The Business Case For Distributed Energy Storage Behind-the-Meter in the California Energy Market Giovanni Damato Senior Associate, StrateGen Consulting, LLC Energy Storage Forum 2010, Beijing
Goals: Overview of Customer Owned & Sited Storage Opportunities in California Explain Storage Market Developments in California Demonstrate the Strength of the Value Proposition for Distributed Storage Propose How the Industry Can Take Advantage of the Distributed Storage Market The Distributed Storage Market Opportunity is Here Now 1
StrateGen Overview StrateGen is a management consulting firm that helps businesses create sustainable value through clean energy solutions U.S. Department of Energy 2
CESA was founded by StrateGen in January 2009 Our Goal: Expand the role of storage technology to promote the growth of renewable energy and create a more stable, secure electric system 3
Why California is a Top Priority Market 4 Energy storage is a fundamental part of all key energy policy initiatives» Foundational California State Legislation Energy Storage Portfolio Standard: ESPS (AB 2514) Self-Generation Incentive Program: SGIP (SB 412) Smart Grid Systems (SB 17) Global Warming Solutions Act of 2006 (AB 32) Solar Energy System Incentives: CSI (SB 1) New 33% Renewable Portfolio Standard: RPS (SB 722)» Renewable Electricity Standard implemented by California Air Resources Board» Regulatory implementation of legislation at California Public Utility Commission» Availability of Incentives via SGIP: $300-450M available $2/W applies to customer sited, distributed systems only (1) Open to storage coupled with wind/fuel cell projects CESA working on other apps: standalone storage & storage + solar» Non-Generator Participation in Ancillary Services Stakeholder Process California Independent System Operator (CAISO)» Many storage demonstration projects currently underway (list in appendix) CESA is driving results-oriented change in all of these areas 1) See Appendix for Self-Generation Incentive Program (SGIP) program details
Spotlight on AB 2514 Landmark Storage Legislation» Unprecedented Energy Storage Portfolio Standard» Modeled after Renewable Portfolio Standard (RPS) legislation» Sponsored by Jerry Brown, Attorney General of California» Authored by Assembly member Nancy Skinner» Mandate for California utilities to procure new energy storage based on: 2 ¼ % of peak demand by 2014 1,500 MW of new storage capacity 5% of peak demand by 2020 3,400 MW of new storage capacity» Storage-technology neutral all forms and applications of energy storage are eligible» All ownership models are allowed: utility, customer, and third party owned» Sets forth serious financial penalties for non compliance» Allows for an increased rate of return for utility-owned storage assets of ½ to 1%» Requires that utilities set out plans by January 1, 2011 for peak load reduction using energy storage 5 AB 2514 could mean 3,400 MW of new storage capacity by 2020 just in California alone CESA is working closely with the bill s sponsor & author to help ensure success
Argument for Focus on Distributed Applications Distributed applications offer the potential to capture and bundle the greatest number of value streams Customer + Utility + System Operator + Society» Reduced energy and demand costs» Emergency backup» Demand response» Improved reliability» Integration of renewables» Load leveling» T&D relief/deferral» Improved power quality» Reduced peak & spinning reserve requirements» Ancillary services» Grid integration» Improved grid reliability & security» More renewables» Fewer emissions» Lower power costs» More green jobs 6
CA Generation (GW) Distributed Applications Are Utility-Scale Small distributed systems can have a grid-scale impact Substation Sited Storage 44 Typical Summer Daily Demand for CA-ISO Region Demand Curve after Implementation of 3,000 MW solar Customer Sited 42 40 38 Peak - Shaving Impact of 13 GWh storage Equivalent to 5 kwh Storage for each kw Installed Solar 36 34 32 30 28 26 24 0 6 12 18 24 Hour of Day Source: EPRI 7
