​
U.S. Market 
​

• 35 GW — New energy storage additions expected by 2025 (link)
• $4B -- Cumulative operational grid savings by 2025 (link)
• 167,000 — New jobs by 2025 (link)
• $3.1B — Revenue expected in 2022, up from $440M in 2017 (link)
• 21 — States with 20+ MW of energy storage projects proposed, in construction or deployed (link)
• 10 — States with pipelines greater than 100 MW (link)
• Leading state markets -- California, Hawaii, Texas, New York, Maryland, Massachusetts; details below
• California (2013, 2017) — Mandate of 1,800 MW by 2024 for the state’s big utilities (link)
• Oregon (2015) — Mandate of 5 MWh by 2020 per utility (link)
• Massachusetts (2017) — Statewide target of 200 MWh by 2020 (link)
• Maryland (2017) — First U.S. state tax credit for energy storage; 30% of the cost of a customer-sited installation; $750,000 per year available; available 2018 to 2022 (link)
• New York (2018) — Initiative to deploy 1,500 MW of energy storage by 2025; NY Green Bank could commit $200M for storage-related investments; New York State Energy Research and Development Authority to invest $60M in storage pilots and activities (link)

This September 2018 headline from Bloomberg sums it up well on the residential front: “Residential Energy Storage Surging, No Longer Just a ‘Cool Toy’” (link) Their impetus was two-fold:

• Q2 2018 residential energy storage installations exceeded large-scale battery installations at the utility level (first time ever)
• ​Q1 2018 residential battery installations jumped 9x versus Q1 2017 (link)

​
​U.S. Energy Storage Internal Rate of Returns for C&I
Source: Greentech Media

​
​U.S. Annual Energy Storage Deployment Forecast: 2012-2022E (millions of dollars)
Source: Greentech Media

​
Technology

• 95%+ — Lithium-ion’s market share for energy storage technology choice (link)  
• 75%+ — Lithium-ion battery prices decrease since 2010 (link)
• #2 — Rank for flow batteries in energy storage technology choice; flavors include those based on vanadium or zinc bromide; they will gain market traction for their use in long duration discharge scenarios (link)

Angel & Venture Capital Finance

We’re just in the first inning of this game. And for a guy who prefers basketball (born in Kentucky and living in North Carolina), that’s saying a lot.

There’s little doubt that Stem has been the big winner, with almost $300M invested to date. With its focus on artificial intelligence, aggregation of distributed batteries, and managing demand charges for commercial customers, it makes sense.

We’ve also seen a host of energy storage companies get gobbled up by bigger giants eager to get a headstart in the battery game. Enel bought Demand Energy. Wartsila snatched up Greensmith. And Aggreko consumed Younicos. See a longer list here.

No one knows what other innovations will make it to market, but we can guess that they will make storage easy and beautiful, take advantage of multiple revenue streams, serve more than one customer, and be loved by utility giants for the grid problems they’ll help solve.

Here some other statistics for your next dinner party:

• $5.9M — Average valuation of energy storage startups (mostly very early stage), per Angellist (link)
• 100s — Number of energy storage investment opportunities: N=275 (Crunchbase); N=324 (Angellist); N=889 (i3) ​

Corporate and Venture Capital Activity: 2013-2017
Source: i3 (Cleantech.com) ​

​Top Energy Storage Venture Deals: 2016-2017
Source: i3 (Cleantech.com)

​Project Finance

The scale of investments in energy storage project finance will continue to dwarf venture capital investments in the sector.

It’s also worth noting that non-recourse financing -- i.e., no corporate or personal guarantees necessary — is on the way. Three big project developers have won this unique benefit of the project finance model: Powin | RES | Green Charge.

However, limitations to quicker market expansion for battery project finance revolve around these investor considerations:

• Revenue certainty -- “Show me the multi-year contract.” — Revenue has often depended on a spot market (e.g., ancillary services in the PJM market). But investors need the kind of 10-year capacity contracts available in some parts of California.

 

• Revenue diversity -- “Are you ‘stacking benefits’?” — Energy storage projects are unique in their ability to serve multiple masters. However, technology, warranties, policies, and investor requirements (e.g., covenants in loan agreements) often limit projects’ opportunities for multiple revenue streams.

 

• Technology bankability -- “Lithium is king: 95% of the market.” — Surprise! But it’s still easy to be confused by the 70+ battery technologies out there and their tempting “shiny object” headlines, like electronic sirens in a modern day Odyssey.

 

• Strong warranty -- “How big is your balance sheet?” — Big vendors like LG Chem, Samsung, Panasonic, and Tesla have enough data to provide performance and full-wrap warranties. It’s easier for the buck to stop at these behemoths than at an exciting new startup.

 

• Creditworthy offtaker -- “Will I get paid?” -- It’s not unique to energy storage, but the number of offtakers that want energy storage solutions is much larger than those with long credit histories and strong credit ratings. But as you know, the lack of the latter is not the same as a high risk project.

 

• Scale -- “Is the sector big enough to be worth my time?” — If it’s too niche, mainstream investors won’t touch it. But things are changing quickly on this front.

 

• Backup power — “That’s a nice psychological benefit. But there is no real ROI.” — Most residential batteries are sold for backup electricity. However, solar self-consumption and the provision of grid services are two additional ways for these systems to generate stronger ROIs while also providing resilience for the 1% of the time that there are grid outages.

