Energy storage is growing, and the buzz around energy storage is growing even faster. Tesla’s Gigafactories and Model 3 are eager investments in residential and vehicle energy storage technology, and significant (though perhaps less salient) investments have been aimed at storage in the utility-scale market. Stories of falling lithium ion (Li-ion) battery costs and promises of universal cost reductions have long populated the news cycle, and even state legislatures are hopping on the storage bandwagon. For example, the Maryland legislature passed storage legislation this year, as did Nevada, though such legislation was later vetoed by Governor Sandoval. Similarly, Massachusetts announced a 200 megawatt hour (MWh) by 2020 energy storage mandate this summer, and with SMART, will soon join the ranks of states like California, New Jersey, and New York that also offer storage incentives.

In theory, the solar-plus-storage system offers myriad benefits. From the perspective of a utility, storage has the potential to aid in renewable integration for grids that face net load variability issues (i.e. the duck curve), reduce peak capacity, and act as a frequency and voltage regulator. Behind the meter, storage can save companies significant amounts on their electricity bills through peak shaving and frequency regulation services, especially when a customer’s load has large peak power usage. From an investor’s perspective, there are many perceived revenue streams available to generate a decent return. Incentives and revenue “stacking” mechanisms ostensibly make storage viable in many markets, especially as the price of batteries continues to fall.

The cleantech world touts the marriage of energy storage systems and renewable energy generation as the solution to many of the challenges of distributed generation. Despite the hype, however, not a lot of commercial storage has actually been deployed, much less applied to solar projects. Though GTM Research projects that revenues from energy storage will nearly double from 2016 to 2017, it is the residential and utility markets that are largely responsible for this growth, not commercial and industrial (C&I). When the acquisitions and development teams at Sol Systems come across commercial scale solar-plus-storage projects, risk and cost often emerge as limiting factors.

So, What’s the Holdup?

Investors generally view storage technology unfavorably since it remains unproven and unstandardized. In our experience, parties interested in the typical 7 – 10% returns that a solar project may produce are institutional investors or corporations with a large tax appetite who view risky investments as unfavorable. To make matters worse, high risk feeds high cost. Acquisition teams are not prepared to sacrifice their lowest-cost capital to back solar-plus-storage projects, at least not yet. As long as investors continue to view solar-plus-storage as risky, only projects with the most outstanding economics will reach fruition.

Unfortunately, solar-plus-storage projects tend to have decidedly un-outstanding economics. We’ve found that given the current price of Li-ion batteries, commercial scale solar-plus-storage projects typically do not pencil except in cases of unusually high demand charges. It is true that battery prices are falling; however, this pricing has not reached viable levels for commercial scale solar in most markets. Additionally, value stacking techniques, such as combining revenue from frequency regulation and peak shaving, are not without opportunity cost.

“Frequently, customers have been sold a value stacking paradigm of savings on the battery without adequate consideration of the fact that each makes demands on the battery – either limiting how deeply you can use it for other purposes, or in shortening its life,” said Colin Murchie, Senior Director of Customer Energy Services at Sol Systems. “You can drive Uber, or you can deliver pizzas, but don’t rely on doing both at the same time.”

Additionally, to capture the overpromised opportunity for revenue stacking, solar companies must become experts on storage technology, their customer’s current and potential utility bills, and offer a guarantee on customer savings. Without guaranteed savings, customers are usually unwilling to commit to a monthly payment, and investors become more concerned that the customer will default. Another option for solar companies is to partner with another party, such as a pure play storage company, to offer the solar+storage package to a customer, and to help them “get smart” on storage deployment. Partnering with a storage company which provides hardware, revenue stacking services, and a savings guarantee is one option. Unfortunately, too often in the current marketplace, these are distributed across multiple unintegrated players, and these guarantees are not backed by creditworthy institutions. Additionally, partnering with another party eats away at an already dicey return for developers in the C&I space.

Solar project economics alone often do not pencil, and adding storage to the mix only adds complex shared savings economics and technology risk. Until a standard offer and algorithm is developed, commercial solar-plus-storage, alongside its wealth of benefits, will likely remain untapped.

Where Do We Go from Here?

The excitement around energy storage is merited, but perhaps we need to adopt a more realistic financing structure. A pure play equipment lease, for example, would shift technological and rate-shift risk onto the customer. If customers demand guaranteed savings, the savings should be backed by an investment grade entity. Either of these solutions would ameliorate issues that sometimes kill a perfectly good project. As battery prices continue to fall and the technology is tested, the solar industry must actively seek structures and partnerships that will allow for the growth of the commercial solar-plus-storage market. Until then, will solar-plus-storage live up to the hype?

ABOUT SOL SYSTEMS

Sol Systems, a national solar finance and development firm, delivers sophisticated, customized services for institutional, corporate, and municipal customers. Sol is employee-owned, and has been profitable since inception in 2008. Sol is backed by Sempra Energy, a $25+ billion energy company.

Over the last eight years, Sol Systems has delivered 650MW of solar projects for Fortune 100 companies, municipalities, universities, churches, and small businesses. Sol now manages over $650 million in solar energy assets for utilities, banks, and Fortune 500 companies.

Inc. 5000 recognized Sol Systems in its annual list of the nation’s fastest-growing private companies for four consecutive years. For more information, please visit www.solsystems.com.