As the cost of batteries, fuel cells, and renewable energy more broadly come down, it’s becoming clear that energy storage will be a big business in the future. It can smooth out the variability inherent with wind and solar, provide valuable services to the grid, and move cheap renewable energy created during the day to hours when it’s most needed. 

It’s becoming more clear that energy storage will be valuable, like wind and solar energy a decade ago. What’s not yet clear, though, is the answer as to how energy storage will generate value for investors. Creating a business model that can exploit the advantages of energy storage to make money will be key. And the industry may be perilous for those on the bleeding edge. 

Where energy storage has value

Generally, we know where energy storage has value. Rocky Mountain Institute has defined 13 value drivers from energy storage, including self consumption of solar, backup power, and energy arbitrage (lowering electricity consumption during high cost times and moving it to low cost times). These are the items Tesla (NASDAQ:TSLA), Sunrun (NASDAQ:RUN), and SunPower(NASDAQ:SPWR) have used to justify a lot of the limited amount of energy storage that’s been installed today, but those businesses are essentially in pilot mode. 

If the chart above is correct, the bigger sources of value may come from the utility side of the ledger. Transmission congestion relief and distribution investment deferral are two of the most valuable uses of energy storage, but they’re driven by utility needs and go through regulators. For developers, you can’t just build a battery and bid it into the open market without regulators driving the utility to buy services from you. 

There’s value from energy storage for the entire grid, from utility to customer, that much is clear. The question is, who pays for this value and how? Here’s a few viable options. 

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Turnkey energy storage system provider Demand Energy has commissioned a solar-plus-storage microgrid in Costa Rica at a medical manufacturing facility.

The company, which has also recently announced a microgrid at a low-income housing complex in New York for utility Con Edison, has already completed the 500kW/1MWh battery storage system at Establishment Labs’ facilities. It is paired with a 276kW solar PV array.

Demand Energy worked with Rio Grande Renewables, a US-headquartered company with a track record of developing a handful of projects in Latin America and the Caribbean. The microgrid provides multiple services, which include assisting the grid. Behind-the-meter it reduces peak demand and ‘smoothes’ out variable solar energy output for effective onsite self-consumption as well as being a source of backup power in the case of outages.

The microgrid, claimed to be the largest in Central America, runs on Demand Energy’s Distributed Energy Network Operating System (DEN.OS), which will also be used for the New York microgrid. It will enable Establishment Labs to cut power costs through peak power reduction while maintaining stability of supply – essential for the facility’s manufacturing processes. It will also enable Establishment Labs to reduce its reliance on diesel.

“The system eliminates the stranded costs of traditional diesel generators while offering a healthy return on investment through optimizing renewable solar generation, which drives a reduction in GHG emissions that supports Costa Rica’s goal to be the world’s first carbon-neutral country,” Shane Johnson, vice president of operations for Demand Energy said.

“This new generation of microgrid technologies is a game-changer in the region,” Rio Grande Renewables’ president Brian J Schmidly said.

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Following on the heels of record breaking year, energy storage in 2016 is on track to break through last year’s record.

The year-over-year increase will likely not be as dramatic as 2015’s 243% increase over 2014, but several developments in 2016 show that the storage market is developing in ways that could clear a path for accelerated growth in future years.

In its third quarter, the U.S. Energy Storage Monitor, GTM Research and the Energy Storage Association said they expect the U.S. energy storage market to grow to 260 MW in 2016, up from 226 MW in 2015.

Analysts, however, say that it is not just the size and number of the installations in 2016 that is notable, but the quality and specific characteristics of those installations.

2016 has been a “transition year” for U.S. energy storage, said Brett Simon, energy storage analyst with GTM Research. And Alex Eller, energy storage analyst with Navigant Research, said “2016 has seen a much more diverse energy storage market, both in terms of the types of systems (market segments) being deployed and the business models.” While utility scale installations dominated the market in previous years, Eller said 2016 has seen more progress at all market levels. He pointed to contracts for demand response capacity and utility ownership programs as key drivers in that transition.

In June, for instance, Consolidated Edison, along with SunPower and Sunverge, announced a $15 million pilot program for a virtual power plant.

The project, which is part of New York State’s Reforming the Energy Vision (REV) effort, will outfit about 300 homes in Brooklyn and Queens with leased high-efficiency solar panels and lithium-ion battery energy storage systems as a way of demonstrating possible revenue streams that from could come from energy storage uses such as peak shaving and frequency regulation.

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As has been referenced in recent reports, dozens of new large-scale pumped storage hydropower projects are being pursued (e.g. per the DOE’s Hydropower Market Report). So while the growth in battery-based electric energy storage is important and will provide ever-increasing benefits as it continues, it is important for us to put “traditional” pumped hydro storage in perspective.