Here some other fun facts for your quiz later:

• 10-20% — Target Internal Rate of Return (IRR) for equity investors in energy storage projects (based on conversations with developers, vendors, and investors, plus research from GTM here and here)
• 8+ — Number of companies providing financing for residential energy storage installations (link)

​
13 Types of Value from Energy Storage
Source: Rocky Mountain Institute

​
Stacking the Benefits of Energy Storage
Source: Lazard

​
Conclusion

If you’re looking for a Blue Ocean Strategy play in clean energy, something with few competitors and new customers, then the time is nearing when you might be late to the party.

But don’t run away crying and defeated just yet.

With $100B of expected investment in the sector over the next 12 years, “the cup runneth over” with opportunities, whether your cup of tea be VC-stage innovation with hundreds of possible winners to choose from, or perhaps project finance targets for lower risk and much bigger capital deployment.

​--
Shout out to Thomas Kelley for the cool Volts photo.

By:  Dr. Chris Wedding, Managing Partner

I recently spoke about investing in energy storage at the SuperReturn Energy investor conference in Boston. In this blog, I hope to pass along 4 of my top 100 takeaways.

(OK, slight exaggeration, but productive indeed.)

Unfortunately, I am unable to also magically transmit the decadent Legal Seafoods’ lobster tails and sushi rolls from the sponsored dinner (#WeLoveLawFirms) or the conference bling (#MyKidsLoveGiftsFromWorkTravel).


1.   Natural gas is misunderstood.

First, low commodity prices will not always mean low power prices. The costs of distribution of gas to the power plant, plus the transmission and distribution of the electricity it produces take place on an ancient grid. (That’s a technical term. But Edison would recognize today’s grid if he magically reappeared in his Florida laboratory.)

Recent research suggests that the average age for power lines is 28 years, while the U.S. DOE quotes studies by the Brattle Group (for the Edison Electric Institute) estimating about $2T in investment needs for the grid from 2010 to 2030 just to maintain the service reliability.

Second, natural gas is not a perfect “bridge” to a low carbon future.

On one hand, its emissions factor (pounds of CO2 per BTU emitted when burned) is roughly 43% lower than burning coal (whose butt it is kicking).

On the other hand, the operational emissions factor for natural gas is infinitely higher than solar or wind (#DivideByZero). Also, methane leaks during exploration and distribution likely counteract its lower greenhouse gas emissions (compared to coal, that is) when combusted at power plants. As you know, methane’s greenhouse gas impact is at least 30x more potent than CO2.

Third, there are two giants in the natural gas ecosystem that see some writing on the wall, and I think they see lots of four-letter words there.

GE has laid off 12,000 workers in its power generation business, and now Siemens is considering selling off its natural gas turbine business, whose Q2 revenue was down to $114M from $438M in Q2 2017.

And with Bloomberg estimating 157 GW of renewables added vs. just 70 GW of conventional power in 2017, we can understand why they might be making those moves.

Having said all of that, I don’t pretend to live in a world of rainbows and unicorns. Conventional energy will likely be part of the global mix for many decades to come. Even in a world where solar and wind power dominate, this analysis shows that natural gas will have a large, though diminishing role over time.


2.  $1T of clean energy investment presents challenges for entrepreneurs and investors.

Most climate change scientists, policymakers, and private sector leaders project a need for $1T of low-carbon investment needed per year in companies and projects in order to keep global temperature increases below 2o C.

However, last year Bloomberg suggests that global clean energy investment stood at just $333B. By my math, that’s 67% lower than the amount of capital we will need.

To get there, we need at least two things:

1. Investor interest
2. Good deal flow

As for investor interest, it is growing.

When I first began speaking at the SuperReturn investor conference series three years ago in Boston, London, and Berlin, I was often part of the 1%. (No, not that 1%. I am a pauper compared to my colleagues in attendance who manage billions in capital.)

What I mean is that I was often the only guy talking about the future opportunities and threats presented by the mainstreaming of energy storage and electric vehicles, or the continuation of investment opportunities in solar, despite the challenges of (and false conflation with) the cleantech VC missteps of the late 2000’s.

Today, many more investment professionals -- with decades on Wall Street instead of roots in the jungles of the Central American rainforest -- are making big investment commitments to renewables, exploring new deals in energy storage, or analyzing the threats that EVs pose to mid- and long-term oil prices.

[You can read more here about the mainstreaming of renewable energy investing in my feature piece for Preqin, a global leading for market intelligence for private capital markets.]

In contrast to this growing interest, investors worry about yield compression.

With lots of capital chasing a disproportionately smaller number of good deals at scale, and with risks being hammered out of renewable energy infrastructure, IRRs have gone down.

[Note: Although IRRs are a helpful underwriting metric, many investors prefer to look at the “multiple of invested capital,” or total cash out vs. total cash invested.]

When I first began investing in solar power projects, we underwrote to private equity returns north of 20%. Today investors in operating projects might get 6-9%, while those investing in development plus operation and/or platform plays (investing in the development company, too) are targeting “mid-teens” returns.

To clarify, these are leveraged returns.

And when most oil and gas investors hear this, they laugh a little on the inside when comparing these numbers to their target returns from 20-30%. But this is apples-to-orange, due to risk. Renewable energy infrastructure returns are based on [15-25]-year contracted cash flows, while oil and gas investments often depend on far riskier exploration and development, plus volatile global commodity markets.

As for deal flow, scale and quality are the two constraints.

