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North America Renewable Energy Brief – Summer 2015
NORTH AMERICA RENEWABLE ENERGY BRIEF ENERGY STORAGE CHARGES UP – SUMMER 2015
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North America Renewable Energy Brief – Summer 2015
INSIDE NORTH AMERICA RENEWABLE ENERGY BRIEF – SUMMER 2015: ¡¡ The outlook for US energy storage installations ¡¡ New methods of financing energy storage infrastructure ¡¡ M&A activity in the energy storage market ¡¡ Progress on the incentive and regulatory front
Welcome to our second edition of North America Renewable Energy Brief. This edition will focus on the energy storage market in the US including the outlook for storage installations during the next five years, emerging financing structures for energy storage infrastructure, the potential for M&A activity in this subsector, and a review of the evolving regulatory and incentive landscape. We hope you find this newsletter thought provoking and insightful. As always, we welcome any feedback. Sincerely, Anton Cohen and Tim Kemper Co-National Directors, Renewable Energy Industry CohnReznick LLP
Rob Sternthal President CohnReznick Capital Markets Securities LLC
PRIMED FOR GROWTH Nearly every market report out there points to the same conclusion: Energy storage is poised for significant growth in the US. According to GTM Research and the Energy Storage Association in their US Energy Storage Monitor (released in March 2015), 220 MW of storage capacity will be installed in the US this year. This is three times the 62 MW installed in 2014. By 2019, the report forecasts that more than 860 MW will be brought online annually, and that the market will be worth around $1.5 billion. ENERGY STORAGE DEPLOYMENTS BY SEGMENT (2012-2019E) 1,000
Energy storage deployments by segment (MW)
900
Utility
Residential
Non-residential
800 700 600 500 400 300 200 100 0
2012 2013 2014 2015 2016 2017 2018 2019 ESTIMATE
Source: GTM Research
ESTIMATE
ESTIMATE
ESTIMATE
ESTIMATE
Every industry executive interviewed for North America Renewable Energy Brief agrees that storage is ready to go mainstream. “The market is ready for storage”, confirms David Fennema, Managing Director, M&A/Environment, CohnReznick Capital Markets Securities. “This industry has evolved very quickly from a venturetype driven business to a commercially and industrially driven sector. This year will witness a huge breakout for storage. It is no longer a matter of if, but when.” From financing and technology limitations to incentives and regulatory frameworks, this report highlights the main challenges the storage market must overcome to realize its potential. By examining some of the markets where it has already made inroads, along with interviews with leading experts in the storage industry, this report also looks at how these challenges can be addressed. Conventional wisdom suggests that the storage industry is not homogenous. There are a wide variety of available storage technologies and business models. The size of storage infrastructure varies significantly between residential installations and commercial gridscale infrastructure. The applications of storage are diverse – from frequency regulation to backup power. The regulatory frameworks for storage
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differ between states and the motivations behind building storage capacity are very different throughout the country. As a result, the most pressing questions facing the storage industry today, such as how will projects be financed, can only be answered with respect to specific geographic markets and storage applications on the customer or utility side of the meter. A single answer to this question simply does not exist.
North America Renewable Energy Brief – Summer 2015
“Storage has become a priority for California because of the growing volume of renewable energy capacity on the grid.”
