How To Spot A Great Energy Storage Opportunity
Solar Media’s Solar and Storage Finance USA Summit on Investing or Lending to Energy Storage Projects
Solar Media’s 2021 Virtual Conference on Solar and Storage Investment Finance included this expert panel session on how to identify a good energy storage project, and what to look for when investing in or lending to such a project.
As the energy storage market grows, knowing what to look for can make or break a project. The market experts from a broad range of fields, including CEA’s Director of Energy Storage, Shawn Shaw, discussed the questions you should ask yourself and the red flags you should seek to avoid.
Webinar Transcript
Jo Wilkinson
So I'd like to hand over now to our chairperson for the panel Daniel Finn-Foley. I shouldn’t need to make a huge introduction, cause I think he's rather well-known in the industry. But Daniel you're very welcome to the panel. Daniel was going to guide us through the next sort of 59, 58 minutes or so, and I will be here in the background just in case you need anything. Daniel, over to you.
Daniel Finn-Foley:
Thank you so much, Jo. And thank you for hosting and, and putting together this panel, it's going to be a great discussion. We've got a great group of people. Hopefully I'm not too well known in the industry as I'm sure it's bordering on infamous for my freewheeling panel moderation style, as opposed to becoming particularly popular, but yeah, absolutely thrilled to be here. And once again, Dan Finn-Foley from PA Consulting, this is a topic near and dear to my heart as identifying these storage opportunities, figuring out what the investment meaning behind them is, what the value is, how to recognize that value, how do identify what is needed, where it's needed and, and how that investment can go forward is really a big part of what I do day to day.
Thrilled to be here and hopefully add some more context to how do I identify a storage opportunity because so often in the industry right now it kind of goes like this, Is it a storage opportunity? Then it's a great opportunity. Let's invest in it right now. That feels to be what a lot of investors and developers and others are focusing on. But I think in this panel, we'll be able to narrow that down a bit and figure out how we can really separate the wheat from the chaff on this opportunity. Yeah. So a lot of great panelists here today. I wanted to frame the conversation a bit, talk about sort of where we've been to provide some context into the rest of the discussion, transition then into sort of how projects are being identified today and where we actually see that moving forward as scale, complexity of value streams, value stacking, et cetera, really becomes the norm.
I would encourage everybody watching now to make my job really easy by asking questions within the chat panel. If you could do that, I'll be able to throw those off to our great panelists here today. And yeah. Really means that I have a pretty easy job here. That will be appreciated. So please do ask those questions. I'll try to work them into the discussion.
Panel Introductions
We'd love to make this as interactive as possible. So with that, I'd love to hand things off to our panelists for a quick 30 second introduction, and then maybe a minute about providing some context as to where we've been, how are these sort of opportunities being identified, being valued and sort of what has the industry built to get us to where we are today? So a bit backwards looking as we do the introduction. So I'll start on a bit of a random order here. Gigio, could you give us a quick introduction please?
Gigio Sakota:
Sure. Hi everyone. I'm Gigio Sakota. I'm at 8minute Energy. I'm a Director of Energy Markets. And so generally looking at storage opportunities, both long-term what the value is, the sort of, you know, working with our clients and off-takers on what the right configuration may be for them, their market needs. And just kind of looking at where industry's been. Now, I'd like to bring up that at one point, I managed the largest battery in the world, which was 10 megawatts. And you know, nowadays you can kinda just laugh at it. It's almost like a, you know, customer size battery versus, the time that was the biggest wholesale battery in the world. And three weeks later, I think somebody had a bigger one. So it really didn't last long as a record holder. And I think that just telling how fast industry has grown from, you know, Hey, should we put some storage to now, it's almost rare that we will develop a solar project where the offtaker is not asking about adding a battery and for our battery people even looking at long duration storage or different options. So it's really been a fast expanding industry.
Daniel Finn-Foley:
Fantastic. And I'd really love to take into that question of scale, not just the market as a whole, but individual projects where 10 megawatt used to be a really big deal. Louise, a quick introduction on your end.
Louise Pesce:
Oh, good day, everybody. My name is Louise Pesce. I'm a managing director in the power financing group of MUFG. MUFG is one of the largest banks in the world. And we have a dominant position in the project finance market globally, and here in the US. We've been the leader in power project financing for about the past 11 years. And a number of clients are sitting on this panel. We finance renewable and thermal projects and over the past four years have seen a huge uptick in both hybrid projects and standalone battery projects. And we look to finance those either with bank debt or private placements and look to support our clients as their needs grow at a larger with the ever increasing size of batteries. It's an interesting market and looking forward to diving in a little bit more on some of the characteristics that we look for in some of maybe the risks and mitigants surrounding financing these projects.
Daniel Finn-Foley:
Yeah. I'd love to get into those risks in terms of identifying opportunities, but also identifying potential defaults in those opportunities as well. Shawn, a quick introduction on your end please.
Shawn Shaw:
Yeah. Thank you. Hello everyone. This is Shawn, I'm CEA's Director of Energy Storage. I've been doing storage work now for about 18 years. Mostly focused around the areas of technology codes and standards and quality, everything from the cells up to the completed projects and residential through big utility scale. You know, I just kinda want to pick up on what Louise was saying in that, you know, one of the areas I think maybe a little bit different from sort of the title of the panel at first blush is my focus is often on mitigating the risks from a technology perspective in making an investment. And so you may have a great revenue stream. You might have a lot of stacked revenues, you know, fantastic in the financial model, but what does it take to get that actually done in reality?
Because right now the trend that I would say best characterizes the market maybe is to say that the supply chain is broadening. We're bringing a new, more and more players into the market. The banks have to get comfortable with players they may not have considered a year ago while at the same time, the complexity of projects is deepening, alongside our understanding of things like safety, performance, and longevity. You know, so there's a lot to be done here as more projects come online, it's not a matter of it's a storage project, and we know what it is. There's a lot of flavors available right now, and you have to take a careful look at them. So pretty excited to join everybody today and talk about it.
