Energy storage overall remains in a state of becoming, not quite yet a market, but undeniably relevant to the grid. Of the various subsets of the industry, though, commercial and industrial (C&I) is the hardest to fit into a clean narrative.
Residential storage saw several quarters of exponential growth, opening a pathway to wider consumer adoption. Utility-scale storage broke out of California and into dozens of states, with record-breaking projects announced seemingly every month now.
C&I hasn’t followed a straight path. Sure, its 78 megawatts deployed in 2018 in the U.S. achieved a 53 percent growth over 2017, and its fourth quarter set a record with 30.5 megawatts and 78.2 megawatt-hours installed.
But the sector got there through fits and starts, with each major quarter followed by a plunge in installations. Despite the years of talk around the economic case for batteries in businesses, 93 percent of the market remains cloistered in California, which not coincidentally offers the longest-running incentive for behind-the-meter storage.
Despite these ambiguous indicators, new competitors are entering the space or ramping up activities, and new geographic markets are gradually opening up.
This week in Storage Plus, we’re taking stock of C&I storage in North America, assessing the geographies that merit attention and the trends defining the market.
Regional markets of note
This is where almost all storage for businesses happens. California alone built 72.7 of the 78 megawatts of C&I storage installed last year. The Self-Generation Incentive Program sweetened the deal, and early utility contracts allowed market openers Advanced Microgrid Solutions, Green Charge Networks and Stem to launch their stacked revenue-stream business model. Other markets are slowly opening up, but the Golden State will stay on top, just like it is in basketball and weather.
State leaders have prioritized a rapid uptake in renewables and a parallel expansion of energy storage. Since the market alone won’t compensate storage providers adequately, state energy authorities are shelling out money to seed the market. The ACES grants pushed out $20 million, and the new SMART incentive for solar includes a lucrative adder for projects that add storage. Massachusetts has a strong base of solar installers that can jump into storage, and a cluster of battery companies that have spun out of MIT. Currently the state lags a bit behind New York in actual deployments, but expect competition between these neighbors as they race to build the premier East Coast storage market.
It's definitely not a market yet, but Mexico inaugurated its first large-scale storage project last year, which turned out to be a reliability asset for an islanded microgrid at a car factory in Monterrey. The factory owner wanted to take power quality into its own hands, and the fast-responding battery serves to back up that system. There are plenty more factories in Mexico that could be interested in such a setup.
After initially keeping storage at arm's length, Governor Andrew Cuomo fell hard for this technology and elevated it to a leading priority for the administration. The state energy bureaucracy opened up $280 million in funding last month, the first block of which has already closed. New York City has tons of demand for storage products, but the high safety standards of the fire department have kept customer-sited development to a minimum. A regulatory effort to shut down the dirtiest peaker plants could open up space for distributed alternatives to provide peak capacity.
Developers are salivating over the demand management opportunity posed by this Canadian province’s Global Adjustment Charge, which makes large customers pay for their use during system peaks. This drives project economics for larger C&I projects, like Convergent’s 10-megawatt/ 20-megawatt-hour behemoth at a petrochemical plant there. That developer recently created a joint venture with Shell New Energies to sell large-format industrial storage in Ontario, starting with projects at two Shell plants. Last summer, Stem also raised a CAD $200 million financing facility from the Ontario Teachers’ Pension Plan to develop projects there, although it’s not clear if any have been built yet. Despite the business potential, developers report that permitting and interconnection can be very challenging there.
Formative industry trends
C&I sales are incurably lumpy
When you see an industry’s deal flow vary widely from quarter to quarter, the first instinct isn’t to call that a mature business that looks attractive for parking one’s capital. Those fluctuations aren’t going away anytime soon, said senior analyst Brett Simon, who tracks behind-the-meter storage for Wood Mackenzie Power & Renewables.
"C&I will, by its nature, continue to be a bit of a lumpier market,” he said.
This stems from the sales cycle, which is often long and unwieldy. It can take two years or more to move from customer acquisition through project design, interconnection and construction. Unpredictable delays in any of those stages make it hard to count on regular rates of project completion; the battery supply crunch of 2018 made matters worse.
As the industry diversifies geographically and increases overall deal count, this volatility should calm down somewhat.
Consolidation among European energy majors
2017 was the year European energy giants started buying their way into the U.S. storage industry, with a heavy focus on C&I. Enel acquired Demand Energy, Engie picked up Green Charge, Wärtsilä took Greensmith. EDF explored the acquisition route, but decided to build its own platform in-house.
Corporate integration takes time, especially when it transpires across oceans, so 2018 was relatively quiet as these companies figured out their new structures and strategies. This year or next, we may finally see them flex their muscles.
“It’ll take time for these large European energy majors to ramp up in the U.S. market, but once they start bidding aggressively, they’re going to eat people’s lunches,” Simon said.
These companies bring massive balance sheets that allow them to finance projects internally, simplifying the thorny process of storage project finance. Moreover, these brands convey staying power: Investors who might doubt a venture-backed startup’s longevity can trust that a billion-dollar global enterprise will survive to honor contracts in 10 or 15 years.
That structural advantage for the majors calls into question the path forward for standalone storage startups. The agility and innovation that helped them win early contracts may not be a match for the brute strength of these larger entities.
"In the next few years there's still a place for the trailblazers, but in the long term these smaller companies will either get acquired or die," Simon predicted.
Early leaders pivot to software
For a while, conversations around commercial storage largely centered on the key three of AMS, Green Charge and Stem. Now Green Charge has morphed into Engie Storage, and AMS and Stem have changed their focus from development to software.
For AMS, this was a matter of necessity. As I reported last year, the company had trouble managing the working capital required to deliver utility contracts over many years. After Susan Kennedy invested her own savings to keep the company afloat, she reoriented the business around energy control software to perform economic optimization and aggregated grid services.
Stem, which claims more than 900 storage systems in its network, has embarked on a similar transition, foregrounding its “big data and machine learning” over the work of battery design and installation. “Think brain power — not battery power,” the website now proclaims.
In practice, that means channel partners are playing a larger role in finding customers and carrying out storage development, and Stem provides guidance and the software to dispatch the batteries economically. In theory, this allows each type of company to play to its strengths.
“If you’re a solar developer, you haven’t been focused on software controls,” said Ted Ko, policy director at Stem. “Now, if you want to move toward dispatchable solar and other use cases, bringing software to manage the output of the facility and how you play in different markets, that’s what we’ve been doing for years.”
Still, these storage pioneers’ shift from C&I developer to software platform, combined with the looming presence of the European energy giants plus Shell, portend an end of the market’s early days and the start of something different.
That’s not necessarily something to be sad about, Simon noted.
“These are companies that blazed a trail and built storage projects in the early years of the market and showed its legitimacy,” he said. “It’s kind of the cycle of the market — look at solar getting commoditized and the big guys coming in.”
The question that hasn't been fully answered yet is what role startups and innovators can play in a commercial storage market more heavily saturated with major energy companies. Stem and AMS have placed their bets.