Potential Sources of Value for Distributed Storage Many value streams and ownership models are possible within the distributed storage market Storage Market Segment Ownership Model Application Distributed Storage Utility Customer Third Party Peak Shaving/Energy Arbitrage T&D Deferral/Flexibility Ancillary Services/Regulation Reliability Today we will focus on the value proposition of customer-owned storage for peak shaving & energy arbitrage applications 8
Value Proposition for Behind-the-Meter Storage Shifting load from peak to off peak is a primary source of value for commercial customer-sited distributed storage Load Before Storage» High Energy Costs ($/kwh)» High Demand Charges ($/kw) Load After Storage» Load shifted from high cost peak to low cost off peak Off Peak Off Peak Off Peak Off Peak 1 3 5 7 9 11 13 15 17 19 21 23 Baseline Load 1 3 5 7 9 11 13 15 17 19 21 23 Baseline Load Post-Storage Load 9
StrateGen s Approach to Distributed Storage Modeling Our approach is to model a specific application/project at the system level 1. Select specific application our focus today is:» Distributed commercial behind-the-meter applications» High school project site in Southern California 2. Define system specifications for the energy storage technology 3. Optimize storage system size and operation to maximize avoided energy cost 4. Model the project s value proposition to the commercial customer behind-the-meter 5. Run sensitivities of key system specifications 10
Value Proposition: Storage Base Case Storage Base Case: A 100kW, 4h battery system has an 8.2% IRR from peak load shifting and avoided energy costs Key Assumptions (1)» Use: customer-sited 100kW, 4h duration storage system» All-equity turnkey purchase» Battery Round Trip AC Efficiency: 65%» CAPEX: $700/kWh ($2,800/kW)» O&M: $0.075/kWh discharged (2)» Incentives: NONE Load Shape Impacts August Peak Day Load Before & After Storage 1 3 5 7 9 11 13 15 17 19 21 23 Results» After Tax IRR (3) : 8.2%» Annual Electric Bill Savings: $25,036 (1) SCE TOU8 tariff, CA high school load profile (2) This cost accounts for replacement costs of battery cells, parasitic loads, and consumables (3) IRR = Internal Rate of Return Baseline Load Post-Storage Load Storage Charge/(Discharge) Storage Optimal Sizing» Analyze net peak load with PV system» SCE TOU8 Peak Period 12PM 6PM» Use storage to shave afternoon peak» 100kW, 4h battery 11
Value Proposition Drivers: CAPEX CAPEX & Incentives have a significant impact on end-customer returns IRR vs. CAPEX for Various Incentive Regimes Assumes 65% AC Roundtrip Efficiency 12
Value Proposition Drivers: Efficiency Roundtrip efficiency for energy based electrical tariffs is a more important driver than for demand + energy based tariffs IRR vs. Roundtrip Efficiency 13 Assumes $700/kWh CAPEX * Demand & Energy Charge Tariff is SCE TOU 8 Option B; Energy Only Tariff is SCE TOU8 Option A
Conceptual Overview of Storage + PV Distributed Solar + Storage Potential Value Streams Base load Load & Solar Generation Net Load is Still Coincident with Peak Demand Charges Storage to Shift Net Peak Load to Off Peak Periods» Charge during off-peak and discharge during peak to reduce demand charges (similar to the standalone storage base case)» Capture new incentives (in California)» Firm up additional demand savings from renewables» Can share inverter / power conditioning equipment with solar or other renewables» Can shift peak demand» Potential to leverage SGIP and FITC for both technologies» Potential to provide emergency back up capabilities 14