Daniel Finn-Foley:
That's a bit of a Baskin-Robbins situation, right? Where you need the little tiny spoons to come in and sample all the different technological elements and how, and then of course those fit into every other risk element and opportunity element of the project. Thanks, Shawn. Lance, go ahead.
Lance Jordan:
Great. Thank you. Good afternoon. I'm a Senior VP and the Director for Pacolet Milliken. We're a family office based out of South Carolina that is an investment long-term hold assets throughout the real estate and energy and infrastructure segments. I lead the energy and infrastructure investment origination efforts for Pacolet. Today we own assets in a small utility in South Carolina, landfill gas, solar and storage investments across the US. To try and answer the question on following kind of looking in the rear view mirror and trying to understand some of the key themes in this space. Just taking a look back over the last few years, I think battery storage very much was in its initial phase, a proof of concept investment where the market was trying to understand, is this a viable technology that operates in concert with solar assets, or could it be truly a standalone viable asset for the marketplace, whether it's looked at as a peaking asset or asset that can be utilized very much like energy storage from the grid, or it can be a separate asset class. And I think what we're starting to see is that it's emerging certainly as a separate asset class and has a very strong future ahead of it, whether it's on a merchant basis or contracted, and I’m happy to dig in and be a part of the panel today.
Daniel Finn-Foley:
Yeah. Great, great to hear. I love the, I always think of energy storage as both an enhancer and a competitor. You may come in and enhance an offering, a solar system and natural gas peaker maybe, but it could also come in and out-compete those systems. So it's a bit of a double-edged sword in many respects. Andrew, go ahead.
Andrew Mazze:
Sure. Thanks, Dan. Andrew Mazze, I'm a Senior Director on our infrastructure investments team here at John Hancock Manulife. Team manages something close to $10 billion in equity investments across a wide range of infrastructure sub-sectors including of course, renewable storage, as well as digital infrastructure, traditional power, utilities, and transport. Hancock's been an investor in storage for almost, we're going back over five years now in standalone storage. And we continue to be pretty active in the space looking at various different markets both obviously in California, a big market for storage. Obviously PJM had its a time to shine there for a little bit. And now more recently in ERCOT where we, again announced an investment alongside Hunt Energy recently in a portfolio of storage projects that that will be kind of in the merchant market.
So maybe picking up on some of the themes of where we've been, that others on the panel have mentioned. And I think it's interesting to see how quickly the space has evolved and the velocity of investment that has poured in. Because I think at first it was very much a proof of concept. And a lot of folks were thinking of this, Hey, this is just like a solar project, right? Like, okay, I have a great contract and I can go ahead and finance it and invest in that and get comfortable with it. But I think the reality is, is it's not a wind or solar project. It's very much a different type of asset. It's actually more akin to like a gas peaking facility in some respects. And so I think there’s going to be an adjustment here, but where we were was, Hey, it's very vanilla, we can underwrite an RA contract. Maybe there's some other ancillary revenue streams that are our value adders here, but now I think we're starting to see that shift of, you know, call it market saturation in some of these areas and then a shift towards, you know, fully merchant projects and can banks get comfortable with that, can investors get comfortable with that as a longterm holder of these types of assets. And so a little bit of where we've been to where we might be now, Dan, sorry to take your thunder there, but I'll turn it back to you.
Daniel Finn-Foley:
No, that's fantastic. I always say energy storage is unique, and anytime anybody comes into a discussion saying, oh, energy storage is just for solar was 10 years ago. I was, I always tried to push back and say, this is a unique market with unique challenges. I believe our last panelist was able to join Jacqueline. Now, can you hear me okay.
Jacqueline De Rosa:
I can hear you, sorry for my tardiness.
Daniel Finn-Foley:
Fantastic. No problem at all. Webinar login details have replaced flight delays and traffic as the problem de jour of these conferences.
Jacqueline De Rosa:
It was the sun, it was the wind, but there's always an excuse.
Daniel Finn-Foley:
Exactly. Yep. Yeah, so, so what we're doing is just the quick 30 second introduction, just a quick note about sort of what you've seen in the market in the past couple of years before we start talking about where we are and where we're going. So could we do just quick introduction?
Jacqueline De Rosa:
Sure. Hi, I'm Jacqueline DeRosa and I'm the Vice President for energy storage systems at Ameresco. Ameresco provides a whole host of energy services, not just in the energy storage and solar arena. We began as an energy services company and have expanded into all different aspects of the energy arena. And I'm seeing a lot, I'm focusing and seeing a lot of changes on the distributed side, as it applies to energy storage. In particular, in fact, we're working on some very cool efforts having to do with multiple use applications of energy storage at the distributed level, such as in front of the meter micro grades, where you can island at a circuit and provide services in the wholesale market and also to a community during say a public safety power shut off, and looking at other really cool areas of energy storage in the distributed space. So thank you again for including me and I can't wait to be part of this conversation.
How is Scale Changing the Way We Look at Storage Opportunities And Making It More Complex?
Daniel Finn-Foley:
Fantastic. So we've got a real brain trust here, everybody watching at home, please do ask questions into the zoom platform. I'll try to pass those through to our panelists. We'd love to make this as interactive as possible. To start off, I think I would throw things back to Gigio, because you brought up a topic that I think is perfect for talking about this flow from where we've been to where we're going, which is scale. Obviously the sort of 10 megawatt system being a massive system at the time. And Shawn, going back, I think you mentioned 18 years working in storage where you were probably stacking up D Cell batteries or something like that. With the scale of this market has accelerated. So Gigio, could you tell us a little bit about how scale is changing way that you look at these opportunities and making it potentially more complex?
