The storage industry stacks its values everywhere it goes.
This happens out of both desperation and aspiration. Often, in the tough early days of the adoption curve, a project won’t work financially unless you get paid for a few different tasks simultaneously. But the ability to stack multiple revenue streams derives from the inherent variety of the functions storage can perform for the grid. To the extent that one piece of equipment can serve as a Swiss Army knife rather than a pair of tweezers, it promises more efficient grid investment and savings for those lucky ratepayers.
That duality of desperation and aspiration says a lot about how storage currently gets to market. A rarefied group of indisputably valuable projects can advance based on a single use case. Think PJM frequency regulation batteries or Arizona Public Service’s Punkin Center project, in which using the battery to meet rare peak demand for a remote desert town cost half as much as running a new wire out there would have.
For cases in which the monetizable value of a single function doesn’t pay the bills, value-stacking may work. In the early days of the distributed storage industry, the term “value stack” saw so much use on the conference circuit that it became a bit of a cliche (until those companies stopped showing up). Talk of value-stacking may sometimes paper over a flimsy business plan, but in other cases, it reflects the true potential of a modernized grid.
I bring this up because last week brought a new story to the value-stacking saga: Vistra Energy augmented its Oakland peaker plant replacement battery with two separate contracts delivering discrete services to different customers. In this case, community-choice aggregator East Bay Community Energy pays for battery capacity to fulfill its resource-adequacy obligation to the state, while utility PG&E pays for transmission services to fulfill its job of delivering power to the city.
This formalizing of the value stack through different contracts selling specific services felt new. It’s certainly the largest project to do this, as a 36.25-megawatt/145-megawatt-hour battery. And the multiple-offtakers concept feels fresh for the front-of-the-meter segment, which typically has an anchor contract and ladles in a bit of market participation to taste.
But the more I thought about how novel this was, the more I noticed subtle similarities and distinctions between the existing approaches. To sort it out, I broke down a taxonomy of the known varieties of energy storage value-stacking contracts, with representative projects for each type.
If the future of energy storage hinges on getting paid for a variety of uses, these early models show the best available pathways to achieve that.
1. Multiple customer contracts
A key challenge with monetizing the many roles storage can perform is that you often can’t find a single customer who can make use of all of them. That’s why the Oakland model is so intriguing: The wires utility pays for the transmission use, the power provider pays for the capacity it needs, and both of those contracts support the economics of the same battery.
As a rule of thumb, adding counterparties to a deal tends to increase its complexity. It’s not hard to imagine a scenario where Customer No. 2 has to drop out unexpectedly and Customer No. 1 gets left without a viable project to serve it.
The Oakland project hedged that risk by building on years of collaborative work involving the Oakland community, PG&E and EBCE, where they established a shared vision of how to proceed in a way that best served local air quality as well as climate goals and grid reliability. That process looks like an effective model for this type of deal, although it won't work everywhere.
When it comes together, this model makes value-stacking a more secure affair, by clearly defining the different battery services and locking in revenue for them. If the model gains traction, it could expand the addressable market compared to a model where single batteries only contract with single customers.
That’s not to say that this is the first time battery developers have stacked multiple contracts on a single asset. That was the original modus operandi for commercial storage startups Stem and AMS. For instance, they both won anchor contracts in utility Southern California Edison’s 2014 local capacity resource procurement, then sought out businesses in that territory that wanted to pay for a battery onsite to reduce their demand charges. The resulting batteries served two masters, much like the Oakland project.
What’s new about Vistra’s approach is that it’s taking the concept in front of the meter and doing it at a much larger scale — the battery will have more megawatt-hour storage capacity than the largest lithium-ion battery in the world right now.
But the origin of the contracts is different too.
The local capacity resource procurement that launched California’s distributed energy future was a massive one-off, designed to fill the gap in regional capacity from the impending closure of the San Onofre nuclear power plant. Around the same time, SCE’s second “Preferred Resources Pilot” handed out several contracts to energy storage companies, but that was a special program aimed at testing distributed resources, and even then it ran into trouble earning regulatory approval due to questions about its efficacy as a use of ratepayer dollars. Both came at a time when regulators were willing to approve major contracts for relatively untested distributed energy formats in a way that hasn’t happened since.
In contrast, the Oakland battery emerged from the involved companies pursuing business as usual in today’s business environment.
Every load-serving entity in California needs to pony up a certain amount of capacity; every wires utility needs to meet certain reliability requirements. Vistra had a legacy fossil fuel plant on its balance sheet that it wanted to do something new with. Showing that the multiple-customer battery works in mundane circumstances, rather than epic special procurements, means it’s more likely to translate to other settings, in California and beyond.
On a smaller scale, Sunrun is building toward the two-contract model in New England, where it won a capacity contract in the independent system operator (ISO) market. The solar installer signs up homeowners who want resilient power; then it will use its fleet to fulfill the contract with ISO New England.
2. One user, multiple uses
This one is an excellent choice if you’re a regulated utility that can actually account for many of the uses storage fulfills. Need capacity, but also want to correct power quality on a feeder with a bunch of rooftop solar? Or need a new source of peak capacity in an urban area where you can’t site a new gas plant, and which has a substation in need of an upgrade if demand keeps rising? Need capacity and have more midday solar production than you know what to do with?
The ability of vertically integrated utilities to put a dollar sign on several different storage activities has proven crucial to the technology’s adoption in Arizona, Nevada and Florida, to name a few.
But this construct works elsewhere, in those special cases where at least a few values are abundantly clear.
Off- or remote-grid settings count among those cases. Up in Alaska, the isolated Cordova Electric Cooperative got a battery from Saft to variously reduce operational costs from running diesel generators, take over frequency regulation from the hydropower plant, and complement the hydro baseload with fast-ramping capacity.
And technically, any homeowner who owns a battery and uses it for solar shifting and occasional backup power is enacting this type of value-stacking. For commercial customers, this model typically requires a quantifiable resilience value, for instance, if you’re running your own factory grid in Mexico.
3. One customer contract, plus wholesale market participation
Another classic. You hook a bankable customer to pay you a nice revenue stream without them needing the battery all the time. As long as you have juice when called on to fulfill the contract, you can make money in the wholesale markets as you see fit.
This is value-stacking, but where one value is formalized in a contract and the other values are internalized in the developer or project owner’s modeling for the project. It requires a willingness to take a risk because the merchant revenue will never be as reliable as the contracted revenue.
On a large scale, this model works for storage developers that also have energy market expertise. Vistra Energy’s Moss Landing battery will deliver capacity to PG&E under a 20-year resource-adequacy contract, but the diversified energy company noted it “retains energy and ancillary services value.”
Tesla’s Moss Landing battery, too, will participate in CAISO markets. Tesla probably has more experience than any other company in bidding storage assets at scale into multiple wholesale markets, thanks to its battery in South Australia.
4. One customer contract, plus uncontracted battery owner use
Vermont utility Green Mountain Power has a network of customers paying a monthly fee to host a Tesla Powerwall that gives them backup power in an outage. In turn, the utility uses the fleet of more than 1,000 batteries to shave its peaks, resulting in lower costs for all its ratepayers.
This is similar to the concept outlined in the preceding section, in that the system owner uses one firm revenue stream to balance out another more uncertain one. But this version works in places without wholesale markets, provided the owner has a way to internalize the value.
More to come?
These are just the early entrants in the taxonomy of formalized storage value-stacking arrangements. If you’re working on one that fits into a new category, let me know at email@example.com.