Value Proposition: PV + Storage Case Storage + 350 kw PV system has an 18% IRR compared to the Storage Only Base Case IRR of 8.2% Key Assumptions (1)» Use: customer-sited 100kW, 4h duration storage system coupled with 350kW of PV» PV & storage share inverter» All-equity turnkey purchase» Battery Round Trip AC Efficiency: 65%» CAPEX: $700/kWh ($2,800/kW)» O&M: $0.075/kWh discharged (2)» Incentives: $2/W SGIP Results (3)» After Tax IRR: 18% (10% without SGIP)» Annual Electric Bill Savings: $26,365 (1) SCE TOU8 tariff, CA high school load profile, PV assumptions the same as PV Only Case (2) This cost accounts for replacement costs of battery cells, parasitic loads, and consumables (3) Incremental value of storage only; PV savings netted out Load Shape Impacts August Peak Day Load Before & After Storage 1 3 5 7 9 11 13 15 17 19 21 23 Baseline Load Net Load w/pv Post-Storage Load Storage Charge/(Discharge) Storage Optimal Sizing» Analyze net peak load with PV system» SCE TOU8 Peak Period 12PM 6PM» Use storage to shave afternoon peak» 100kW, 4h battery 15
Closing Remarks & Recommendations How to Enter into the California Distributed Storage Market:» Find local channel partners (integrators)» Find ideal customer(s)» Send in your SGIP application ASAP, first come first served Help Accelerate California Market Creation by Joining CESA:» Finalize implementation of SB 412 (SGIP)» Increase demand via utility mandate (AB 2514)» Create storage market for ancillary services (CAISO)» Facilitate implementation of solar and RPS (CPUC, CARB, CAISO)» Create standard offer for permanent load shifting (CPUC DR) 16
Questions? For questions about CESA and the California regulatory environment contact Janice Lin: JANICE LIN Co-Founder & Director JANICE LIN Managing Partner 2150 Allston Way, Suite 210 Berkeley, CA 94704 O 510 665 7811 F 888 453 0018 M 415 595 8301 2150 Allston Way, Suite 210 Berkeley, CA 94704 O 510 665 7811 F 888 453 0018 M 415 595 8301 jlin@storagealliance.org www. storagealliance.org jlin@strategen.com www. strategen.com 17
Appendix 1. Value Proposition Base Case Pro Forma 2. Value Proposition Framework 3. SGIP Detail 4. List of Demonstration Projects in California 5. About StrateGen 18
Value Proposition: Base Case Pro Forma Year 2011 2012 2013 2014 2015 2016 2026 2036 Period 0 1 2 3 4 5 15 25 REVENUE Electric Bill Savings Demand Savings All-Hours 14,673 15,406 16,177 16,985 17,835 29,051 47,320 On-Peak 8,682 9,116 9,572 10,051 10,553 17,190 28,001 Mid-Peak 1,757 1,845 1,937 2,034 2,136 3,479 5,667 Off-Peak - - - - - - - Energy Savings On-Peak 3,351 3,518 3,694 3,879 4,073 6,634 10,806 Mid-Peak 5,270 5,534 5,810 6,101 6,406 10,435 16,997 Off-Peak (8,696) (9,131) (9,588) (10,067) (10,571) (17,218) (28,047) Total Energy & Demand Savings 25,036 26,288 27,603 28,983 30,432 49,570 80,745 EXPENSES OPEX Storage OPEX Annual Variable O&M (5,889) (6,007) (6,127) (6,250) (6,375) (7,771) (9,473) Insurance (1,036) (1,057) (1,078) (1,099) (1,121) (1,367) (1,666) Total OPEX (6,925) (7,064) (7,205) (7,349) (7,496) (9,138) (11,139) EBITDA 18,111 19,224 20,397 21,633 22,936 40,432 69,606 DEPRECIATION Storage Depreciation (40,012) (68,572) (48,972) (34,972) (25,004) - - Total Depreciation (40,012) (68,572) (48,972) (34,972) (25,004) - - EBT (21,901) (49,348) (28,575) (13,339) (2,068) 40,432 69,606 TAXES State Tax (liability) / benefit at 8.84% 2,524 1,738 1,062 475 (38) (3,574) (6,153) Federal Tax (liability) / benefit at 35.00% 6,782 16,663 9,630 4,502 737 (12,900) (22,208) Total State & Federal Taxes 9,306 18,402 10,691 4,977 699 (16,475) (28,362) Net Income (12,595) (30,946) (17,883) (8,361) (1,369) 23,958 41,244 FREE CASH FLOW TO EQUITY Total Project Costs (Net of Debt Proceeds) (280,000) Adjustments to Net Income PLUS: Depreciation 40,012 68,572 48,972 34,972 25,004 - - LESS: Debt Principal Repayment - - - - - - - Total Adjustments to Net Income 40,012 68,572 48,972 34,972 25,004 - - Total Free Cash Flow to Equity (280,000) 27,417 37,626 31,089 26,611 23,635 23,958 41,244 Cumulative Free Cash Flow to Equity (280,000) (252,583) (214,957) (183,868) (157,258) (133,623) 83,243 410,684 Equity Holder IRR 8.2% 19