Gigio Sakota:
Sure, I mean, you know, one thing we've seen is, again, when 8minute started, it was just a solar company and at one point folks were like, Hey, you know, we may need to do storage and something appealed may ask about, and now again, it's, every client usually asks about storage. And it used to be, you know, maybe a little bit of a storage, but now it's, most clients will ask for like, almost like a one-to-one ratio to how much solar they're putting to have that much storage onsite. And you know, three or four hours folks are asking about, you know, five or eight hours too. And so it's really, I would say that scale has gone significantly. So, from being a minor part of what you do now, it's actually a significant part of both. You know, if you look at the capital investment, if you look at just the megawatts you're putting on a system and that megawatt hours.
Daniel Finn-Foley:
Everybody feel free to jump in here. Thoughts about scale, about duration. If you're looking at a project, how do you identify what size it needs to be, what duration it needs to be, or the scale of the market moving forward?
Andrew Mazze:
Yeah. I was just going to say, it's obviously it’s market dependent, right? Obviously in Texas, we certainly see essentially you’re trying to create, it’s energy arbitrage, right, at the end of the day. Obviously there are some other revenue streams that you can stack on top of that, but there is a declining value to each hour that your storage facility can run. And so essentially your first hour that you're creating energy arbitrage in something like Texas, just given the market construct is much more valuable than like the fourth hour. And so the additional capital costs for something in Texas, you just don't typically see the penciling out because I don't need four hours to maximize the value of my battery. I can get 90% of the value with way less capital costs for a one hour, maybe a two hour battery. Obviously we see you know, the four hour battery being more advantageous, just given that there's some underlying regulatory types of benefits to that, being able to sign RA contracts and whatnot, but then also the, the dispersion of those revenue outcomes are across four hours is just better. It's more compressed. And so you can get a better return profile with a longer duration battery.
Jacqueline De Rosa:
I'll jump in. In terms of scale, it becomes a bit tricky because for large projects in California, for example, I know, and Andrew had just mentioned the four hour duration, but we also need to think about augmentations and what we need to buy going forward in the future. And a lot of the buyers here want to make sure that that capacity is going to last for 15 or 20 years. And it makes it kind of funny, cause you don't really know how much space you're going to need. You don't know how much you're going to have to buy, when you're going to have to augment, how you're going to price it. If you're going to price it a capacity guarantee going forward, if you're going to just price it at capacity, you know, into some kind of availability requirement. So it becomes a little, I know that's a little bit of a diversion from what you asked, but you know, it just depends on how much, how much of this stuff are you going to buy on day one, because can you augment on the first year? Can you augment, do you have to wait to the fifth year? It seems a little fuzzy. So I just put that out there as another issue that needs to be considered.
Shawn Shaw:
That's a really good one. We spend a fair bit of our time helping clients who are going through procurement processes, evaluate suppliers bids, and one big part of that is often their approach to augmentation. One supplier might significantly overbuild initially in the hopes of forestalling augmentation. Another might do almost no overbuild and then plan to augment every few years. And it's, and it's not always obvious. The other sort of flavor is, you know, do you accept sort of a fully wrapped capacity guarantee or do you roll the dice and say, well, batteries might be cheaper in five years. I can come back and buy more capacity when I need it. And maybe I'll get a better price because of the advancement of technology. So, you know, and you have to look at it very much case by case and supplier by supplier when you're doing that. And the technology options are also interesting. You might have the ability to oversize enclosures and add racks later, but that may be less convenient and not a great use of space compared to adding modular solutions to the site that might have you know, might be easier to drop in place. And so there's a lot to figure out there for sure, I would say.
Louise Pesce:
I think it's interesting, Sean. I mean, what we're hearing from most people is that there is no standardization here either from a technology perspective or a market perspective. The US markets are so divergent in terms of their needs for battery storage and then the technology itself. I mean, we're talking about Li on here. And the question is, is it just a transitionary battery? What about all of the other technologies that might come into play with sodium ions, zinc, flow. You know, it's an exciting time because it is transition made, but it also adds a risk element and a planning element.
Andrew Mazze:
Yeah. To me, that begs the question of, you know, how do you invest in a space or in an asset that's so fluid, right? And that has kind of this potential obsolescence of one underlying technology. You have potential regulatory risk or call it a market framework, design risk or around it. Right. And so that's something I'm interested in. I don't think not to take your thunder here again, Dan, but like Lance or others that kind of invest in this space. Cause it's something we grapple with as an investor in this space of how do I protect my capital and something that could not be there six years from now, like, right. And or if it is, it changes. And so that's something we've certainly been working through in our shop.
Lance Jordan:
Yeah. Great question. I think from my experience, it really is developer technology manufacturer and project specific. So it's really working with someone that has that experience that found the right project that has the right design and from packet's perspective, the right kind of revenue story, whether it there's an offtake structure, capacity payments. We have yet to do or invest in merchant batteries. Although I did listen to the buyer panel, which was pretty informative from a market arbitrage and overall ancillary service perspective. But it really is, you know, a discreet project level set of diligence, which to get to that level, it's really relationship based with the developer or project owner that you've worked with in the past and feel good about some of the key assumptions they're making. But I think all the points raised here kind of highlight that it's still is a bit market in transition or technology and transition.
I do think lithium ions here to stay certainly for the near term, but unlike solar or wind where it seems like key assumptions are fixed now, you know, solar asset life of 35 years seems to be where the market's coalescing. I haven't yet seen some of those same assumptions, asset life, cycling, degradation, et cetera on battery storage yet to have a set of assumptions that the market kind of underwrites. It seems like even today, it's a bit project specific there as well, but we'd love any perspective of some of the panelists here, if you have a view on whether that's changing or we need to have more development in the space for that to become a theme.