California vs New York: Different problems, one solution – energy storage
California and New York are the trailblazers in the US energy storage market. However, the motivations behind encouraging investment in storage, the types of storage infrastructure being deployed, and the incentives and regulatory frameworks are very different. The varying dynamics of the energy storage market in these two states clearly illustrates that there is no such thing as a single storage market across the US. Let’s start with California. This state undoubtedly has the most ambitious plans. Its three investor-owned utilities – Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric – will award 200 MW of storage procurement contracts by the end of 2015. This is part of a long-term mandate to procure 1,325 MW of storage capability collectively by 2020. The three utilities will purchase storage capacity through four requests for proposals in 2014, 2016, 2018 and 2020, each increasing in size. All of this capacity must be operational by 2024. Storage has become a priority for California because of the growing volume of renewable energy capacity on the grid. In fact, The California Independent System Operator expects curtailment of wind and solar projects to increase in the coming years as more intermittent capacity comes online. New York also has ambitious energy storage plans. New York City utility Con Edison’s Demand Management Program plans to install 125 MW of load reduction capacity through energy storage, demand response, and energy efficiency by June 2016. To stimulate investment in energy storage, incentives of $2,600 per KW and $2,100 per KW are
being provided to thermal and battery storage respectively. These measures are in direct response to power plant retirements outpacing new generation in recent years. According to the report by the New York Independent System Operator released last year, growing power demand combined with generation retirements resulted in a narrowing of New York’s power resource margin from more than 5,000 MW in 2012 to just over 1,900 MW in 2014. The potential closure of the 2 GW Indian Point nuclear power plant, which supplies about one-fifth of New York City’s base load, will only exacerbate the problem. “Storage solves many problems facing the US electric grid but they are unique to each coast,” explains Gregg Patterson, President & CEO of Demand Energy. “In New York it is all about how you address the pressing problem of reducing peak loads in NYC. In California, it’s all about how you handle the integration of renewables and the impact of over-generation in the peak afternoon hours when the sun is up and all of those solar resources are generating. The challenges are different, but the deployment of intelligent, distributed energy storage resources at the edge of the grid, on the customer side of the meter is a compelling solution in both markets.”
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ADDRESSING THE FUNDING CHALLENGE One of the greatest challenges to energy storage realizing its full potential is financing development. For large-scale projects, project finance structures might be a viable option. This is especially true in markets like California where the three investor-owned utilities’ energy storage agreements indicate contracts will include a financeable tolling component. However, even if the contract structure is palatable for banks, financing will not be forthcoming unless the banks can become comfortable with the technology risk. The limited track record of energy storage technology means equipment providers need to provide robust, long-term warranties to attract debt and equity investors. In addition, these warranties must be backed by large balance sheets in the wake of multiple bankruptcies among major battery manufacturers in recent years. “There are at least ten different versions of how storage providers are structuring agreements with customers, and this diversity applies to both small and utility scale projects,” explains Fennema. “There won’t be a straightforward model that everyone will use to finance projects as there is with tax equity for renewable energy projects. One option is project financing. But, to secure this, projects will need to demonstrate that they have three critical components in place – stable cash flow, strong guarantees on storage technology performance, and strong credit on the back end of the agreement.” Even if banks become comfortable with lending to utility-scale energy storage projects, it is unlikely that project finance structures will be suitable for financing commercial and industrial behind the meter storage infrastructure. Given the high upfront cost of storage, the critical challenge is
North America Renewable Energy Brief – Summer 2015
how to locate and access financing structures that reduce the initial cost to the consumer. This is why a “no money down financing” option is gaining traction. In this model, a storage company offers to install batteries for businesses at no upfront cost. Instead of owning the asset, the business housing the batteries pays for energy storage as a service through a longterm contract. Storage offered through this financing mechanism helps businesses reduce their demand charges (charges levied on large electricity consumers for the right to have large volumes of capacity available to them). Storage helps reduce these bills during periods of high demand – similar to the leasing model that has proven to be successful with solar. To date, a small number of companies have secured funding to allow them to finance the initial cost of the storage. The most active companies in this market are outlined in the table below: Company
Funds secured
Investor
Financing date
Green Charge Networks
$10 million
TIP Capital
March 2014
Green Charge Networks
$56 million
K Road DG
July 2014
STEM
$5 million
Clean Feet Investors
October 2013
STEM
$100 million
B Asset Manager
September 2014
CODA Automotive
Undisclosed
Fortress Investment Group
N/A
Source: Company press releases
“Several battery storage technology companies have raised funds intended to finance 100% of the actual storage unit through the use of shared savings or power purchase agreements,” said Mark Hooley, CPA, Office Managing Partner – San Diego, CohnReznick. “If you take the capital investment decision and long-term maintenance cost out of the sales discussion, the value proposition is very compelling and will promote aggressive adoption.”