Regarding the scale of these markets, things are getting better. For example, annual U.S. solar project installations are up roughly 50% versus just two years ago, and by 2023 total installed U.S. solar capacity is expected to increase by more than 2x.

But we still need more entrepreneurs to build more projects and companies worthy of investors’ capital. (A tantalizing call to action, for sure.)

Regarding quality, over the years, we’ve vetted 100s of MWs of solar projects. But very few have passed review and made it to investment committees. Again, things are getting better. Developers and entrepreneurs are learning from past mistakes (e.g., using venture capital, the most expensive capital on earth, to built factories to make s*#t).

For more about what it takes to increase a company’s chances of raising capital, we’ve written a few primers, structured in numbered lists, with attempts at humor included.

• Checklist: Are You Ready to Raise Investment Capital?
• How to Kiss Frogs: (aka) Tips for Bringing in the Right Investor
• 11 Ways to Ruin an Investor Meeting: What NOT to Do

3.  We overestimate the impact of new tech in the short-term, and underestimate its impacts in long-term.

This quote from Bill Gates highlights a comment from an investor panelist: In the current energy transition, trillions of dollars will be created and destroyed.

Another investor put is this way: If you have no strategy on the growing role of clean energy, then you’re leaving value on the table.

For my panel on energy storage investments, the topic on most investors’ minds was this: “Is energy storage a real market today?”

Opinions varied. But here is the right one: Heck ya, it’s real today. But it’s not real everywhere...yet. Hence the confusion.

There are hundreds of millions of investment already committed to or invested in batteries each year at the utility, commercial and industrial, and residential level, including projects involving our clients.

Consider these stats from Greentech Media:

• 21 U.S. states have 20+ MW of energy storage projects proposed, in construction or deployed.
• 10 U.S. states have pipelines greater than 100 MW.
• Leading state markets include California, Hawaii, Texas, New York, Maryland, Massachusetts.

To be sure, the bulk of energy storage investments have yet to come. Bloomberg estimates $100B invested by 2030. For a great graph of billions of dollars projected to be invested, check out the black bar graph here.

But even today, giants like NextEra estimate that no new gas peaker plants will be built post-2020 due to the falling price and increasing performance of large-scale battery storage.

[For more about energy storage investing, you can read our research here -- Financing Energy Storage: A Cheat Sheet.]

Despite early indications of massive growth for new clean energy solutions like storage or EVs, most people see them as a long-term thing. Not a material consideration for today’s portfolio.

However, this graph from NYT / HBR shows that often new technologies are being adopted on increasingly quick timelines, following S-curves with step change growth, not incremental linear progress.

Of course, when comparing EV adoption to smartphone adoption, investors at the conference pointed out that there is a massive difference in the CapEx among these items; hence much slower adoption is possible.

But if any fraction of Tony Seba’s projections in his ReThinkX report on the future of transportation are correct (the question may be “when, not if”), then we could be talking about switching from a CapEx discussion to an OpEx discussion, thereby making the mass transition from ICE (internal combustion engine) vehicles to EVs much quicker.

According to one investor panelist, this research estimates that most Americans spend about $10,000 per year on their cars, while ReThinkX projects that autonomous shared EVs could reduce personal travel costs by 90% while also delivering convenience, too. (Ah...to relax and work while going to the airport in a Lyft, instead of navigating traffic and crowded parking garages in my own vehicle.)

Building on that theme, while at the event, I received an update from Bloomberg on their EV projections for 2040: 55% of new sales and 33% of global fleet. (#ThatAintNoNiche)

[Quick aside: Some panelists laughed at the idea that EVs meant clean energy. True, it depends on the grid mix of high vs. low carbon energy sources. But this calculator from U.S. DOE shows that EV CO2 emissions are roughly 50% less than gasoline-powered cars based on average in the U.S. The calculator lets you see differences by state location, too.]

Panelists also noted that major adoption of EVs in the U.S. could lead to 2x growth in utility power output, even describing this monumental revenue-generating opportunity as a “w*t dream” for utilities.

(And, yes, the room was mostly full of men. I apologize. Just the messenger...)

In a time when Moody’s just gave the utility sector a negative outlook for the first time in history, maybe Elon Musk is right: The electrification of transportation could be a much needed savior for the challenged power sector.

Considering that the average capacity factor for U.S power plants is roughly 40%, the utility sector has lots of excess capacity in sunk costs to harness with 100+ EV models coming online by 2020.

[Background: Most grids tend to overbuild capacity in order to manage peak loads, thereby underutilizing power plants and perhaps wasting CapEx for perhaps 90%+ of the hours in a year.]

On a related note, solar plus storage has until recently been an enticing topic for discussions at conferences, or fun projects for my graduate students. But this, too, is changing quickly.

Today almost all renewable energy RFPs from utilities in deregulated markets require the inclusion of energy storage capacity.

And suprisingly, the bids are coming in at very low prices. As an example, Xcel Energy’s recent process resulted in 10+GW of bids for solar plus storage at 3.6 c/kWh and wind plus storage at 1.8 c/kWh, which are both new record low prices.

Finally, investors often feel limited in their consideration of long-term trends and multi-decade infrastructure assets due to the [8-10]-year life of most private equity funds.