Modeling the value proposition of storage is challenging. StrateGen s approach: Collect Site/Project Specs Optimize Avoided Energy Cost with or without Storage Model Value Proposition Baseline Load Profile Avoided Energy Costs from DG Storage and DG CAPEX & OPEX Ownership Model (Turnkey Purchase or Third Party PPA) Financial Assumptions (Discount Rate, Taxes, etc.) PV/Wind Turbine Generation Fuel Cell Storage Sizing/Specs Pro Forma Output (Cash Flows, NPV, IRR) Federal Investment Tax Credit Generation (Electric & Heat) State Incentives & Utility Rebates Utility Tariff Avoided Energy Costs from DG and Storage Peak Demand Shifting Generate Results & Iterate Energy Cost Arbitrage Maximum Allowable Price Levelized Cost of Energy 20
Current SGIP Energy Storage Incentive Structure System Size Incentive Structure Renewable Fuel Cell Non-renewable Fuel Cell Wind Energy Storage 0-1 MW 100% $4.50 $2.50 $1.50 $2.00 1-2 MW 50% $2.25 $1.25 $0.75 $1.00 2-3 MW 25% $1.125 $0.625 $0.375 $0.50 Minimum technical operating parameters:» Ability to be used daily in concert with an on-site generation resource, and still meet its 20-year lifetime requirement» Ability to handle hundreds of partial discharge cycles each day» Ability to be discharged for at least four hours of its rated capacity to fully capture peak load reductions in most utility service territories.» Ability to meet Institute of Electrical and Electronics Engineers, Inc. interconnection standards.» Must comply with all local environmental and air quality requirements. NOTE: Subject to change with implementation of SB412 21
List of Announced Energy Storage Projects in California 22 Technology Location Date Announced Utility Vendor References Expected Online Date Size (MW) Flow Modesto, CA 2009 Modesto Irrigation District Primus 50 Power Flow Sacramento, CA 2009 SMUD Premium Power 4 CAES Kern County, CA 2009 PG&E http://www.next100.com/2009/08/pge-opts-for-energystorage.php 300 NAS Dublin, CA 2009 Alameda County/PG&E NGK NGK 2 NAS San Jose, CA 2009 PG&E NGK NGK 4 Li Ion Tehachapi, CA 2009 Southern California Edison A123 DOE FOA 36 Award, Tehachapi Wind Integration, 2011 deployment: http://www.next100.com/2009/08/pgeopts-for-energy-storage.php 8 Thermal Southern, CA 2010 Southern California Public Ice Energy Ice Energy 53 Power Thermal Palmdale, CA 2010 Southern California Edison Ice Energy Ice Energy 2 Pumped Hydro Riverside, CA 2009 Lake Elsinore Advanced HydroReview magazine, July 2009 edition; TBD, after 2020 500 Pumped (LEAP), Elsinore Municipal Water Dist, Nevada Hydro Company Inc. http://www.hydroworld.com/index/display/article- display/351182/articles/hydro-review/volume- 26/issue-6/departments/hydro-currents.html Pumped Hydro Alameda, CA 2009 Brookfield Renewable Power HydroReview magazine, July 2009 edition TBD, after 2020 280 Pumped Hydro San Diego, CA 2009 San Diego County Water Authority Pumped Hydro Iowa Hill, CA 2009 Sacramento Municipal Utility District (SMUD) Pumped Hydro Tuolumne, CA 2009 Modesto & Turlock Irrigation Districts, Red Mountain Bar Turlock Irrigation District Pumped Hydro Riverside, CA 2008 Eagle Mountain Eagle Crest Energy Molten Salt Rice, CA 2009 PG&E Solar Reserve HydroReview magazine, July 2009 edition TBD, after 2020 50 Sacramento Municipal Utility District (SMUD) TBD, after 2020 400 HydroReview magazine, July 2009 edition, http://www.tid.org/stellentdmz/groups/public/docu ments/tidweb_content/tidweb_red_mountain_fact_s heet.pdf TBD, after 2020 880 HydroReview magazine, July 2009 edition, Eagle July, 2016 1,300 Mountain Energy (http://www.eaglemountainenergy.net/) New York Times 2013 143 (http://greeninc.blogs.nytimes.com/2009/12/26/holdfor-playback/) Total 3,975