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ESTABLISHING CONSISTENT REGULATORY FRAMEWORKS IS KEY Another challenge to storage reaching its full potential is an inconsistent regulatory structure. In some markets, regulatory change has enabled the full value of storage to be realized. FERC Order 755, enacted in 2011, is a prime example. Until the Order was enacted, frequency regulation in PJM, which is part of the Eastern Interconnection grid, was sold as a capacity resource, with providers receiving a certain price for each MW provided during a certain period, regardless of how fast or effectively that service was delivered. Realizing that frequency regulation sources such as batteries, flywheels, and demand response can respond much quicker to grid signals than centralized generators, FERC Order 755 increased payments for faster sources. ‘Fast’ frequency regulation tripled in the year after this regulatory change was enacted. “The fastest growing markets for storage will be driven by policy,” said Victor Babbitt, Vice President Energy Storage, RES Americas. “PJM has been very proactive in adjusting its policies in a way that allows energy storage to compete fairly. Other markets are headed that way but haven’t come as far.” Regulation has also slowed the development of storage in an emerging, but potentially huge, market – the co-location of residential solar with storage. Many utilities have demanded that battery-backed solar panels undergo a lengthy and costly assessment for safety reasons. They want to ensure that batteries don’t store grid power before feeding it back to the grid through net metering under the guise of solar power. In some markets, regulators are overruling utilities that adopt this stance. For example, in April 2014, the California Public Utilities Commission issued a proposed decision that exempted combined solar and battery installations from additional fees and studies (subject to certain requirements).
North America Renewable Energy Brief – Summer 2015
Explaining storage technology: There are many different storage technologies on the market. The most common are explained below: •
Electrochemical batteries are, by far, the most common electricity storage technology. Electrochemical batteries are widely used in portable electronics products to store small amounts of power. They have also been used in grid-scale applications. The many forms of battery technologies include lithium-ion batteries, which are the most widely used, lead-acid batteries, nickel-cadmium batteries, and others.
•
Flywheels store energy in the form of rotational kinetic energy. They have a number of applications including voltage regulation, spinning reserve, power shifting, and output smoothing. Flywheel storage is particularly suitable for applications requiring swift response times and high cycling.
•
Compressed Air Energy Storage (CAES) stores energy by compressing air before mixing it with natural gas. The technology is well-suited for frequency regulation applications.
•
Pumped hydroelectric storage transfers water to an upper reservoir using surplus electricity. When needed, the water is released and passes through a turbine on route to a lower reservoir.
Other storage technologies include flow batteries, fuel cells, liquid air energy storage, pumped thermal electric storage and supercapacitors.
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North America Renewable Energy Brief – Summer 2015
What incentives currently exist? The following are a small number of incentives currently available for energy storage infrastructure: Investment Tax Credit (ITC): There is no energy storage tax credit. In April 2013, the IRS ruled that batteries used to store solar energy can qualify for the 30% tax credit, subject to certain restrictions. California Self-Generation Incentive Program (SGIP): Designed to facilitate the rollout of 200 MW of behind the meter storage, SGIP provides a $1.46 per watt incentive to advanced energy storage.
WHO IS ENTERING THE STORAGE MARKET? From utilities and independent power producers (IPPs) to electric vehicle companies such as Tesla, many different businesses are exploring ways to enter the storage market. Some companies have entered the market by developing new storage products. Others have acquired, invested in, or formed partnerships with storage companies. One of the most high profile entrants to the residential storage market is Tesla. In April 2015, Tesla launched Powerwall—a 130cm by 86cm rechargeable battery for the home. Priced at $3,000 for the 7KWh unit, the battery provides load shifting, power backup, and stores excess solar energy. The system is closely based on Tesla’s electric vehicle battery. The company has enlisted SolarCity to help distribute its batteries. In addition, utilities and IPPs have acquired, invested in, and partnered with storage companies to broaden their product offerings. A few notable transactions have already been completed: • In March 2015, SunEdison acquired the team and assets of Solar Grid Storage, a provider of combined energy storage and solar PV systems, for an undisclosed sum.
