The year 2015 broke records for energy storage system (ESS) installations in North America. By capacity, 90% of 2014 energy storage deployments were in front of the meter while 10% were behind the meter. Seventy percent used lithium-ion batteries. These projects occurred in US states with supporting policy, regulatory drivers and wholesale market designs -- and storage qualified for the solar investment tax credit (ITC) when it demonstrated it was charged with 75% or more solar energy.
Energy storage is no longer unproven or immature; the market has demonstrated otherwise. As more solar-plus-storage projects go into the field, what does this mean for due diligence procedures?
Familiar solar finance terms like “non-recourse debt” and “tax equity” also apply to ESS finance. Just as risk in solar projects depends on the longevity and reliability of the technology, cost and benchmarking, energy storage due diligence does, too. ESS due diligence today builds on the independent engineering (IE) practices established for wind and solar.
Know your risk factors
ESS risk has many dimensions. Photovoltaic (PV) solar systems introduce duty cycles to the battery that should be evaluated to determine if the battery can meet their performance requirements. Battery life depends on the duration of time it spends at states of charge, the temperature at those conditions and other stresses such as a deep discharge or high power events. Software control layers will limit these parameters.
First, the battery management system should optimize the battery lifetime and keep the system within safe limits. Second, the command and control layer (which optimizes economic dispatch) should not prematurely degrade the battery. These control algorithms may involve weather forecasting, predictive tools based on historical demand, lifetime predictors for the energy storage device and decision trees that make tradeoffs between instantaneous economic benefit and incremental degradation. Controls have a direct impact on the project revenue and are a critical part of project risk. It is also important to have the quality of components and backstops in place to assure reliability.
Supplier agreements can be a significant factor in assuring that the ESS provider will honor a future warranty claim. All these criteria are important for project developers to consider as they are structuring the project lifetime and delivery guarantees.
What to do to be truly diligent
A typical ESS review includes documentation, manufacturing capability, designs and data. It also includes interviews with business principals to assess the credibility of the company. Sometimes these reviews rely entirely on the vendor information, so a diligent IE should make efforts to confirm the most critical facts, for example, by visiting the manufacturer facility to witness testing or manufacturing firsthand, or perhaps by reviewing the patent literature. If the technology is in doubt, independent testing or economic models may be required and these will extend the due diligence process. A good IE should be able to perform this testing or at least witness it at the independent lab.
ESS technologies are differentiating themselves from the market with aggressive claims. It is critical for the IE to pierce through the marketing and evaluate the technology objectively. A clever IE can quantify the benefits of the controls, safety and performance and understand their connection to project risk.
Sometimes this may require testing or modeling. The IE should be able to quantify whether a long duration battery or a high power battery is appropriate for the project, whether the stated advantages of the storage technology are relevant to the project context or if the cost optimization is dependent on up front capital or total project lifetime. In all cases, the risk factors are an engineering tradeoff and the IE has to see how that tradeoff is met and evaluate the result with objectivity. The IE should understand the technology just as well as the vendor.
Independent data goes a long way to bolster an IE report, but it must be relevant to the project context. For example, it does little to state that a system is a “safe” technology and to cite the standards it has passed. It is more valuable to show how the system meets or exceeds the pass/fail criteria of the test and whether or not those criteria are relevant to the project at hand. In the project context, the investor seeks to understand how the technology makes the investment safer. The equipment provider seeks verification of unique claims that may make them more competitive in the market. The third party independent engineer seeks to meet the needs of both and can do this most effectively with independent data in the relevant context.
Solar precedents show the way
The lessons learned from solar in the areas of technical due diligence are relevant to ESS. Even though understanding storage technology and its risks can seem challenging, solar precedents help to demonstrate that storage, too, can be financed and the IE practices are there to support it.
Written by Davion Hill, Energy Storage Leader, North America at DNV GL