Consider one of the largest hydro pumped storage facilities in the U.S.—the 3GW Bath County Pumped Storage Station (co-owned by Dominion and FirstEnergy):

If you needed several hours of power at a 3 GW capacity level, it would take around a million Tesla Powerwalls to do the same job as this one big plant. But to be fair, in contrast, if you wanted what we may call a “pumped hydro residential equivalent” of a single 13.5 kWhr Tesla Powerall for your home, you’d need to install, along with your own generator/pump set-up, a 440 cubic foot pool in your home’s attic—pumping its 14 tons of water up and down each time you needed to store and utilize desired energy.

While it is still a large-scale affair, pumped storage remains by far the dominant source of electric energy storage, at 97% of all U.S. MWhr of utility-scale stored electric energy, and 98% of world-wise (see table).

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Electrek has learned that Mateo Jaramillo, Vice-President at Tesla Energy and one of the early members of the company’s stationary storage effort, is leaving Tesla after 7 years. The company’s energy storage division has undergone a restructuring over the last few months ahead of the merger with SolarCity, but a source familiar with the situation told us that Jaramillo’s departure from the company is unrelated to the recent shake-up at Tesla Energy.

CEO Elon Musk once compared working at Tesla to being in the Special Forces:

“…the general understanding is that if you’re at Tesla, you’re choosing to be at the equivalent of the Special Forces. There’s the regular Army, and that’s fine, but if you are working at Tesla, you’re choosing to step up your game. And that has pluses and minuses. It’s cool to be Special Forces, but it also means you’re working your ass off.”

Seven years of Special Forces is a long time and our understanding is that Jaramillo is taking a break.

He joined Tesla back in 2009 as Director of Powertrain Business Development. At that time, Tesla was starting to work with other OEM to develop electric powertrains, namely for Toyota second generation Rav4 EV, Mercedes’ Smart EV and later Mercedes’ Electric B-Class.

Two years prior to Jaramillo coming on board, Tesla co-founder and former CEO, Martin Eberhard, launched the predecessor of ‘Tesla Energy’, ‘Tesla Energy Group’. The new division aimed to produce battery packs for other automakers and potentially for stationary energy storage.

In a since-deleted blog post, Eberhard explains the goal of the new Tesla division:

Tesla Energy Group is a group within Tesla Motors, Inc. created to allow us to design and sell Energy Storage Systems (ESS) to other companies.

Eberhard put Bernard Tse, a member of Tesla board of directors at the time, in charge of the new division.

Unfortunately, things were difficult at Tesla in 2007-2008 and Eberhard was replaced as CEO, leaving Tesla not long after. The company refocused its limited resources on the Roadster that had yet to start production and Tse also left the company. He started Atieva, now known as Lucid Motors, to enter the same business as ‘Tesla Energy Group’ – making energy storage systems for OEM.

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What do Gerald Ford, a fossil-fuel plant on the Houston Ship Channel, the second-largest utility in Vermont, and the California legislature have in common?

They each ushered in a major national market transformation in the U.S. power sector over the last 40 years, at a rate of one per decade.

And in 2016, right on schedule, that once-per-decade cycle repeated. This year, it was batteries that made a transformative advance into both the competitive and vertically integrated power markets. 

A quick review of how competition entered the power industry, decade by decade:

• 40 years ago: Energy efficiency bills signed by President Ford established incentives to encourage demand management.
• 30 years ago: Generation competition launched as the AES Deepwater co-generation plant began operating in Houston under PURPA.
• 20 years ago: Retail competition launched with Green Mountain Power, then the second-largest utility in Vermont, offering renewable energy choices in the first retail pilot programs in New England. 
• 10 years ago: Solar competition launched as California’s legislature passed SB1 supporting the California Solar Initiative, thus creating terminal market velocity for distributed solar to orbit across the U.S. — the ultimate form of retail choice.
• 2016: Battery competition hits early, widespread market penetration, culminating with FERC’s November efforts to establish national standardization for energy storage participation in organized wholesale markets.
• With four momentous market transformations under our belts, what have we learned that can inform industry and advocates’ efforts on the next stage of power market design evolution including central and distributed storage? Here are five conclusions.

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By some estimates, 30 percent or more of the typical organization’s non-capital expenditures are attributed to energy costs, making this line item a focal point for cost-management efforts. However, amid technological, regulatory, and political changes in the energy sector, it’s nearly impossible to predict a particular organization’s future energy costs, which hampers decision making. [Full disclosure: this post has been generously sponsored by Green Charge.]

One way to minimize risk in the face of such uncertainty is to hedge against some of the variables in the energy cost equation. Many businesses and public sector organizations are realizing that a judicious combination of self-generated solar PV and behind-the-meter energy storage can greatly reduce overall energy costs while increasing ratepayer control over those costs. To understand how, let’s look at a typical commercial energy bill.

The two main cost components on most bills are energy use charges (measured in kWh) and demand charges (measured in kW). Energy-efficiency programs address the former. Examples include lighting and HVAC retrofits, building upgrades, and renewable self-generation plants, such as solar PV.