In response, panelists came out in two camps:

1. New fund model -- More funds are experimenting with “evergreen” structures, wherein the investors seek long-term yields and capital appreciation, without forcing arbitrary asset sales within the typical limited-life funds. However, finding these is a bit like seeing an albino deer, which ironically happens to live in forests near my house. (Does that mean I should go raise an evergreen fund?)
2. The next buyer’s terminal values -- It is helpful to think about the secondary or tertiary investor considerations. When a GP sells a long-life clean energy asset, the buyer is thinking about their cash flows during the hold period and the terminal value from running a discounted cash flow analysis in the out years. If you stack the cash flow and terminal values for 2-3 investors, you get pretty close to the full lifecycle of some renewable energy projects.

4.  Definitions of ESG and sustainable energy vary widely.

Despite the concern that ESG (Environment, Social, Governance) or sustainable investing is for hippies who love to earn below market financial returns, many investment giants would disagree. Below are samples of their thinking:

• Sustainable investing: more than doing good (BlackRock)
• The ESG Investing Enlightenment: How Principle and Pragmatism Can Create
  Sustainable Value through ESG (State Street)
• Sustainable Signals: More Asset Owners Embrace Sustainability (Morgan Stanley)
• ESG and financial performance: aggregated evidence from more than 2000 empirical studies (Deutsche Bank)
• Scaling mission-driven companies (Bain Capital)
• KKR launches unit focused on impact investing (KKR)

Yet still there is confusion about what the terms mean.

Some panelists said their investments in oil and gas have been doing ESG for many years. Now they just needed to add social sustainability goals.

However, they were equating ESG with HSE -- Health Safety, and Environment. While there is overlap, and both are important, there is at least one key difference:

• HSE is mostly about legal compliance (e.g., not hurting or killing workers). It is often about today’s known risks.
• ESG is about elective goals that go above what regulations require (e.g., carbon reduction goals). It is often about tomorrow’s less certain risks.

Furthermore, some conventional energy asset managers, intending to do better in ESG, described their greenhouse gas footprinting efforts, and believe that that their conventional energy holdings are low carbon.

Some said the CO2 impacts of oil and gas investments were very low impact because exploring, drilling, and transporting via pipelines constituted a very small amount of the sector’s air pollution.

This is true relative to the combustion of those resources. However, companies are increasingly being expected to consider and account for broader life cycle impacts of their investments, inside and outside of their direct corporate control.

In this new world order, a new analogy may apply: Making guns, but not accepting some accountability for gun deaths, could be a dead argument.  

(Yep, pun and controversy intended.)

---

For more short (and sweet?) commentary on clean energy finance, along with tips on productivity, life hacks, and trivia for your next dinner party, check out our (mostly) weekly newsletter -- 2 Bullet Tuesdays.

It’s a quick 4-minute read, with bullets and short paragraphs, plus links for you to learn more if you somehow have more than 24 hours in a day.


---
Photo by Jesse Collins on Unsplash

By:  Dr. Chris Wedding, Managing Partner


​It’s easy to assume that the energy storage market is plagued with technology risks.
 
With over 70 battery chemistries being tested or deployed, it is no surprise that many financiers worry about backing the wrong horse and earning a “goose egg.”
 
However, as the Transformers comic series so wisely noted years ago, this is another situation where there is “more than meets the eye.”
 
(Get your nerd on, and read more at the Transformers Wiki. Yep, it’s a real thing.)

In this post, I will call out 7 factors that are projected to make lithium-ion batteries the top energy storage technology through at least 2025.
​
 
1.  Lithium — Not One, But Many
 
This dominant type of battery is a leader in part because it is not defined by just one type of chemistry. So, the math is not quite fair.
 
Many of these versions of lithium-ion batteries actually compete amongst themselves.
 
Lithium-ion batteries include varieties with cobalt oxide, manganese oxide, iron phosphate, nickel manganese cobalt oxide, nickel cobalt aluminum oxide, and titanate (titanium oxide).
 
Use cases for this smorgasbord of lithium-ion options cover areas of great interest to us at IronOak Energy Capital — such as grid services, demand charge reduction, and EV uses — as well as non-power sector applications such as medical devices and power tools.
 
For more, here’s a good summary from Investing News.
​
 
2.  Experience with the Technology
 
Lithium-ion is about as innovative as a middle-aged person.
 
(That was meant to terrify all Millennial readers.)
 
But seriously…
 
With roots in the 1970’s, lithium has gone from science labs and discussions of the distant future to billions of dollars of investment and global dominance.
 
In terms of actual energy storage installations, lithium-ion batteries increased their market share considerably: 29% (2012), 40% (2013), 46% (2014), 71% (2015), and 93% (2016) of all batteries installed globally. (Source: IHS and Navigant)
 
The numbers are even higher today. In the U.S., lithium-ion batteries led all energy storage installations for the tenth straight quarter, including a roughly 97% market share in Q1 this year. (Source: GTM)
 
The next biggest player was vanadium flow batteries with 3% market share.

Source: GTM Research
​
​With each additional quarter of lithium’s leadership, the whole host of market players becomes more comfortable with the technology, from regulators and developers to investors and suppliers.  
 
Furthermore, costs for lithium batteries have fallen 50-70% since 2010 and are expected to fall another 25-50% by 2020. (Sources: Lazard, Moody’s, Tesla)
 
In addition, each year their performance continues to increase.
 
As such, competitors to lithium face a moving target, one where the bar is constantly rising.
 

3.  Scale of Invested Capital: Divided and Conquered
 
With dozens of lithium-ion competitors trying to win over technology investors, they each receive less capital than they need to scale quickly.
 