Shawn Shaw:
I think the theme is that it's very project specific, unfortunately, because it's, you know, a solar module, if you know where you're putting it and what direction you're pointing and I'm being a little fast and loose here, you know what it's going to do. With a storage asset, your use case can change at the flip of regulation or the flip of a market you know, very quickly. And that drives its physical performance heavily. A once per one cycle per day use case generates a much different degradation and performance profile than a frequency response oriented use case. And the prevalence of some of the sort of revenue arrangements or tolling arrangements that allow off-takers a great deal of flexibility in the specific operations of the system. That's not always an easy thing to predict. You try to put guardrails around it and you certainly keep it operating within the manufacturer warranties, but that's still a pretty broad bit of latitude you can operate within. So it makes it very hard to have broad, acceptable assumptions for anything like degradation or round trip efficiency or things like this. Cause it can change with those variable use cases.
Andrew Mazze:
Yeah. I was just going to say, I mean, like answer it on a point and then sort of Shawn, but in terms of, for us, it's really aligning with the operating partners or developers who have the expertise to operate these assets locationally, where they should be. And then those interactions between your warranty provider, your market touchpoints, things of that nature that ultimately, it's a big balancing act. And it's not just, like you said, turn the panel, face the sun and go. And so the two guys in a truck type mentality that you can sometimes have with solar, you really can't do here. And that's kind of what we've learned is you need to find the people that know what they're doing, and it's almost imperative here and it's not as easily interchangeable as it may be for some other asset classes, within infrastructure within power gen.
Jacqueline De Rosa:
I would just comment though that, in California, right, these procurements have been going on since 2014. So some of these issues while they are very project specific, the contracts, you know, by the IOUs, maybe not everybody here, but they are pretty consistent and they have mechanisms. So if you are going to cycle more than your 360 cycles per year, they have what's called a variable asset replacement charge so that you can price what those additional costs would be to augment more frequently for more cycles. So there are some standardized approaches, I don't know if they actually have ever implemented VARC in a contract, but the price is in there. And so one has to agree to it. So there are some things that have happened to streamline and standardize some of these issues contractually.
Gigio Sakota:
Yeah. One thing I was going to connect is, my understanding of the industry so far is that from the project finance side, folks are a lot more confident if you have contracted revenues, right? If you have a off-taker, it's a tolling agreement, you can put in a model and for next 10, 15, 20 years, you know exactly what that battery is gonna generate from a kind of revenue side versus merchant. We can run projections, but ultimately, there's no crystal ball. And so you're going to have to have faith in some of these assumptions and, maybe a plan haircut, but again, we can argue all day what the right forecast is. Interesting thing though, is if you kind of hand over the keys to somebody as a tolling agreement, you have no idea how they're going to upgrade an asset.
Now yes, you can put, and I've actually, some of the contracts operated when I was on the utilities side had these VARC charges at different things so that, as you’re based in a state of charge or cycling so that the seller could capture some of those costs. But ultimately somebody else is running the battery. They're gonna run it based on a contract, not based on the actual costs, versus if you have the merchant battery, while you have higher risks, you can actively tweak your bids to say like, oh, well, I'm hitting up too many cycles, I'm going to increase my costs that I'd been in the market. Or, Hey, I'm running very low cycles. You know what, for a dollar cycle, it that's fine. And so I think there's an interesting, you know, Andrew mentioned earlier, it's, it's like a Peaker, right? It's a very responsive asset. And so you can use it in many different ways, right? You can say, Hey, I wanna, I'm not going to run it unless it's a hundred, $200, $500 realtime price, or you can say, you know what, I'm just going to lock it into the day market, whatever that balance is. And I'm going to lock in that revenue. And you can daily change between those two modes or any other notes. So it's a very flexible asset.
Daniel Finn-Foley:
Absolutely. And Gigio as a consultant who specializes in looking at those market opportunities, I can confirm there is no crystal ball, it's actually tea leaves that we use a hundred percent accurate as well know. And I think somebody else was going to weigh in quickly. And then I did want him to continue this thread out to replicability.
Louise Pesce:
Yeah, I was going to comment on your tealeaves because lenders rely on those quite significantly when we're putting together our financing. That's the push pull here of, kind of the thrust of what we're talking about is it's, you know, lenders like revenue certainty. And so contractual revenue is great. However, from the sponsor standpoint that obviously may not be the best return for them on an equity perspective. So having that flexibility to offer a full suite of products, the ancillary type revenues, frequency regulation, spending reserves, folder support, et cetera and, and being able to take advantage of pricing and needs from the off-taker or the market is great, but it doesn't give us as lenders much certainty. And so the idea of total merchant battery or hybrid projects, I think is still a question mark. Could you do it on the short term? Yes, because your tea leaves are a little bit more accurate, but potentially in the one to five year range than beyond that. So it is, it is going to be challenging to do large-scale merchants battery financings.
Andrew Mazze:
Absolutely.
Lance Jordan:
And I think that's a great point. Just one, one point there is that it does seem like even though merchant batteries overall are emerging more as an asset class, that maybe you have a deeper market than people thought two, three years ago, especially in light of what went on in ERCOT during the winter storm, some of the things going on in Cali. So maybe where parts of the Northeast shakes out when you get a lot more solar penetration but, but that's a great point by Louise, which is that today it does feel like still do invest in a merchant battery likely is a majority, if not all, equitized from a principal perspective. So that's, that's obviously a point to note there so likely has to hit a higher cost of capital higher return outside of something with a more contracted set of cash flows or a capacity payment.
Louise Pesce:
Yeah. Having said that though, the RA Contractual structure in California, there is some appetite for taking, I'll call it merchant RA after the initial contract period. I think, we're seeing that on thermal plants, for example, where we're taking as lenders, the risk of kind of that renewal mechanism under the RA construct. And so that I think could be added in but obviously RA is specific to the California market.
