Massachusetts wants to use a forthcoming solar program to kick-start its energy storage industry.

The Solar Massachusetts Renewable Target (SMART) will deploy 1,600 megawatts of new solar capacity in the coming years, pending regulatory approval. The incentive contains an adder that pays more for solar generation tied to energy storage.

The storage industry has barely gotten started in Massachusetts, but it will play an increasingly valuable role by balancing out the gigawatts of new wind and solar the state has planned. Those intermittent resources are already reshaping the region’s electricity consumption.

"If we’re going to double the amount of solar we have, we really need to make sure storage is part of that, in order to manage it and make sure the system can handle that much additional distributed generation," said Mike Judge, director of the Renewable and Alternative Energy Division at the Department of Energy Resources.

"The SMART program is probably the biggest opportunity that is going to be available out of the gate for storage in Massachusetts," he added.

The storage adder, though, isn’t large enough to support storage investments on its own. Developers will have to find other revenue streams in a state with few time-differentiated electricity rates.

Creating a new business model is challenging on its own, but the thriving storage industry that Governor Charlie Baker has prioritized might never materialize if utilities succeed in controlling the capacity rights of batteries deployed through this program.

The regulatory jockeying is well underway this summer, and the outcome, expected in coming weeks, will determine whether Massachusetts becomes the next major storage market after California, or whether it misses out on that economic and grid modernization potential.

Mind the revenue gap

Up to 1,766 megawatts of storage could deliver net benefit to ratepayers, DOER found in its landmark State of Charge report from 2016. But the report laid out a number of structural barriers that need to be addressed before storage developers can earn compensation for those benefits.

Until then, the storage industry suffers from a revenue gap, resulting in compensation below the value it provides to the grid.

The storage adder in the SMART program is intended to address that gap in the near term, not to constitute the entire revenue opportunity for a project.

“The Department expects that most Energy Storage System owners will seek out other monetizable revenue streams in order to facilitate the financing of their solar + storage projects,” DOER wrote in a description of the program.

There are a few qualifications. The storage must:

  • Have at least 25 percent of its capacity paired with solar
  • Deliver at least two hours of energy duration
  • Have at least 65 percent roundtrip efficiency
  • Deliver 15-minute interval performance data
  • Discharge at least 52 complete cycle equivalents per year

That last one bears some explaining, as there is no obvious linkage between weekly discharge and optimal battery operations for the good of the grid.

A discharge requirement divorced from actual price signals can be harmful to project economics. Cycling the battery degrades it incrementally, so battery owners have good reason to make each cycle count.

The once-a-week requirement is how DOER wants to ensure that the batteries that benefit from the subsidy will actually participate in the electrical system, rather than sit around waiting to deliver backup power in an outage. More detailed operational guidelines are coming soon.

“We’re designing our guideline to ensure that the facilities operate in a way that provides maximum value to ratepayers,” Judge said.

In customer-sited projects, the customer has good reason to discharge stored energy during times when electricity is most expensive, reducing bill payments but also lessening stress on the grid. Thus, the customer acting to minimize the electric bill contributes to lowering costs for all ratepayers.

In Massachusetts, though, time-differentiated rates, which charge more during on-peak hours than off-peak, are still rare. For developers to make use of the storage credit, they have to have some other revenue stream.

In their view, one of the most promising options is under threat from the utilities.

Fight for your right (to capacity)

Massachusetts’ earlier solar net metering debate yielded a compromise: Solar developers handed over their systems’ capacity rights as a way to pay down the cost of the program to ratepayers. Distribution utilities could bid those assets into wholesale markets and use the proceeds to reimburse ratepayers for the net metering expenses.

That didn’t work out as planned, because the utilities chose not to use those capacity rights.

Eversource did not assert title to the net-metered capacity rights "because the Company did not wish to take on the administrative costs and risks associated with registering those assets in the Forward Capacity Market," the company explained in a filing.

National Grid asserted title to net-metered capacity, but chose not to bid into the market, citing risks posed by doing so.

Indeed, it would be risky for a distribution utility to bid capacity three years in advance, when the operation and maintenance of the asset is controlled by a third party.

It would seem that this situation works well for no one: The utility fears it's too risky to capitalize on; the owners of the solar can't bid their own resources into the markets; ratepayers who subsidized the solar lose out on the potential for additional supply to lower capacity prices, not to mention revenues to reduce the costs of net metering.

While recognizing the past inaction, the utilities nonetheless assert that once the SMART program incentivizes storage deployments, they should control capacity rights for that too.

Storage industry professionals described this proposal as a potential existential threat to Massachusetts' budding storage market.

“If we can’t control when we charge or discharge the battery, we can’t finance the project,” said Juliana Mandell, director of market development at Engie Storage.

To finance a commercial storage system, for instance, a developer needs to show it will successfully reduce the customer’s energy bill. If the utility has capacity rights to the battery, it could dispatch it for its own purposes right before the customer’s peak hits, leaving the company defenseless against a hefty demand charge.

Utility dispatch of a home battery could leave it depleted before a blackout, eliminating the backup function that appeals to customers in the storm-prone Northeast, said Chris Rauscher, Northeast director of public policy at Sunrun.

“Utilities reaching behind the customer meter and taking rights to home solar and battery systems creates uncertainty around the value and dependability of the assets,” he noted.

For Ted Ko, director of policy at commercial storage provider Stem, the entity that controls the storage matters even more than who owns it.

“Whoever is controlling it behind the meter has to know how to do that optimization,” Ko said. “That’s a software thing that utilities have very little expertise in. Our whole company is designed around that idea.”

The way out

The regulators at the state's Department of Public Utilities have some options to weigh. The challenge is how best to unlock the systemwide benefits that energy storage could provide, without saddling ratepayers with excessive costs to pad the profits of storage companies.

The decision could keep with tradition and give Eversource and National Grid capacity rights for the batteries as a trade for subsidies paid. That would be a bit strange, since the subsidies go to the solar generation connected to a battery; there isn't any subsidy payment based on the discharge of the batteries.

If the utilities behave the way they did previously, they will not act on the new rights; developers, unable to finance new systems, will look to other states with greater assurance of benefit from their investment. New York, which just released a robust storage road map and features strong political support for the industry, could be a welcome destination for Northeastern energy storage developers.

It's hard to see how the SMART program helps launch the Massachusetts storage industry under these circumstances. Instead, the grid absorbs a lot more solar and wind power without the flexibility of widespread storage devices that Governor Baker prioritized.

The regulators alternatively could give the utilities dispatch rights but require that they actually use them. After all, the point of the adder is that storage can benefit the distribution grid and the transmission grid.

The Attorney General's office supported this possibility, while allowing for the utilities to recover their costs if capacity market participation incurs penalty fees. Proceeds from the market payments would go back to ratepayers.

Under this approach, the utilities could perhaps contract out operation of the batteries to third parties that specialize in that sort of thing. This would fuel storage industry activity, but in an indirect way subject to potential bureaucratic gridlock.

Lastly, the developers could keep their capacity rights to play the markets, setting up a more robust competitive landscape for distributed energy. If the DPU determines the cost of the program will be unfair to ratepayers or overly generous to storage providers, they could impose a revenue-sharing agreement.

A new round of comments is due Monday, which will shed light on what sort of middle ground the parties can stomach.