The growth of solar PV has been fuelled in part by lower equipment and project development costs, but also by the development of standardized power purchase agreement (PPA) contracts. Without a standardized PPA contract, each new project looked unique to investors. This type of contractual uncertainty made investors’ ability to evaluate and finance projects at scale next to impossible. The introduction of standardized PPA contracts as part of the US-based National Renewable Energy Laboratory’s (NREL) multi-stakeholder Solar Access to Public Capital Working Group enhanced investor comfort levels by standardizing key contract terms and the approach to project revenue streams. These efforts resulted in the growth of an at-scale financing asset class that continues to drive solar PV technology deployment today.

Markets for the deployment of behind-the-meter (BTM) stationary battery energy storage systems (BESS) are beginning to grow. Navigant Research recently explored the development of new BTM energy storage business models and financing instruments in its recent research brief, Financing Advanced Batteries in Stationary Energy Storage. Similar to the financing benefits delivered by a standardized solar PV PPA, several new standardized contracts have emerged enabling BESS financing. One such standardized contract focused on tariff-specific demand charge savings at commercial and industrial (C&I) facilities.

Demand charge shared savings agreements

A demand charge shared savings agreement (DCSA) mimics the contractual approach employed by energy service companies (ESCOs) to finance energy efficiency projects. An ESCO uses the cost savings from energy conservation measures like lighting or heating, ventilating, and air conditioning system upgrades to repay debt and equity partners. With a DCSA, the host and a third-party energy storage system owner or operator agree contractually on how BESS and load management software will be deployed during peak energy use to reduce demand charges. The financing partners depend on a portion of the cost savings from tariff-specific demand charge reductions to be paid by the host to debt and equity partners.

Advantages and challenges for DCSAs

Key advantages of financing distributed energy storage technology deployments using demand charge savings agreements include:

  • The deployment of a BESS with no money down by the C&I host, thus eliminating the access to capital challenge;
  • The ability to bundle O&M costs for the BESS into a single transaction, eliminating the need for the C&I host to add staff or resources to manage the system.

Key challenges of financing distributed energy storage technology deployments using demand charge savings agreement include:

  • The ability of the BESS software platform to accurately evaluate historical building load profiles and site-specific tariff requirements relative to future load to generate project revenues;
  • The effect of future changes in building load profiles and tariffs on battery deployment assumptions and project revenues.

Quantifying complexity, risks, and revenue

These contractual hurdles are being addressed today, despite the complexity. Navigant Research points to Green Charge Network’s commitment from Ares Capital in early 2016 for non-recourse project finance-based debt funding as an example of where these issues have been sufficiently addressed, resulting in DCSA financing commitments.

A second type of standardized contract has emerged to help finance behind-the-meter distributed BESS. This new standardized contract focuses on aggregating BESS assets across multiple sites as a virtual power plant (VPP) to reduce energy demand.

Demand response energy services agreements

A demand response energy services agreement (DRESA) is typically executed with a local utility responsible for managing load on the distribution system by means of VPP technology. In this case, the utility compensates a third-party VPP owner for system availability (capacity) and actual DR energy storage services provided (performance). With a DRESA, the local utility can utilize the VPP for a defined duration for grid demand response. But in most cases, the energy storage system owner or operator also promises to provide demand charge costs savings to hosts by means of a demand charge savings agreement (DCSA).

Advantages and challenges for DRESAs

Key advantages of financing distributed BESS VPPs using a DRESA include:

  • The ability to deploy reliable DR assets in local power markets without upfront capital expenditures by either the local utility or the commercial and industrial (C&I) host facility;
  • The ability for utilities to deploy reliable DR assets to optimize the local distribution system without the need to own and operate new storage assets.

Key challenges facing the financing of BESS VPPs using a DRESA include:

  • The ability of BESS VPP software platforms to evaluate historical building load profiles and site-specific tariff requirements across large portfolios of C&I host sites to predict VPP deployment scenarios and project revenue;
  • The hardware/software complexity involved with integrating building load, on-site distributed generation, and building control across large portfolios of C&I host sites into VPP deployment strategies.

Standardized approach to quantifying complexity, risks, and revenue

One can only imagine the complexity required to be addressed in these types of standardized agreements and technology deployment scenarios. For example, for a DRESA VPP application, the highest value will often be for the energy storage software system to leverage automated DR building efficiency technology to aid in reducing building load. Quite simply, installing and deploying this technology with some degree of battery energy storage capability will likely have a lower overall installed cost than deploying only larger batteries and inverters to do all the work.

Navigant Research can point to two examples where these issues have been sufficiently addressed, resulting in BESS VPP financing commitments:

  • Advanced Microgrid Solutions’ financing partnership in July 2016 with Macquarie Capital for $200 million in customer-sited, utility-focused DR energy storage projects;
  • Stem’s new $100 million round of customer-sited, commercial energy storage system project finance support from Starwood Energy Group this past August. This latest tranche brings Stem’s total energy storage project financing commitment to $350 million over the past few years.

Now that the ball is rolling on energy storage financing, the roadblocks facing energy storage projects don’t look so difficult. Navigant Research anticipates that standardized contracts such as DCSA and DRESAs will lead to the kind of financing innovation necessary to drive the deployment of distributed energy storage technology.  

William Tokash is a senior research analyst in Navigant Research’s Energy Technologies and Transportation Efficiencies programme. 

This article was originally published here