Andrew Mazze:
I was just going to echo Lance's point from an equity investor perspective of we've certainly in a fully merchant type of scenario. We look at these on an unlevered basis and would only think of leverage in a very opportunistic and limited way, very prudent, just because, you know, the asset by design is going to be a volatile one, and you want that flexibility to be able to operate the asset as you need to. Right. Which could have some cashflow volatility associated with it, which obviously, you know, doesn’t marry up great to long-term debt. And so I think what we've seen is that investors are flocking to these types of assets because the cost of capital is certainly much wider and it kind of falls into this renewables pocket that, Hey, if I cannot earn an unlevered double digit type return on a renewables asset, sure, like where do I sign up? Right. And so I think we've seen a lot of people start to chase in that, but to get those on lever, double digit returns, you now need to kind of believe in some of these market forecasts. What Gigio is talking about, of like various different revenue streams and start stacking them all up. What's your useful life assumption to get there. And I think that's where it's starting to get interesting as now we're seeing this become more, I'll call it a mainstream. I think some of that first mover advantages is kind of gone away a little bit and we expect at least some compression in value in some of these revenue streams as markets become more saturated, more investors get in it. Doesn't mean it's not attractive and that there's going to be a ton more investment. It's just that the dynamic is starting to shift.
The Potential for Replicability of Energy Storage Projects
Daniel Finn-Foley:
So let me push the panel a little bit. So let's start looking forwards when it comes to this idea that we started with scale and we move towards the sort of risk and replicability portion of this, which I love. How are we going to get more comfortable with investing in these assets, whether it's contracted merchant, whether it's lithium ion battery or new technology, whether it's in Texas or Massachusetts. Is there going to be some sort of scale that results in replicability that builds confidence, or is this a market where you're really going to have to feel comfortable taking these projects one at a time for the foreseeable future? What do we think?
Lance Jordan:
I'm happy to start with that one. Great point. I think your point on we're going to need to see more of an operating track record and success or losses play out. You know, I think that that's kind of more penetration and you know, the use case of the battery storage that's on the ground, whether it's for the grid via some sort of capacity contract arrangement or hedge off-take or it's on a merchant basis, and the grid can see some of the attributes and characteristics of the battery. I think that's what we need to see, because I think we'll see two things happen at that point. One, you'll have the markets start to coalesce some key assumptions, operating performance, degradation, asset life, overall costs, O&M, et cetera. And then you'd also see the revenue story start to show up a bit more as some of the characteristics are known in the grid or utility customer or corporate says, I may need this for my load profile and I'm willing to pay for it.
And as the equity or investors sees that the battery can deliver, their view on cost of capital and overall return for the asset comes down at the same time. So I think that'll only happen a bit with some of these batteries being installed, deployed and working well for the customer off-taker grid and investor. Obviously, if things don't go well, then the market will also sharpen their pencils a bit and either increase the discount rate or start to make more conservative assumptions on the operating profile. And you'll see a bit more of a bit ask between the load customer that's not necessarily owning that risk and the investor that is in these instances.
Daniel Finn-Foley:
So Lance, if it’s about building that track record, how big of a track record do you need before you start really feeling comfortable? Is it five years, 10 years, 50 years?
Lance Jordan:
I think with the kind of pace you're seeing in renewables and growth overall, you know, I think it's really something like two to five years. And I think if we had events like the ERCOT Storm where the case studies coming out of that were, what really benefited the grid or benefited the customer or helped offset what could have been a very difficult loss if plants weren't performing was a battery installed on site or behind the meter, or procured in advance of these events by the customer and the investor, you know, came in and invested capital. I think those kinds of case studies coming out of these events will be nothing but helpful for the industry overall. I just think the overall growth and the fact that you look broadly at the power and utility space, renewables is really the only area that's growing. You have a lot of retirements on the come from nuclear, from coal, large-scale gas maybe not fairing as favorably as people would have thought. So a real transition in the grid. And I think that, I think the growth is certainly focused in this area. So I think to me, it's two to five years, and maybe even sooner, if you have more of these case studies coming out of big events.
Gigio Sakota:
Question for that, and, obviously an investor has to understand that you want certainty, you want predictability so that, you know, when you put your money to work, you kind of know what you're getting. But in a way that sounds like, for projects become commoditized, it's almost like a bond investment, right? It's very predictable cashflow, predictable decay of the battery, predictable revenues. And at that point it seems like, if you're making that kind of investment, it's not going to be very competitive returns, right. It's kind of becomes commoditized. Something that, it's hard to get better returns than somebody else versus if you're investing earlier. I mean, the way I'm thinking about this as an investor, I assume you want to get, you know, industry leading returns for the asset class you're investing in. And so kind of how do you balance that desire to have kind of, I'm calling it bond, but, you know, very predictable returns with also trying to be kind of the leading edge or kind of beat the industry to some extent.
Lance Jordan:
So I think that it’s very much, once again, coming back to relationships. It's the developer or the project owner that's looking for that long-term capital to put to work so that they can recycle it in their development engine. Cause they're saying, Hey, look, you know, this is a great project. I want to build it. But maybe me as a developer, my cost of capital is so high that I don't want to be the permanent equity in an operating project. I want to sell out at FMTP and then take that capital and recycle it through the development engine. And so I think finding a partner like Pacolet to work with, or Hancock to work with in concert, so that you're bringing that investor down a bit and helping them get comfortable with their risks and the investors kind of stretching the developer to educate them on the right steps, that helps accelerate this process of the market understanding what the key risks they're taking.
