The U.S. commercial energy storage segment is growing faster than both the residential and utility-scale segments. GTM Research’s latest report provides an economic analysis of the U.S. commercial storage market and finds that commercial storage is financially viable in just a handful of markets today. However, the report notes that by 2021, commercial storage will make economic sense in more than a third of U.S. states.
We sat down with Ravi Manghani, GTM Research’s Director of Energy Storage, to discuss the analysis.
MM: Before we dive into some of the findings, can you give us a quick overview on the methodology of your commercial storage economics study?
RM: To begin, we collected electricity rate tariffs for two customer types in the largest utility territory in each of the 50 states and Washington, D.C. This includes energy charges, demand charges and fixed charges, in addition to idiosyncratic rules on applicable peak, partial peak and off-peak hours. Additionally, we used OpenEI to gather hourly load data across 102 customer loads.
We applied appropriate assumptions for storage-system costs and characteristics as they relate to demand-charge reduction potential and computed end-customer economics across all customer loads from 2016 through 2021.
MM: So, does commercial energy storage make financial sense today?
RM: We looked at economics for 1-hour and 2-hour storage systems for each market and customer type. The optimal system sizing will be a function of underlying rate schedules, load volatility, and incentives when applicable. Across the two customer types, 1-hour systems had better economics than 2-hour systems. For a 1-hour system, the internal rate of return (IRR) was higher than 5 percent in just seven state markets today. States with the highest IRRs for systems of all sizes include New York, California, and Michigan.
Now an IRR of 5 percent in and itself doesn’t mean these markets will grow multifold instantaneously. In fact, a 5 percent IRR may not even be sufficient for financiers to line up millions of dollars for commercial storage projects. It is, however, an important threshold, a starting point, when storage starts to look appetizing for certain customer types that value other benefits that storage provides, such as reliability and resiliency.
MM: In the report, you find that commercial storage will be “in the money” in 19 states by 2021. Can you give us a sneak peek at some of the more surprising states?
RM: Let’s get some of the less surprising markets out of the way -- California, Hawaii and New York will continue to prosper due to their high retail electricity rates. Outside of these three markets, most of the Northeastern states are right there on top. There are a few interesting states that pop up as attractive in our analysis -- Kentucky, Michigan, and New Mexico, to name a few. Now I don’t think the industry should take these markets for granted just because commercial storage economics look attractive. As the industry has seen in already-attractive markets like California and New York, there are other hurdles beyond economics that impact market viability. These include interconnection policies, safety and fire codes, and "authority having jurisdiction," or AHJ, requirements. These and other issues that have constrained commercial solar growth will keep storage vendors and developers on their toes, too.
(Editor's note: More recent GTM coverage on which states are most attractive for commercial storage can be found here.)
MM: Your model assumes storage costs will fall by 8 percent to 9 percent annually. If history has taught us anything, we know that forecasts are sometimes a bit conservative when it comes to price declines for renewables. What happens if prices drop even faster than expected?
RM: We did provide an aggressive cost-decline case in the report. When we assumed 15 percent annual reductions in battery pack and storage balance-of-system costs, there would be 26 state markets where commercial storage is economically attractive.
Under this scenario, the majority of markets will require demand charges of $7 per kilowatt per month or higher by 2021 for favorable commercial storage economics.
MM: The report looks at specific use cases like restaurants and hospitals. Is there a specific customer segment you expect the most growth from?
RM: We chose restaurants and hospitals based on analyzing the load factor across multiple customer types. In short, in addition to looking at the maximum demand-charge rate, there are other factors that determine economics, such as load factor (amount of electricity consumed as a percentage of peak demand), which is a measure of load volatility. Anyway, to answer your question, the type of customer segments that are most likely to grow are the ones with relatively low load factor and which are in need of reliability. So while not all hospitals will have low load factors, these are, after all, 24x7x365 institutions, so they might value reliability and resiliency more than others. On the other hand, customers such as big office buildings likely see their demands peak up at around 5 p.m. when employees typically make a dash for the elevators (unless of course you’re a GTM employee and prefer to take the stairs!).
For more information on the Commercial Economics of Energy Storage in the U.S. report, download the brochure here or contact firstname.lastname@example.org.