Lux Research notes that “beyond lithium” battery companies raise an average of $40M over 8 years.
 
Compare this to the $5B invested in Tesla’s Nevada Gigafactory. Or the three additional gigafactories they announced in February of this year.
 
In addition, this trend is happening outside of Tesla’s magnetic media coverage.
 
Experts suggest Tesla’s factory is only 1 of 12 such factories around the world.
 
In Asia, Amperex Technology, Panasonic, LG Chem, and Boston Power are all planning new lithium factories in China. And Samsung and BYD plan to expand their existing plants.
 
And in Europe, Daimler announced in May this year its own big ole’ lithium-ion battery plant. But it will only cost about $500M. (Yep, sarcasm.)
 

4.  Size of Balance Sheets
 
Startups are known for innovation, being nimble, and disrupting 800-pound gorillas. While exciting, those are also correlated with company-level risk and balance sheets that leave something to be desired.
 
So, if you are the developer and investor in a large stationary battery installation serving the power grid, or the global manufacturer of thousands of electric vehicles, do you choose an innovative startup or an 800-pound gorilla to supply your batteries?
 
Yep, you guessed it. Big and boring wins the day when it comes to scale. As an imperfect proxy, think of large market capitalizations — Samsung ($254B), Panasonic ($26B), LG Chem ($18B), or Tesla ($57B).
 
As they say, “You won’t get fired for hiring McKinsey.”
 
It reminds me of another grim expression: “I want just one throat to choke.” If something goes wrong with those batteries years down the line, you want to be able to … well, you get the idea.

 
5.  Expert Analyst Projections
 
With its considerable inertia, the lithium-ion battery market is expected to continue leading the battery market through at least the next decade.
 
Projections vary, but here are a few to digest:

• Lithium market to grow 1.5x between now and 2020 (Source: Albermarle)
• Lithium used for stationary energy storage to grow 3x by 2020 (Source: Lux)
• Lithium-ion battery market to grow 3.2x between now and 2025 (Source: Market Watch)

 
It’s worth noting that some lithium competitors may have stronger Compound Annual Growth Rates than these projections imply. However, they are starting from a much smaller base so percentages can be deceiving.
 

6.  U.S. Government Projections
 
When countries don’t have what they need, they look for alternatives. (Or go to war. But let’s stay positive.)
 
In terms of known global lithium reserves, the U.S. has roughly 0.3%.
 
That’s not so great when projections suggest $1.4T of U.S. infrastructure could be underutilized over the next 15 years without feasible energy storage solutions.
 
It can also be a limiting factor when electric vehicles hold the keys (yep, bad pun) to managing grid stability as renewable energy penetration grows. As an example, consider that California, the sixth largest economy in the world, is eyeing a new 100% renewables target by 2045.
 
Accordingly, U.S. national laboratories are on the hunt for lithium alternatives. The most notable initiative is Joint Center for Energy Storage Research (JCESR), an innovation hub based at Argonne National Laboratory.
 
So, what is their latest conclusion after considering dozens of next generation battery technologies?
 
Well, one of the two is still based on lithium — that is, lithium-sulfur batteries, which are lighter and have greater energy density than today’s lithium-ion versions.
​
 
7.  Will Lithium Popularity be Its Demise? 
 
You have undoubtedly seen articles suggesting that lithium is a rare metal whose availability will be entirely consumed by Tesla’s Gigafactory.
 
OK, now forget all of that.
 
Let’s talk about the difference between lithium reserves vs. resources.

• Reserves = what is extractable given economic feasibility today
• Resources = locations where lithium might be extracted in the future at higher market prices

 
Quiz time: Fill in the blank.

• _________ stand at roughly 14 million tons.
• _________ are estimated at 40 million tons.

 
So, which is reserves and which is resources?
 
Duh, right? Resources refers to the lower, much higher number. Reserves applies to the upper, lower number.
 
Moreover, the volume of resources should continue to climb higher as projected future demand for lithium entices companies to invest more in exploration.
 
Now consider some wild numbers from Mr. Musk: The world could be powered 100% by clean energy if we had the storage capacity output form 100 gigafactories.
 
If true, and if you assume that the full volume of resources is static, then experts suggest we would still have enough for 50 years of lithium supply.
 
 
In Conclusion
 
All in all, no one can predict the future.
 
But it’s nice when many prognosticators are saying similar things: Lithium batteries make up 97% of new installs in the U.S. (and similar dominance globally). In addition, the seven factors above suggest that its market appeal is likely to continue into the foreseeable future.
 
That said, lithium-ion batteries are not perfect.
 
For example, their maximum duration is four hours of storage.
 
Yet experts suggest that in the years ahead power markets will demand longer duration batteries that allow for over four hours of capacity. Some even call for seasonal storage — think multi-month capacity.
 
And lithium batteries are also not perfectly scalable. So, a 5x increase in size may not mean a 5x increase in power, as would be the case for a flow battery.

But keep in mind that the perfect is the enemy of the good when it comes to controlling market share.

Furthermore, if you’re coming from the wind or solar industry, it’s helpful to remember that energy storage is not an industry where one size fits all. There is not one energy storage market. There are many.

Finding battery investment opportunities that make sense require the right match among technology, geography, utility territory, customer, and business model. (See the figure below.)