I mean, I think a good corollary is what's happened in the utility scale solar front, where 10 years ago, you couldn't build a solar project unless it was really someone leaning in on how to make it work from a revenue perspective. And then that started to, as cost declined, you started to see the cone come down the equilibrium, capital rushed in, offtake structures started to align better, maybe got more competitive. And now today it very much is utility scale projects are starting to seem more like that bond likes structure. Maybe it's backed up a bit in light of some of the overall costs that people hadn't planned on insurance and operating performance or energy yield and making sure they're getting them right. But I'd say that batteries, there's no reason why a battery investment couldn't become that over the next few years, but there needs to be a number of key assumptions and operating performance worked out so that people can get comfortable.
Daniel Finn-Foley:
Yeah. Lance, I warned everybody about the 10 years out solar versus storage piece. It's not quite the same, but I'll let you get away with it, because I think that was relevant. I know Shawn, you were gonna mention something and then Louise, I think you're on deck as well for a comment.
Shawn Shaw:
Yeah. I'll try to keep it brief so I don’t take the floor from Louis too much. But I think we have to, there's some very smart folks on here about revenues and I won't focus on that, but none of this investment takes off in a big way without addressing technology risk. And so from within the solar industry, for example, we've had to get comfortable with accepting new inverter typologies way before they've had any significant amount of field time to validate those assumptions. So I have optimism that in storage, we can get comfortable in much the same way, but it does require a lot of effort to get comfortable with these new technologies and get them treating like an asset that everyone understands and is comfortable with.
And as far as differentiation and margin, though, this is where things get a little tricky. If everyone is putting out the same CadTel or BYD containerized solution, and they're going after the same markets and revenue streams, it becomes a little hard to stand out from the pack. And so this is where expanding and that broadening of the supply chain I mentioned earlier starts to present both an opportunity and a risk, which are obviously sides of the same coin. But by going deeper, reaching deeper into the market as for your supplier partnerships, if you're willing to take that risk and do the diligence to get it done, you know, we are finding that that's really helpful. And then the last point I would make is that we are very knowledgeable in the industry about the technology risks of solar, to the point where some investors would say not really much technology risk on solar. We need to get there on storage.
We've done about four gigawatt hours of quality assurance work on energy storage equipment mostly in China, but also in South Korea. And we find a pretty wide range of things there. You know, we do a factory audit, we find an average of about 12 different issues in that factory audit. I don't think that same is true when we do one for solar. So there's a lot to be done there in terms of building that investor confidence in the storage technologies before we can tap into some of those revenue streams. And before we can pull some margin out of a more diverse supply chain
Daniel Finn-Foley:
And that technology question ties into the revenue portion as well, because if you have degradation, if you have unexpected outages, obviously that takes the revenue piece and gives it a nice little haircut. Yeah. Louise, I think you were going to weigh in a moment ago. Sorry if the conversations move fast, there's a lot of things to talk about. Go ahead.
Louise Pesce:
So I was actually going to talk about the technology side and Shawn gave me a couple of good points to build on. And that is that you know, if you're looking for financing, revolutionary technology is not going to be available for non-recourse financing. Evolutionary different. Uou know, over the past 20 years as a lender in the space, we have become very familiar with the advancements in both thermal technology, solar and wind. We've seen, you know, just look at the size of wind turbines and how those have expanded. I mean, we just closed the vineyard wind deal about 10 days ago, 13 megawatt turbines. That is evolutionary, not revolutionary, it’s the next stage of the turbine technology. Same thing with panels, we went bifacial, different you turbine blades on thermal.
So for storage, I think the question is, what is next? Is a new technology revolutionary? What do we need to see to make it proven, as we like to say. And so that is going to factor in very much to the growth of the industry. And also the other element that was mentioned very briefly was kind of procurement. Are we going to actually see bottlenecks over the next couple of years and actually procuring the batteries to be able to build out your projects? Because there are so few suppliers and those tier one suppliers that lenders want to back because they can stand behind the warranties, are they going to be able to supply all of the needs globally for these large scale projects? So I throw that open for the conversation.
Daniel Finn-Foley:
Yeah. Jacqueline, I'm curious if you have any thoughts on that?
Jacqueline De Rosa:
Well, on the last piece, I do think that we will move past just the tier one suppliers, because at Ameresco we look at the other suppliers as well. So I think it's just like any other industry, it will happen. And I think that there's just, the demand will increase and the supply will increase and the quality will increase. So that's my perspective on that. And I guess on the other topic, in terms of, I think things are becoming more standardized than what we give it credit for. So Ameresco is active with universities, hospitals, schools, municipalities, and we're seeing those traditional ESCO type performance contracting customers start soliciting for storage and solar as part of those types of contracts. So it's more of a design build and then a service agreement, an operations agreement that has performance requirements.
So it's not all just PPAs anymore. I'm also seeing, utilities, both investor owned utilities and municipal utilities looking at the same kind of construct, the EPCM as opposed to going to a PPA. So I think that there's an appeal to have a single credit worthy counterparty to be able to build that project, and then be able to operate and maintain it according to very specific availability and performance requirements and commissioning and all those things that need to happen to alleviate risk to the buyer. So I just think a lot of things are happening and I'm seeing a lot of standardization. And when there is not standardization in a contract, like in the operation side, then a company like ours who has done this type of work can replicate it for another customer. So I see a lot of hope in both areas in contracting and in terms of new supply as well, Louise.
Daniel Finn-Foley:
So that does tie into a question that we have from the audience a bit, when you're talking about PPN, moving beyond these PPA's. There's a question from Mohammed on strategies that you can take to attract off-take potential for your projects. So I may throw this the developers in the audience first. What can you do that's going to actually really attract off-takers. And how does there maybe approach to identifying a project differ from say an investor or other entity as well?
