparent regulatory frameworks reduce policy risks and provide revenue certainty. It is highly needed to incentivize investments in storage projects. Furthermore, grid operators and utilities increasingly incorporate storage’s unique capabilities and fast response times. This is in their system planning, modeling, and operations.
Continuing to evolve electricity market regulations to fully capture storage’s bidirectional flexibility and fast-ramping attributes will further accelerate deployment in the years ahead.
Growing Industry Experience
Grid-scale energy storage has assumed the character of an increasingly mature business sector. Moreover, today it has established players, mounting case studies, standardized contracts, and institutionalized expertise. If we see leading storage companies like Fluence or Wartsila, the companies have honed their product performance capabilities, operating sophistication, and reliability. They have perfected iterative project learning for it.
Moreover, major utilities such as AES, Engie, and others are gradually ramping up their investments and business models around grid-scale storage. Additionally, independent power producers are increasingly incorporating storage into their renewable projects.
This accumulation of commercial industry experience provides mounting confidence in the viability of continued rapid scaling of storage deployments in the years ahead.
Expanding Financing Options
Finance options are also a major enabler of the boom. As perceived technology risks have fallen, more types of institutions have become comfortable investing in storage. Furthermore, private equity firms and infrastructure funds are increasingly targeting leading storage project developers. Moreover, investment banks are underwriting speculative storage developments.
Major solar financiers are beginning to finance storage retrofits and hybrid solar-plus-storage projects. Additionally, behind-the-meter commercial storage is seeing new financing partnerships. This is between vendors, property owners, and banks to create storage-as-a-service offerings.
Financial innovation and capital market activities such as yields, securitization of contracted storage assets, and CrowdFunding may provide additional low-cost financing channels. It will help continue scaling up the market over the next decade.
Energy Storage Evolution: Impact on PPA Prices
As storage gets added, it presents great potential to significantly increase the wholesale market revenues. It will also have a positive impact on capacity value, and peak hedging abilities of renewable energy projects like solar and wind. Now, as we talked at the start about PPA frameworks needing remodeling, here is where we will talk about what is the impact of energy storage systems.
Some of the key ways energy storage could reshape PPA price structures include:
Higher capacity payment components
Adding energy storage increases the effective capacity factor and dispatchable peak capacity value of the renewable asset. So, it should enable higher capacity-based payment elements in PPAs. Here is where storage extends the number of hours the project can deliver firm capacity.
Accessing peak pricing premiums
Another great factor with storage is that it enables the asset owner to shift the renewable plant’s generation profile. It shifts it to take advantage of peak pricing periods when wholesale electricity prices spike higher. So, Well-structured PPA prices could be designed. It will help to share these incremental peak revenue benefits between the buyer and also seller.
Improved hedge value
Storage brings a smooth power discharge profile. As a result, it reduces intermittency. It also provides the off-taker with a better long-term hedge value and index supply tracker against volatile wholesale spot market prices. This results in an improvement in hedge value that should be captured in the PPA.
Lower risk premiums
Storage decreases volume risk and timing uncertainty for buyers. It allows buyers to shift and firm a greater share of renewable energy production towards peak demand periods. This results in lower risk premium needs priced into the PPA.
Optimized true-up structures
Contract true-up clauses may need to become more dynamic and complex. It will then properly account for the ability to shift renewable delivery schedules. This is to optimize revenues when storage is added. Moreover, true-up provides flexibility between contracted and actual volumes.
New Performance Guarantees and Risk Sharing
The change in renewable energy pricing models is influenced by the rise of energy storage. So, this shift requires a reevaluation of performance guarantees and risk allocations within renewable project power purchase agreements.
Traditionally, these agreements focused on ensuring the availability of energy systems. However, with the integration of storage, additional clauses are necessary. It will ensure the optimal performance and also longevity of the storage assets. Guarantees related to roundtrip efficiency, capacity degradation rates, and response times become increasingly important. Moreover, the proliferation of digital control systems introduces new obligations concerning cybersecurity vulnerabilities.
Since battery degradation and replacement are significant lifecycle cost factors for storage assets, it is crucial to allocate risks associated with these issues in renewable PPAs. Moreover, contracts may need to specify which party assumes performance risks. This is related to optimizing charging/discharging cycles and depth-of-discharge operating regimes over the storage system’s lifespan. It balances utilization and longevity.
Moreover, the emergence of alternative revenue streams from energy storage, such as wholesale capacity payments, ancillary service market revenue, and arbitrage, requires clarity on how to share these value streams in renewable PPAs. Parties must also determine who controls dispatch to optimize total project value. As storage technology evolves, innovative risk-sharing and upside-sharing models are likely to emerge.
The Rising Trend of Paired Storage for Solar PV Projects
Solar PV power has seen the highest adoption of co-located energy storage among renewable energy sources. Solar costs have fallen dramatically making it an attractive option to add value. Let us understand more about some of the key drivers for insights into this accelerating trend and what is the impact of energy storage systems on it:
Storage Maximizes the Value of Solar Generation
Project developers are adding storage to solar plants to address the issue of solar power being inconsistent. Energy storage systems can save extra solar energy when there’s too much during the day. Later, the stored energy can have use when solar production decreases, making the overall power output more steady.
Having storage also allows using solar power during high-demand evening hours when electricity prices are usually the highest. This time-shifted solar power can increase project revenues. Stored energy can be used to adjust and shape solar output to match the utility’s needs.
Adding storage is useful because it offers an option other than reducing solar output when there’s too much energy. This helps in using more of the solar capacity and avoids wasting power.
Revenue Stacking Opportunities
Energy storage optimizes wholesale energy sales revenues. Moreover, it opens up opportunities for solar projects to get revenues from capacity markets, ancillary service sales, and arbitrage in certain markets. Storage systems pass for capacity payments and ancillary services compensation. The reason stands to be the reliability and response speeds they provide.
These additional sources of revenue on top of energy sales can improve the economics of storage-paired solar projects. Furthermore, it incentivizes the adoption of solar plus storage hybrid configurations. It is to capitalize on these stacked value streams.
Changing System Value Proposition
Adding storage to solar power alters the value and usage. Instead of solely relying on solar panels, a battery is built to store extra energy. This adjustment makes the energy supply more flexible and usable when it’s in requirement.
Combining solar power with storage assists during peak times when energy demand is highest. This postpones the need to upgrade power lines and equipment. Calculating the price for solar power with storage might require a different approach compared to just solar power alone.
To Sum Up
The energy storage revolution is bringing great opportunities to create value. Moreover, it reshapes the risks for both buyers and sellers in renewable power purchase agreements. However, it is not without its challenges and uncertainties.
Industry stakeholders across the renewable energy value chain will need to strategically engage. It will help to evolve PPA frameworks that maximize the benefits for both buyers and sellers.
The upcoming Net Zero Energy Sourcing & Power Purchase Agreements 2024 summit in Berlin on February 29th-March 1st provides an ideal forum for developers, corporations, utilities, financiers, and technology innovators. This is to proactively collaborate on designing storage-ready PPA solutions. So, make sure you get aligned with the summit and attend it to be a step ahead in the revolution!