The second component is demand charges, surcharges for maximum demand within a billing period. Demand charges can be hefty for non-residential customers, sometimes accounting for as much as 50 percent of an organization’s utility bill. Even after implementing every feasible energy-efficiency program, demand spikes will occur—and demand charges will persist. Over-reliance on solar PV can actually exacerbate the problem. A short period of cloud cover disrupting solar generation during a peak usage event can result in a very costly demand spike.

One way to reduce demand charges is to negotiate a more advantageous rate structure. However, this is only a temporary fix, since the utility may change its rate structures at any time. A less risky approach is to prevent peak usage events from showing up on the utility’s meter. This is one of the functions of a behind-the-meter energy storage system. It can sense peak load events and instantaneously discharge power to cover that demand. The utility meter never registers the peak, so it does not factor into the demand charge.

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The cost of energy storage technologies is set to reduce significantly over the next five years driven by economies of scale and improvements in both technology and standardisation, according to a new report from financial advisory and asset management firm Lazard.

The second of Lazard’s Levelized Cost of Storage Analysis compares the costs of various energy storage technologies in detail across different segments in terms of capital cost and LCOE. The analysis was conducted with support from Enovation Partners.

The cost reductions will also be pushed forward by increased demand as regulatory environments improve, the penetration of renewables increases, and as ageing grids begin to need more support.

More demand for energy storage will also result in enhanced manufacturing scale. Meanwhile, the increasing deployment of both renewables and storage will create a mutually beneficial growth cycle where one technology’s success supports the other.

However, the extent of cost reductions in the five-year period has seen a mix of projections. Lazard cited some industry members forecasting lithium, flow and lead battery capital cost declines of around 40%. Lazard said cost reductions for lithium are already well underway since last year.

Ultimately it will be manufacturing and engineering improvements in batteries rather than balance of system (BOS) costs that drive the cost reductions.

Another key takeaway from Lazard was that some technologies are increasingly attractive for a number of specialised power grid uses, but not all uses are economically attractive right now. The main use at present is to strengthen the power grid through frequency regulation, transmission and distribution investment deferral. Another main use is to reduce energy bills for commercial and industrial energy users.

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Ambri, with its liquid metal battery technology, has returned to the energy storage race after “a pause” during which it redesigned its high-temperature seals and worked on other facets of its storage system.

Getting an entirely new and novel battery chemistry to commercial scale is Sisyphean work. About a year ago, the firm had to lay off approximately 25 percent of its staff because the startup had “not made the technology progress [it] had anticipated.” The CEO said at the time, “Bringing new scientific discoveries in the physical sciences to commercial success is hard; the process is not entirely knowable or amenable to predictable timelines.” Ambri had been working on prototype storage systems with project partners such as Hawaiian Electric and Con Edison.

The now 37-employee company just announced that it’s still going after the potentially immense stationary energy storage market, but with an improved version of its unique battery.

Ambri’s technology is based on the research of Donald Sadoway, MIT professor of materials chemistry, and inspired by the economies of scale facilitated by modern electrometallurgy and the aluminum smelter. The big-battery startup has raised more than $50 million in venture capital from investors KLP Enterprises, the family office of Karen Pritzker and Michael Vlock, Building Insurance Bern, Khosla Ventures, Bill Gates and French energy giant Total. 

Over the last year, the firm kept busy redesigning high-temperature seals and developing its battery management system and heater control. Ambri has been testing a “fully functioning in-lab” energy storage system, which provides 20 kilowatt-hours of energy storage with a peak capacity of 6 kilowatts.

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The energy storage industry has grown to become a $100 billion market, projected to reach $250 billion by 2040.

This massive valuation is due, in part, to more than 50% of consumer energy bills being attributed to peak hour charges. Noticing the need to make energy usage more affordable and efficient, paired with a passion to improve the planet, one entrepreneur launched a company aimed at transforming the way we use energy.

Founded in 2009 by Vic Shao, Green Charge Networks designs and installs commercial energy storage systems. Their mission is to empower businesses, municipalities, and schools of all scales to use energy more efficiently, by limiting carbon emissions and minimizing costs through servicing energy storage. Energy storage is designed to help avoid drawing energy from the grid during peak hours, instead charging itself during regular hours when energy is cheaper. By using energy storage as a method to balance peak power demands, power efficiency increases. This subsequently reduces demand charges, reduces capital expenditures for service upgrades, and improves the planet by decreasing the usage of power plants.

Green Charge was the first to market with an ROI-driven energy storage product. Now, the company stands as the largest provider of commercial energy storage in the country, boasting a growing portfolio of 48 MWh of battery storage projects deployed or under construction across more than 150 sites. In addition to expanding their reach, the startup has successfully helped customers across the United States cut the cost of their electric bills by up to 30%.

To date, Green Charge has raised over $56 million in two rounds of funding. In May, Green Charge was acquired by global energy power Engie, an industry-leading battery storage company. Leveraging an innovative suite of patented software algorithms and smart data, Green Charge deploys, owns, operates, and optimizes battery systems across both private and public sectors.

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