Gigio Sakota:
I guess I'll start with that. And you know, I'll go with the basics of understanding the market, understanding the customer, understand the regulatory environment. And sometimes the customer come with you with one idea of what they want, but they may not have the latest information. Right. And so going to what Jacqueline said about things being standardized, you know, if they ask for a three hour battery, we can do that. But a three hour battery is not 75% of the cost of a 4-hour battery. And so, you know, but they may think it is and say, okay, well, you know, when I do my math, that is the best project for me. And I said, really, to the extent you have having that open conversation of what they're really looking for, but sometimes just kind of have to guess, so like, well, what is really their need? And, you know, how can I steer them towards something that actually meets their need better? And so it's, how are we going to size that PV versus battery? How are you going to size the battery? And then just kind of running through the math and scenarios, looking to the tea leaves, but trying to understand how different options may actually benefit the customer.
Shawn Shaw:
I actually have a follow up. I thought Jacqueline raised a really good point. So if I can. The contracting aspect is one that I, I failed to mention, but it's, it's really an excellent point, Jacqueline. I think there's a bifurcation in a way in what we're seeing in the market. There’s a class of sponsors that are very keen on a heavily packaged agreement. They have an LTSA, it's set for 20 years. They know what they're getting, it's very predictable, but it's also expensive. There's another class of sponsors that's almost the complete opposite. They are, let's call them a little more scrappy, a little bit more willing to take on integration risk, and they'll go out and they'll do self-procurement, they'll do self-integration. They'll do a lot more of the construction risks themselves. And so in terms of, kind of coming back to the points Lance was raising about, where do you find your margin to be at best in your asset class? There's a whole group of folks that think they can find that by building a better mouse trap on the integration side. So it is interesting that you do have this sort of two worlds, one very standardized and very predictable for a battery system. And another, that is still willing to be adventurous and creative.
Andrew Mazze:
Yeah. I think that's a keen observation, Shawn, and kind of along the same threads of a point I was going to raise earlier in that, does this market compress down to like a very low cost of capital years to commoditize bond, like project, right. I don't think it can, and I don't think it will because I think there'll be different sort of folks, right. There'll be folks that will want to chase the more ancillary service revenues and act like a gas peaker and to borrow the previous reference within the market. And then I think there's going to be, you know, market construct redesign, that ultimately there'll be more and more procurement of utilities looking for issuing RFPs to find storage and are willing to sign a 15 year contract. And so there's going to be a spectrum of those type of opportunities that are, of course, there's going to attract different class of capital.
Then the question is, you know, where in that are, from my perspective, of where are you investing? Are you going to invest with a developer kind of at the front end of it or at a platform level, or are you going to invest that kind of the commoditized safe 15 year, you know, RA contract project and the associated returns with that because all of those projects in there are still taking some of these same uncertainties of a market redesign risk, taking the same uncertainties of technology risks, potentially lithium-ion becoming obsolete in 10 years or whatever it is in favor of flow or solid state batteries. Right. And so you're taking that, those similar risks that we don't have our arms around, but you could be getting different return profiles within. A lot to think about there, but that's kind of how we've been approaching it as well.
What Would It Take to Feel Comfortable Investing in Storage Projects Using New Technologies?
Daniel Finn-Foley:
Let me throw this way forward and then do a little challenging questions because these discussions have been great. And talk about that sort of obsolescence and new technologies. Let's say that you're either from a technology perspective, as a developer, as an investor, a couple of years from now, you're looking at a project that say 8, 10, 12 hours, 150 hours maybe with a non-lithium-ion technology, bidding into some sort of market or providing some sort of long duration storage opportunity. What would it take for you to feel comfortable investing your time or investing money into a project like that? That's a tricky one, who wants to earn the brownie points of diving in?
Jacqueline De Rosa:
I can give a few initial remarks. I think that it is imperative for the market design to accommodate that type of solution, because whoever is going to be buying it is going to have to justify that procurement. So coming from a regulatory background before jumping in on this commercial side at Ameresco, I think that is really imperative. I guess the second thing would be the technology risk. There would have to be quite a bit of the evidence, you know, now coming more on the commercial side that the technology works, to put it very simply.
Daniel Finn-Foley:
We got comfortable with it for lithium-ion what's it going to take to get comfortable with it for a flow battery or a mechanical storage system?
Gigio Sakota:
One point I'd like to throw out there is, I mean, obviously obsolescence is a concern, but you know, I would argue that, and even ignoring climate change, but I would just argue that coal plants are obsolescent because they're just too expensive, right? Like it's at the margin, they're not in the money. But we still have significant portion of energy being produced by them. And the thing is that even if a technology gets old from a perspective, you can just kind of flip a switch and immediately replace it with a shiny new thing. Just because, one, you're not going to get the volumes from suppliers. Two, I'm looking at this side behind me, it's a great site. We didn't develop it in a year. It's, you know, five years is really fast if you go from scratch. And sometimes you're working on a site for 10 years to get something in place, whether it's construction permits, whether it's finding an off-taker, whether it's supply chain things. And so it's definitely something to think about. I think, you know, lithium ion is a dominant technology right now. 10 years from now, I have no idea. It may be history, but it’s just not as quick to replace it as you think.
Andrew Mazze:
Yeah, I think that it's not going to be, it’s interesting point because I don't think lithiu,-ion just goes obsolete and it just doesn't work, right? Or just kind of like, oh, we don't want that anymore. It's more of the situation of you now as a lithium-ion plant, what's my heat rate relative to this new technology, right? Essentially just using heat rate as a kind of crutch here. Like in other words, it's the market revenues that I can earn now as existing with lithium-ion on just being compressed so far that, you know it’s marginal for me to operate. Or am I just been pushed so far up the dispatch stack, relatively speaking here, that it's not economic for me to run, or if it is, I'm not really getting much annual cashflow.
