In-depth explainer on energy storage revenue and effects on financing

By Michael Klaus, partner, Hunton Andrews Kurth

Battery energy storage projects have a variety of goals for utilities and other consumers of electricity, including backup power, frequency control, and balancing electricity supply with demand. These different uses of storage, along with differences in regional energy markets and regulations, create a range of revenue streams for storage projects. In many locations, battery owners, including storage facilities located adjacent to solar or wind projects, generate revenue from multiple contracts and generate multiple tiers of revenue or value stack. Developers then seek funding based on projected cash flows from all or some of the components of this value stack.

The following article provides a broad overview of the revenue models for utility projects for energy storage and how financiers evaluate the different sources of income.

1. Fixed price contracts

Financing parties traditionally prefer projects with long-term agreements from creditworthy parties to pay a fixed price for a project’s output. output. Financing parties are able to determine their loans or equity investments based on the assumption that the project will produce a minimum of output and that a creditworthy party will pay a fixed price for such output (per unit or per month). or a combination of those prices), and that the project’s net cash flows will be sufficient to repay a loan and for equity investors to earn a return on their investment. Fixed price contracts come in different forms.

Tolls and capacity contracts for utilities

Thanks to Burns & McDonnell

For toll contracts or capacity contracts, the buyer pays a capacity fee or “battery usage fee” for the right to transmit energy from the storage system, subject to compliance with negotiated operating procedures. The fixed payment is often conditional on the project continuing to meet specific operational metrics, such as demonstrating an ability to maintain an output at the point of delivery or maintaining a guaranteed level of availability during each measurement period. Under these types of contracts, the project generally does not retain the right to additional revenue from the sale of electricity discharged by the battery. In exchange for a fixed fee, the buyer receives the benefits of battery operation. The amount of compensation is often determined on the basis of energy supplied by a generating facility to a storage facility (and the utility pays a price per kilowatt-hour for such energy, whether or not it actually uses energy stored in the storage facility), or the payment can be a fixed monthly fee that can be adjusted based on the performance of the facility.

From a utility’s perspective, entering into such a contract may enable it (a) to use stored electricity during times of peak electricity demand (such as in the late afternoon) rather than relying on electricity generated by gas-fired projects, (b) controlling frequency levels on the grid by charging or discharging the battery when there is an imbalance between the supply and demand of electricity on the grid, or (c) injecting reactive power into the grid, causing the force (voltage) required to move electrons is preserved through the lattice.

End User Battery Contracts

Business end customers also enter into battery usage contracts that allow the customer to (1) store electricity generated by a solar project during the afternoon hours when market prices are low, and then use stored electricity later in the day when the retail electricity prices are high and (2) have access to stored electricity when grid electricity is otherwise unavailable due to grid outages. Ownership of the project, including the right to any tax credits, remains with the sponsor and the end customer pays a fixed monthly fee for the right to use the battery.

Resource adequacy contracts

For utility-scale projects in California, storage contracts (whether standalone storage projects or solar or wind projects in conjunction with storage) typically include a fixed-price payment for resource adequacy attributes, which utilities and other tax authorities must purchase under state supervision. . regulations to ensure sufficient capacity to meet customer demand. In many of these contracts, the project owner retains operational control over the storage facility and the right to collect and retain revenue from the sale of electricity discharged by the battery. The project may be able to sell electricity to the same buyer of resource adequacy characteristics or to another buyer in the market.

2. Variable Sources of Income

Borrego solar + storage project in Hubbardston, New York. (Credit: Greg M. Cooper/Borrego)

Other forms of variable payments associated with warehousing facilities may provide increased revenue for project sponsors and financing parties, although pre-determination of a project loan or equity investment typically does not take into account sources of income that are subject to potentially volatile fluctuations in project output market prices . Financing parties and sponsors often negotiate the distribution of these cash flows upon receipt by the project. For example, these cash flows can be allocated as prepayment to funding parties or distributed in full to sponsors (or shared between funding parties and the sponsor, depending on the overall funding structure). Depending on the geographic location and size of the project, the project owners may have different forms of variable income.

Wholesale electricity sales

Linking a storage project to a solar or wind power generation project allows projects to charge the storage system instead of supplying power to the grid when electricity market prices are low (or negative) or when electricity that would otherwise be supplied to the interconnection point would be curtailed. In this way, if there is insufficient demand for electricity generated by a solar or wind project, the battery project is used to store the excess electricity. Subsequently, the project could discharge electricity during times of high market prices and when electricity would not be restricted at the interconnection point. Similarly, the price that buyers pay for electricity under a power purchase agreement is often higher during late afternoon periods, and a storage facility can enable a project to supply electricity to the buyer during such peak price periods. This feature of storage projects also allows project sponsors to manage the risks associated with financial hedging contracts that consider the delivery of fixed amounts of energy over certain periods of time. For generating facilities eligible for production tax credits, project owners may be restricted from claiming a production tax credit based on energy discharged from a co-located storage system, unless the storage system cannot be recharged with power from the just.

Energy management costs

For behind-the-meter battery storage projects associated with solar projects, project owners may be able to charge the customer based on the customer’s savings on electricity costs or demand costs. In California, for example, electricity rates vary by time of day, and industrial customers often pay high demand costs. By shifting electricity consumption to times when electricity rates are lower or by reducing peak demand, customers can reduce electricity costs and the project owner can receive compensation for providing this benefit to the customer.

ancillary services

Swinerton’s Mira Loma, California, energy storage project.

In many regions, storage projects can also sell “ancillary services” to transmission owners or regional grid operators in addition to energy or capacity. Ancillary services include various forms of frequency regulation and corporate reserve products that can be sold in market-based clearing price auctions. They also include certain voltage regulation services sold at cost-based rates that can be set through a utility or grid operator’s rate or through a project’s own rate schedule.

State-Level Loans and Incentives

Several state-level programs offer credit or other incentive payments for distributed general solar and battery storage projects. In New York, for example, storage projects may qualify for the value of distributed energy resources (VDER), a credit per kilowatt that includes fixed and floating rate components.

3. Hybrid revenue models

Co-located solar and storage projects typically have a mix of the fixed and variable revenue streams described above, which continue to evolve as changes in regional energy regulations and markets. Fixed price contracts allow a project to generate a relatively predictable and stable amount of revenue, provided the project meets the technical business assumptions. For many energy projects, a single power purchase agreement is the source of all project revenue. This is rarely the case for battery projects and solar + storage projects, and project developers put together various contracts and market participation plans to generate revenue, negotiate with financing parties the treatment of the revenue streams under financing documents and the project’s plans to value the value of a storage project. maximize.

Mike Klaus is a partner at Hunton Andrews Kurth LLP, where he represents investors, lenders and tax equity sponsors in the acquisition, development and financing of renewable energy projects. Mike has represented tax equity investors in financing several of the largest solar projects in the United States, including battery storage facility projects.

Comments are closed.