Overview of StrateGen StrateGen helps businesses create sustainable value through clean energy solutions Deep experience in clean tech + strong roots in strategy, finance, and operations Technology Specialists Project Developers Controls & Regulatory Focus exclusively on clean energy Look at issues through an economic (vs. green ) lens; focus on value creation and what drives value over the long-term Broad reach and deep network StrateGen Core Team» Deep industry knowledge in clean energy» Core focus on solar, storage, wind, smart grid» Analytical and financial capabilities» Strategic management expertise» Product development experience» Project leadership and management Capabilities include: industry expertise, economic analysis, technical/product advice, and policy/regulatory expertise Energy Efficiency Structured Finance Corporate Sustainability 23
The Work We Do We primarily serve four types of clients Clean Tech Manufacturers / Service Providers Examples of the where we help our clients:» What is the value proposition of our product / service?» How can we develop a new product to differentiate our company and generate additional profits?» Where are our profitable opportunities for growth?» How can we alter regulations/policies in our favor? Corporations Exploring Clean Energy Opportunities Examples of the where we help our clients:» How can we use our competitive strengths to take advantage of opportunities in clean energy?» How can we minimize risk to our firm and customers?» How should we plan for future market evolution?» With whom should we partner, and under what terms? Private Equity / VC Firms Investing in Clean Tech Examples of the where we help our clients:» What are the most valuable sectors of clean tech?» What is the likely impact of future regulatory changes?» What value does a company s products and services generate for its customers and for itself?» Is this company well positioned for long-term success? Next Generation Real Estate Developers Examples of the where we help our clients:» What mix of efficiency, renewable energy resources, and smart grid is best for the development?» What do our customers want? What will they pay for?» What are the economics of different alternatives?» How should we work with the local utility? 24
StrateGen Team Janice Lin, Managing Partner» Founded StrateGen in 2005. Also co-founded the California Energy Storage Alliance» Has led over 30 projects at StrateGen, primarily in solar and storage» Prior to StrateGen, served as VP of Product Strategy and VP of Business Development at PowerLight. Former strategy consultant with Booz Allen and Hamilton» MBA from Stanford GSB, BS from Wharton at the University of Pennsylvania Chris Edgette, Director» Extensive solar product development, engineering and field installation experience» Prior to StrateGen, founded and managed the Commercial Projects Division for Solar City. Prior to that, served as SolarCity s Director of Field Engineering» Led Construction Management for PowerLight, directed worldwide installations of over 25MW and brought to market a successful non-penetrating rooftop solar system 25
StrateGen Team Max Gardner, Manager» Focused on helping maximize the value of clean energy technologies and business models» Has led projects guiding vertical integration and product development strategy» Prior to StrateGen, served as an analyst in the Renewable Energy group at GE Energy Financial Services providing structured financing to wind, solar, & landfill gas projects» MBA from Harvard Business School, BS in Computer Science from USC Giovanni Damato, Senior Associate» Focused on developing the value proposition and strategic implications of Solar PV, Solar Thermal, and Advanced Energy Storage for a wide range of key stakeholders» Prior to StrateGen, was Field Engineer for Granite Construction on Las Vegas Monorail project, founded home construction business, and is a certified CA Class B General Contractor» MBA from Stanford GSB, BS in Civil Engineering from Cal Poly, San Luis Obispo 26