And I think that's why we look at like how quick is my payback period when I'm making an investment today. And is it six years? Is it 10 years? Is it 20 years? And that's kind of what's factoring that decision because I don't know, like I really don't know, lithium-ion might only be around for 20 years and all these other things are just ideas, or if it'll be, you know, five years. And I think that's where we're trying to just make the assessment because it's more of that risk rather than our plant just doesn't work anymore or just isn't going to be around anymore type of risk.
Shawn Shaw:
I don't think we should downplay the modularity of the technology either. So as you know, lithium ion is, first of all, it's a broad family of chemistries, it's not monolithic at all. So to the extent that we might transition say from NMC to LFP, to sodium ion or to NMX, there are chemistries, and within chemistries there are lots of innovations and headroom still to go. The point being that the modern design of everything from battery modules up to design of utility scale plants, there's a certain amount of modularity and repeatability to it. You see modularized containers. Those can be replaced with other AC or high voltage DC connected equipment that might be running a totally different chemistry of battery at some point in the future. So long as you can line up the BMS and these other things that works. We've done it with solar. Solar modules have gotten much larger. The cell technology within those modules has evolved continuously over the last well, really 50 years, but let's say the last 10 years in particular. So I think it might be a bit of false pessimism to say that we're facing obsolescence for battery energy storage systems, because there's a proven adaptability in the technology and in the people implementing it that we've seen so far.
Andrew Mazze:
That was my argument when we did some of these investments. It's just plug in, play, right, put a different one. And it's just a matter of what the cost is.
Shawn Shaw:
Well, I like to make it sound more complicated than that, but yeah, basically that's all there is to it.
Key Takeaways on Challenges and Opportunities Around Identifying Storage Opportunities
Daniel Finn-Foley:
Fantastic. I want to put our panelists on the spot here. I know we only have a couple of minutes left. So my challenge to everybody, obviously there's going to be conversations around this panel afterwards. Often it would be at the water cooler, oh I couldn't attend the identifying solar and storage opportunities, what did you hear from it? Now with hybrid work, just like hybrid solar and storage, wind and storage, gas and storage. It may be a kitchen sink conversation moment. So for people who are watching, what is the key, just 30 second takeaway that they should think about when they talk about the challenges and opportunities around identifying storage opportunities? And we'll go with the introduction order. Gigio what do you think for a 30 second, what's the key takeaway?
Gigio Sakota:
Well, I think for opportunities for storage, one thing to think about there's the, I'm going to call it the offense side of it, you know, Hey, there's real aggressive market returns you can get right now, and so can I get in on it and try to get a piece of that? I think it's important to think of the kind of defense side of it too. So highly to special assets if prices go to the drain, negative presses are great for storage, you're getting paid to charge. Right. And so there is sort of the kind of offense and defense part of it.
Daniel Finn-Foley:
Love that, offense and defense. Shawn?
Shawn Shaw:
Yeah. I would say, think about supply chain and technology roadmap. That's where you have an opportunity to think beyond the current tier one suppliers to tier two, tier three, and you can have some very creative partnerships with those suppliers to guide them into the market, be a cornerstone consumer or customer of their systems. But you've got to do a lot of careful due diligence and you've got to drive the need for high quality and safety in the space at the same time.
Daniel Finn-Foley:
Yeah. Quality. Absolutely. Lance, what do you think?
Lance Jordan:
So I think I go back to my opening that batteries aren't asset class that feels like they're here to stay. I think originally it was co-located or had to have some sort of special purpose. I think today, whether it's merchant contracted standalone with solar, with another technology it's an asset class, it's attractive. It's only going to grow in size and applicability. I think what's important from an investor's perspective about finding the right kind of attractive project for the investor or for the developer who wants to continue to fuel their development engine and recycle capital. The relationship and track record are the most important things to think about working with the investor and their successful track record of continuing to do deals with parties they've built relationships with and the same part about the developer, developing and selling projects that have operated as expected and are designed as you anticipate. And just building upon that success.
Daniel Finn-Foley:
To some extent past is prologue. Fantastic, Andrew?
Andrew Mazze:
Yeah, sure. I mean, I think echoing some of those comments, it's an exciting space for us as well. And we're really optimistic about the future opportunities that are going to come from it as the market evolves. There'll be additional kind of revenue constructs and off-take structures as some may fall away and new ones will certainly come in their place because the technology and kind of the flexibility that storage offers in whatever configuration is required to essentially enhance and to make possible the clean energy transition that is kind of underway right now. And so with that will come a bunch of opportunities and we're going to continue to ,as Lance had mentioned, try to find those relationships and alignments with key strategics, owners, operators of these assets that believe in that as well, and our best position to operate them and drive value going forward.
Daniel Finn-Foley:
Great. Louise, what do you think, what should we talk about at the kitchen sink?
Louise Pesce:
Wow. Well, everyone said everything that I was going to say It's about partnerships, flexibility and choosing your markets wisely because they are so varied across the US and internationally. I mean, there's not just the US, we can look to experience internationally, especially if you're looking at new technology. Look to see is there an advancing technology elsewhere in the world that might've been utilized that you can then bring to the US.
Daniel Finn-Foley:
Wonderful. Jacqueline, last thoughts?
Jacqueline De Rosa:
For potential customers who are considering energy storage projects, it is very doable today. It's proven that the benefits outweigh the costs, there are contractual mechanisms that can alleviate and allocate risk. And I would say that new technologies are on the horizon, longer duration storage is going to be viable. We have a lot of money going into that from the US government. And I think we're going to see that become available and able to contract and build in the near future, at least by 2030.
Daniel Finn-Foley:
Yep. This market's only just getting started. That's what I would say. I ran over a little bit, apologies for our host there for running a couple of minutes over. I'd like to say a special thank you to our conference hosts and Jo for organizing and taking care of all of the administrative pieces here. Thank you so much. And thank you so much to all of our panelists. This has been a fantastic discussion.