​

​2.  Most battery investors are angel and venture capital investors — for now

Technology — both software and hardware — are today’s investment focus. As such, angel and venture capital investors drive this discussion.

The table below from the witty and savvy data scientists at CB Insights offers a great summary of who’s investing in energy storage technology. ​

If you work in renewable energy or infrastructure finance, then you might like this...

Yesterday, I published an article in the Real Assets Newsletter for Preqin, a global leader in market intelligence for the alternative assets investment industry, serving 40,000 investment professionals in 90 countries. 

See the link below. It's on page 8.

"The Mainstreaming of Renewable Energy Infrastructure Investing - Risks, Returns and Emerging Sectors"

​Here are two  highlights...

Figure 1 shows the attractive risk-return of infrastructure vs. other asset classes. Note that renewable energy made up 54% of all infrastructure deals globally in Q3 2016.

Figure 2 illustrates that solar projects in the developing world tend to be larger (i.e., allow for greater volumes of capital allocation) and generate higher IRRs (albeit with more political and other country risks).

What does it all mean for investors?

It's time to look forward, not backward. Most perceptions about renewable energy are outdated because the sector is changing so quickly.  Those wait run the risk of being late to the (raging) party.

You may have heard of phrases such as “The Internet of Things” (IoT) or the “Smart Grid.” Both terms are defined differently by many people.
 
According to IBM, the IoT refers to the “digitization of the physical world.”
 
According to the U.S. Department of Energy, the smart grid can be defined as “a [new] class of technology to bring utility electricity delivery systems into the 21st century, using computer-based remote control and automation.”
 
The investment opportunities in improving the intelligence of our electricity generation, transmission, and generation system can be summed up by a joke reserved only for energy geeks (like me).
 
It goes like this: “If Thomas Edison were alive today, and you showed him a smart phone, he would be blown away by the innovation. In contrast, if you showed him how we produce and distribute electricity, he would say, ‘Oh yeah, I recognize that.’”
 
As an example of the scale we are talking about, estimates suggest that the U.S. alone needs to invest US$2.1T by 2035 to upgrade its electrical grid and integrate the massive surge in renewable energy and the need for greater resilience. (International Energy Agency, 2016)
 
As an example of what is coming, consider analyst predictions that the number of internet-connected devices globally will grow from approximately 13 billion in 2015 to almost 39 billion in 2020. (Juniper Research, 2015)

Or consider the scale of the opportunity in the infographic below.

Can the energy storage industry withstand the scrutiny of having their own ITC?

It cannot be understated how transformative an energy storage ITC would be for the industry. At IronOak Energy, we have written previously on the impact of such an ITC, and even presented a positive take on its potential rollout.

Here, I want to pose the question of whether the industry is really ready for such a game-changing policy.

The graph above shows projections for the growth of energy storage development under the current policy regime. Not too shabby.

But is the energy storage industry prepared to put that delicious tax equity to good use on stand-alone energy storage projects (in practice, solar + storage applications currently qualify for the solar ITC)? Of course, the answer is always: it depends.

Depends on what? Some would argue that the critical issue holding back a tidal wave of energy storage projects is the technology.

One could easily view the vast array of energy storage technologies vying for prominence with some trepidation. Some are commercially viable, while many are not.

It takes some brainpower to suss out the contenders from the pretenders. Even the smarties at MIT have a tough time doing it.

Do we want the government to incentivize the deployment of technologies that may not be ready to contend for the main stage? Conversely, is that precisely the role we want the government to take?

The double-edged sword of government subsidy

​This is a classic double-edged sword phenomenon. On one edge, there are green grassy fields of opportunity in rolling out new storage technologies in commercial applications. Accelerating storage deployment will drive down costs and help evolve viable business models. Beautiful.

Lurking on that other edge is the distinct possibility that many storage technologies in earlier stages of development will simply fail.

And failure is bad press, even if it is the Darwinian process of technological progress.

It puts the government in the untenable position of having subsidized a “reckless” experiment with taxpayer dollars.

“Picking winners and losers” they will say, even though an ITC is designed to avoid precisely this potential conflict.

And, let’s just say that there is a history of nasty repercussions for such interference with the so-called free market for energy (ahem - myth).

Solyndra - need I say more.

Some will say that Solyndra was blown out of proportion (it was) AND it was 5 years ago (a lifetime ago in the clean energy industry).

To top it off, Solyndra was backed with loan guarantees, not really what the ITC is about. Details, details...

But now, the vengeful energy gods have gifted us SunEdison. It was an altogether explicable collapse, but one that, nonetheless, provides ammunition against government support for the clean energy industry.

Who knows what would have happened with the extension of the solar ITC if SunEdison has filed for bankruptcy in 2015 rather than 2016.

So, be careful for when you wish upon your industry the scrutiny of being a target of government support.

Technological risk is a red herring -- it is really all about how to finance storage

Sure, risk exists with many energy storage technologies.

Even the most established battery technologies lack the operational history to assuage the concerns of investors looking at decadal time horizons. If you are absolutely intolerant of risk, go invest in government treasuries (just kidding - terrible idea).

Just running down the ladder to the cheapest storage technology fails to capture the complexity of the underlying value proposition. Cost is king, but there are many other factors competing for a role on the king’s court.

Energy storage technologies cannot be reduced to a simple efficiency or production metric, as with solar or wind (even that is an oversimplification, but at least a reasonable one).

There are more than a dozen potential services that could be generated by a given storage technology, many of which have few established market mechanisms to generate reliable revenue.

