An overview of current deal structures crossing the finish line
Contextualizing, evaluating, and understanding a path to monetizing all that’s occurring around technology, policy, and finance within the battery storage space can feel like the expression “drinking from a fire hydrant”. To paraphrase Jeff Bishop (CEO of storage developer and operator Key Capture Energy and member of ESA Board of Directors) during a January 2019 podcast, the tricky part of storage is it can be a lot of everything or it can be nothing.
A 2017 IEEE publication highlights the ability of energy storage to provide a number of grid benefits, identifying twelve (12) applications for energy storage, then grouping them based on the time scale into two categories: energy applications (e.g. demand charge reduction and T&D upgrade deferral) and power applications (e.g. frequency regulation and voltage support). Given the topic of this blog, it’s worth noting that other experts, like Union of Concerned Scientists’ Mike Jacobs, place the market applications into Wholesale, Retail, and Reliability categories with the idea that it’s more closely related to the value and potential for revenues.
As stakeholders of a potential battery storage project (whether the developer, equity investor, industrial retail electricity customer, etc.) look to quantify the value of a potential application within a specific market, it’s prudent to remember that one of the fundamentals of project finance is borrowing a large amount of money to build a project requires locking down costs and locking in a revenue stream. A sharp and simplifying voice I find helpful in thinking about viable revenue streams is the writing and work of the team at international law firm Norton Rose Fulbright. Instead of attempting to paraphrase or replicate their recent insights on the five (5) kinds of offtake structures for standalone storage, I thought it most helpful to clients and readers of S2 Solar’s blogs simply to present excerpts from Senior Associate Deanne Barrow’s June 16th article, verbatim.
Revenues
We see five kinds of offtake structures currently for standalone storage facilities. Storage projects provide a number of services and, for each service, receive a different revenue stream. The developer tries to lock in a long-term offtake agreement for each service.
The first offtake structure is a capacity sales agreement with a utility.
The project company receives a capacity payment that is a fixed dollar amount per megawatt in exchange for an obligation to be ready to run (charge or discharge energy to the grid) when called on by the grid operator. The utility purchases only capacity, so the project company may be able to earn additional revenue from selling energy or ancillary services in the wholesale market. This structure is common in California where the investor-owned utilities and community choice aggregators need to procure capacity to meet resource adequacy obligations set by the California Public Utilities Commission.
The second structure is a twist on the basic capacity sales agreement.
The project company may negotiate a put option that gives it the right to sell to the utility on an annual basis all of the stored energy and ancillary services at a fixed price. Although the project company loses the flexibility to earn additional revenues in the market, it may assign greater value to the certainty of a fixed revenue stream. The agreement is typically structured as a tolling arrangement, where the utility provides and pays for all charging energy during the put period. In return, the utility has the right to charge or discharge the facility as it sees fit.
The third offtake structure is an ancillary services financial hedge.
Ancillary services are used by the grid operator to balance the frequency of the grid and ensure there is enough reserve capacity to meet unexpected stress events. The project company sells ancillary services to the market at the spot price. It swaps floating payments for a fixed-dollar-per-megawatt-hour price calculated on a fixed volume of capacity for each settlement period. The swap uses as the floating price the market clearing price for the specific ancillary service product sold. The project company can mitigate volume risk by self-scheduling rather than taking the risk of not being dispatched by the independent system operator under economic-merit-order rules.
The fourth offtake structure is a demand response grid services agreement.
It involves aggregation of distributed storage facilities to form a virtual power plant that provides demand-response service to the utility in exchange for fixed payments. Demand response means shedding behind-the-meter load in response to a signal from the utility. The battery or other storage device may be used by customers for other applications when not providing demand-response services.
The fifth offtake structure is a demand-charge management agreement.
Unlike the other structures, this agreement is with a commercial and industrial solar customer rather than a utility. Power from the storage facility is used to meet peak demand at the customer premises, thereby reducing expensive fees the utility would otherwise charge the customer for peak electricity consumption. Demand-charge savings are split between the customer and project company under a shared-savings model. Alternatively, the customer pays a fixed monthly subscription fee in return for guaranteed savings. This provides revenue certainty for the project company, but it eliminates upside potential.
Thank you for your interest in battery storage deal structures and finance. We hope you found this to be a helpful starting point and that you’ll check back in the ensuing weeks for an upcoming blog focused on qualifying opportunities for the fifth offtake structure. To dig-in further on this topic and discuss specific battery storage strategies for your organization, please Contact Ben.