ConEdison rebates: To reduce peak demand, ConEdison offers an incentive for systems that reduce summer on-peak demand of $2,600/kW for thermal storage and $2,100/ kW for battery storage systems. Additional bonus incentives are available for large (>500kW) projects. Incentives will be capped at 50% of the project cost. • In May 2015, NRG participated in the $23 million Series C funding round of Eos Energy Storage, a manufacturer of grid-scale battery technology. • In December 2014, leading solar company SunPower entered into an exclusive partnership with storage and solar business Sunverge Energy to offer a joint solution to residential customers and utilities in the US. “I expect M&A activity to pick up for storage companies,” said Anton Cohen, CPA, Partner, Renewable Energy Industry Co-National Director, CohnReznick. “It will be driven by companies seeking a full vertically integrated, solution. Whether it’s from unregulated utilities or developers, we will see an increase in M&A.” M&A activity will also be driven by the fact that most storage companies are small and venture-backed. As such, they will need to align themselves with larger companies capable of funding project construction. “The storage market is at an early stage so the companies building projects are quite young and often venturebacked,” explains Fennema. “It’s hard for them to finance projects themselves, so it’s become attractive for those companies to merge with an IPP or utility. If they can get the economics of the merger right, it’s very attractive for them as it can provide an established customer base. So, we expect M&A activity to continue for some time.”
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North America Renewable Energy Brief – Summer 2015
WHAT DOES COHNREZNICK THINK? There is no doubt that explosive growth in the US energy storage market is imminent. The size of the market is projected to expand 250% in 2015 and, with the right conditions in place, could be worth $1.5 billion by 2019. This is 11 times the size of the market in 2014. While the potential is clear, many regulatory and financial obstacles need to be overcome to make storage commercially attractive. Increased adoption will be primarily driven by policy. PJM and California, two storage trailblazers, demonstrate the importance of adequate regulations and incentives. PJM housed two-thirds of all storage capacity installed in the US in 2014, and California plans to procure over 1.3 GW of energy storage over the next five years.
Private sector investment in storage will increase as the industry matures and technology advances further. However, financing structures are still relatively unsophisticated so access to funding is limited. Innovation in funding models is crucial because the large upfront costs of installing a system mean storage is not possible for many consumers. Despite the challenges, we are confident that the energy storage market will successfully demonstrate significant growth in the next five years. If you would like to discuss how any of the themes discussed above impact your business, feel free to contact us to discuss how these themes impact your business.
About CohnReznick: CohnReznick LLP is one of the top accounting, tax, and advisory firms in the United States, combining the resources and technical expertise of a national firm with the hands-on, entrepreneurial approach that today’s dynamic business environment demands. Headquartered in New York, NY, and with offices nationwide, CohnReznick serves a large number of diverse industries and offers specialized services for middle market and Fortune 1000 companies, private equity and financial services firms, government contractors, government agencies, and not-for-profit organizations. The Firm, with origins dating back to 1919, has more than 2,700 employees including nearly 300 partners and is a member of Nexia International, a global network of independent accountancy, tax, and business advisors. The Firm’s Renewable Energy Industry Practice helps clients navigate the industry’s nuanced business, regulatory, and financial issues. The Practice’s integrated service platform includes assurance and attestation, technical accounting consulting, tax and advisory structuring, and advisory (IPO readiness, YieldCo, valuation, transactional, capital markets) services. The team includes more than 40 highly experienced professionals with deep industry credentials. For more information on CohnReznick, visit www.cohnreznick.com and to learn more about our Renewable Energy Industry Practice, visit www.cohnreznick.com/industries/renewable-energy. About CohnReznick Capital Markets Securities: CohnReznick Cap Markets offers a comprehensive financial advisory platform for the renewable energy industry, providing solutions for tax equity, equity, debt, asset sales or purchases. An affiliate of parent company CohnReznick LLP, the company represents financial institutions, infrastructure funds, strategic participants (IPPs and utilities) and more than 60 wind, solar, biomass and other alternative energy developers nationwide.
Contact our renewable energy team for more information: Anton Cohen Co-National Director, Renewable Energy Industry CohnReznick LLP 301-280-1822 anton.cohen@CohnReznick.com
Rob Sternthal President, CohnReznick Capital Markets Securities LLC 917-472-1272 rob.sternthal@crcms.com
Timothy Kemper Co-National Director, Renewable Energy Industry CohnReznick LLP 404-847-7764 timothy.kemper@CohnReznick.com
cohnreznick.com cohnreznickcapmarkets.com
CohnReznick is an independent member of Nexia International
This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.