So, here’s the central takeaway.

The biggest challenge in the energy storage market is not how to choose the right technology. It is how to design the right market structures to support financial innovation.

Making energy storage bankable is close to being a precondition for the successful utilization of an ITC.

Recall that the success of the solar PPA model hinged on stable, contracted cash flows. Making solar bankable unlocked a vast market potential that we are still in the early stages of witnessing.

There is no equivalent financial structure with energy storage, yet there remains a distinct need to create consistently financeable project cash flows.

But wait, SolarCity and Tesla (perhaps soon to be joined in holy matrimony) pioneered a solar + storage PPA earlier this year.

The energy storage industry needs a financial product the equivalent of a PPA, and perhaps we are not too far off.      

Thus far, it has taken a savvy, not mention risk tolerant, investor to back energy storage projects. There is only so much runway with this sort of approach.

Easing the path for new investment in storage will hinge on making this inherently complex technology and market application simpler.

There are already frontrunning markets generating experiences that will guide future market design and development - thanks, California.

In tandem with this type of market development, energy storage needs a greater degree of standardization of financial strategies and structures to help make projects pencil.

And not just for the smartest guys in the room, but for a broad swath of interested investors.

The question remains as to whether an energy storage ITC will aid or inhibit such progress.

Related Reading:
​

• 5 Surprising States Where Commercial Energy Storage Works Today GreenTech Media, 7/20/16

• Making Energy Storage ‘Bankable’ Renewable Energy World 12/7/15

• Energy storage for renewables can be a good investment today, study finds MIT 6/13/16

• Energy Storage Would Get US Tax Credits in Bipartisan Bill Renewable Energy World 7/19/16

​

• Smart Grid, Battery/Storage, & Energy Efficiency Companies Raise $433 Million In Q2’16 CleanTechnica7/21/16

Congress is again considering an energy storage investment tax credit

The proposed H.R.5350, known in short form as the “Energy Storage Act of 2016,” seeks “To amend the Internal Revenue Code of 1986 to provide for an energy investment credit for energy storage property connected to the grid, and for other purposes.” Sponsored by Silicon Valley’s Congressman Mike Honda (D-CA), the bill has bipartisan co-sponsorship from Reps. Tom Reed (R-NY), Chris Gibson (R-NY), and Mark Takano (D-CA). As reported, it also has the full support of the Energy Storage Association: “The bipartisan Energy Storage Act of 2016 would unlock competitive access to investment in a more resilient and efficient modern electrical grid by expanding the investment tax credit (ITC) to include all types of advanced energy storage,” according to ESA Executive Director Matt Roberts.

We’ve seen public support for energy storage tried before at the national level, such as with last year’s push to pass a national storage mandate. The current initiative builds on earlier efforts for a storage ITC. For example, in 2013 Sen. Ron Wyden (D-OR) proposed a bill that would have granted a 20% tax credit for systems above 1 MW/1 MWh and a 30% credit for smaller 1 kW/5 kWh systems.

A potential $2 billion for energy storage

The details are as follows. A 30% investment tax credit is allowed for any “qualified energy storage property” (see below). Two billion dollars would be set aside in total credits for the life of the proposed program, with any single storage project capped at $40 million. As a side note, under these constraints it makes sense to assume that energy storage project developers would be incentivized to keep total project size under a $133 million price tag.  

What qualifies? At a first reading there does not appear to be a capacity size requirement for any large project, as long as it is used for one of the following purposes: 1) peak demand management; 2) deferral or substitution of investments in generation, transmission, or distribution; 3) backup for variable generation; 4) transmission or distribution grid reliability; 5) end-user energy consumption management; or 6) disconnection of load from the main grid. All energy storage technologies are also covered, including mechanical, electrical, thermal, and electrostatic. Small residential storage would qualify as well, if installed at primary residences and used for peak energy reduction for primarily onsite consumption. These systems must have a 5 kWh capacity and the ability to deliver 1 kW of electricity over 4 hours.

What doesn’t qualify? In general, non-residential energy storage that is designed primarily for on-site consumption does not qualify, unless it exceeds a 5KWh energy capacity and the ability to discharge 1 KW for 5 hours. Special exceptions are given to both pumped hydro and compressed air storage -- these projects must begin construction and operation within set timeframes or risk losing the credit.  

Supporting storage? Two points to consider

The first point to consider is that -- to the extent to which energy storage is paired with renewables -- it may be under-supplied in the current market and deserving of public support. A study that was released in-press last week in Applied Energy from researchers at the University of East Anglia is garnering a lot of attention. In the article, “The value of arbitrage for energy storage: Evidence from European electricity markets,” researchers simulate the arbitrage value of price-taker pumped hydro and compressed air energy storage under different market characteristics and across a portfolio of energy trading strategies. Not surprisingly, decisions can be made to maximize these values across different conditions. More significant was a summary conclusion: “Government subsidies should be used to encourage investment in energy storage systems if renewable power is to be fully integrated into the sector…”

The second point is that a separate energy storage ITC is not the only pathway to support energy storage. Some storage is in fact already eligible for the solar ITC as long as it follows strict rules about explicit pairing with and charging from solar power generation sources. As seen below, we already know that energy storage is expected to receive a huge boost from the extended ITC for solar, whether or not it takes advantage of this limited opportunity under the solar ITC.

(Source: Greentech Media)

The current IRS rules on storage eligibility under the solar ITC have been described as “ambiguous.” In February, the IRS issued a request for comments on this issue, with observers hoping for further clarification in future letters. Regarding the eligibility of storage, the required pairing with renewables was seen as necessary in order to avoid subsidizing storage that was existing merely to arbitrage with the grid, rather than serving as a support for renewables. Conceivably the IRS could decide to expand storage eligibility under the existing solar ITC, but this seems like a case of trying to fit a new effort (storage) under a policy for which it was not designed (solar power promotion).  

The good news is that the new proposed energy storage ITC excludes subsidizing projects that exist merely for arbitrage. Allocation of the credits across projects would be determined by the DOE, to choose those that maximize the following metrics: reliability or economic benefit, integration of renewable resources on the grid, or efficiency of grid operations. H.R. 5350 is just beginning its path from bill to law, but the possibility is there for an energy storage ITC to complement the existing solar ITC.
​

Which ducks do you see?The California Independent System Operator (CAISO) can be commended for providing an accessible daily data dump on renewable usage across its system. With these data one can construct various “duck curves” for the grid’s daily net load profile, the shapes of which result from the rising penetration of a variable energy resources (VER) such as wind or solar. 

VERs exhibit four characteristics:  

1. They are non-dispatchable.
2. Generation demonstrates a somewhat regular pattern of cyclical daily variation -- wind peaking in the mornings, solar peaking during the day. The pattern for solar is more pronounced and predictable than the pattern for wind.
3. Fluctuations in generation can vary rapidly over just a few minutes.
4. The variable short-run cost of providing new generation once the sun is shining or the wind is blowing is effectively zero.  

Duck curves are in essence the daily net load profiles after accounting for VER generation. They show the required remaining dispatchable energy required to ramp up or down to take up the solar and wind shortfall. As we see from the two examples below, duck curves can take on various forms, often depending on the scale range of the y-axis.  

1st flock of ducks:  Average net load profiles over seven days around March 31, over 2013-16.

Source: Blog post by Meredith Fowlie, “The Duck Has Landed” (5/2/16), using CAISO data.

​2nd flock of ducks: Net load profiles for March 31 for 2012 and 2016. Forecasts for 2017 and 2020 were made in 2013.

Source: Council of Economic Advisors, The White House, “Incorporating Renewables into the Electric Grid:  Expanding Opportunities for Smart Markets and Energy Storage,” Fig., 4 (June, 2016), using CAISO data.

Both sets of curves cover almost exactly the same sets of data, with the first emphasizing a more extreme story. The the stories are essentially the same -- net load after VERs bottoms during the day when solar is peaking, ramps up very quickly as solar generation drops off dramatically and evening usage rises, and then drops again as nighttime usage drops and wind picks up. 

The takeaways are two:  

• One of the main challenges in incorporating more VERs into a grid depends a lot on how steep the evening ramp-up rate is, and
• These duck curves will only become steeper in the future, with more VERs.

Ancillary services as regulation mileage

A recent report from the Council of Economic Advisors at the White House goes deeper, looking at some ways of understanding the value of energy storage via the idea of regulation mileage. The concept measures the changes -- increases or decreases -- in power output that a grid operator requests from an electricity generation resource over a specific timeframe. It would stand to reason that regulation mileage, a proxy for the amount of ancillary services required, would be determined by several factors. The Council’s study looks at the total load, the amount of that load from VERs, the slopes of each of those load curves, and a series of effects that are specific to the hour of the day, day of the week, and week of the year that the electricity is generated. Among other results, and as expected, one of the clearest that appears is that the slopes of the load and VER generation have a lot to do with the services required. In other words, the faster the late-afternoon ramp up at the end of a sunny day, the more energy storage will be wanted.   

Valuing storage based on its ancillary benefits

What are other approaches to valuing energy storage in these settings? The peer-reviewed journal Nature Energy recently carried the results of a new study on capturing the full benefits of energy storage in investments. Applying a techno-economic model, the authors of ”Limiting the public cost of stationary battery deployment by combining applications,” find that battery storage becomes more attractive as an investment as each storage facility offers more energy services. An article summary carries the message that energy storage apart from pumped hydro is, “still considered unattractive by investors on mainly two grounds:  cost-competitiveness with other technologies and the absence of a commonly shared classification of electrical storage as a competitive or regulated activity -- that is, as an electricity generation asset or network component” (emphasis added).  

The drawn conclusions are that the best way to incorporate all of these benefits are to remove non-market barriers, a legacy of rules that were originally written for conventional generators. According to the summary, these “institutional and regulatory frameworks are key elements in the determination of the economic value of storage,” and “economic principles require new, enabling rules to be technology neutral, that is, not directed at the diffusion of storage or any other technology in particular.” The article calls for three such policy recommendations:  

1. Eliminate overly restrictive technology requirements that may be cutting smaller or different types of batteries out of market applications.
2. Revise certain competition rules, such as in Germany, that present significant barriers to capturing the different value streams of energy storage.
3. Agree on a legal definition of “energy storage” that incorporates its multiple roles in generation, transmission and distribution, and consumption.  

This policy neutrality from above is a point worth repeating. In revising public policies, the goal is not the promotion of energy storage out of any favoritism towards the technology. Rather, the point is to promote energy storage as an enabler for VERs such as solar and wind, which in turn leads to progress on an overall societal goal of reducing greenhouse gas emissions.