Solar + Storage Financing Requires ExperienceBy | November 8, 2018
In Solar Novus Today
By Bill Bush, Stem CFO
Within five years, the vast majority of the retail solar market will be solar + storage, and much of the wholesale distributed solar market will be, too.
Why? The energy markets, supply chains, electric rates, solar remuneration rules, and customers’ interests in controlling their energy decisions are all changing, with impacts which are difficult to predict for the future. Solar project economics are getting skinnier and riskier. Artificial intelligence (AI)-driven energy storage gives developers and customers the flexibility to deal with all of those changes. Adding AI-driven storage to solar offers the customer maximum value and returns from the solar system, greater control and flexibility today and tomorrow, and access to new value streams and market opportunities.
But adding AI-coupled storage also poses a distinct challenge to solar financing and tax equity community who are less familiar with the storage industry or with executing storage projects.
Enter the benefits of artificial intelligence
AI-driven energy storage is fundamental to our shift in energy markets. But battery hardware alone does little to unlock the value of energy storage. The fundamental key to unlocking that value is artificial intelligence. Managing the timing of energy use in real time to minimize costs and respond to changing grid needs is extremelyâ€¨ complex. Even with the ability to store energy, there are still thousands of calculations, forecasting simulations, and split-second decisions required to produce meaningful results.
Stem provides real-time energy optimization, combining AI with batteries so building owners can automatically lower costs beyond what they expect from solar. Athena, Stem’s AI, can then integrate the systems into networks that provide developers, financiers and/or customers with new market opportunities by shifting unused and unneeded stored energy power in their batteries, while relieving overall stress on the grid for grid operators and utilities.
The solar financier’s perspective
In my experience, solar financiers are looking for partners to address a range of due diligence, compliance, and forecasting complexities. Storage financing vehicles and expectations differ greatly from solar financing. Storage is a very different technology platform, offering up to 13 different services for the customer, utility, or grid operator. For the financier, that’s like shifting from calculating the value of a rotary phone to a cellphone that has multiple applications dispatchable on a real-time basis. Each customer faces different tariffs, utility services, and grid revenue opportunities. Therefore, solar financiers must learn how to co-optimize myriad variables depending on the specific use applications of each customer.
At its most basic, the solar financier will need initial support from their energy storage provider on both the finance and the engineering side – specifically with warranties, savings reports, performance guarantees, and asset maintenance to win approval from tax equity and debt partners. For example, Stem’s performance guarantees are supported by our algorithms, and we work with our finance partner to lock down expected returns based on the predicted system performance.
However, solar financiers will also need help maximizing returns from the storage system while ensuring program compliance. Program compliance is not limited to Investment Tax Credit (ITC) or state storage incentive program rules, but also to complex market and utility program contractual requirements. The ITC benefits come with charging requirements; state incentive programs have their own charging rules plus cycling and throughput requirements, operational rules, warranty obligations, and so on; and wholesale market bids and utility contracts have still more performance metrics.
Ultimately, flexibility is key in a storage partner to be able to finance the storage independently or together. Either way, AI offers the solar financier side of the equation the ability and control to self-correct as market opportunities or program compliance rules change.
The (uncontracted) revenue opportunities ahead
Over the life of the 20 to 25 year solar + storage asset, additional revenue opportunities for the customer will expand as regulators see more value in leveraging privately-invested distributed assets to perform additional grid or utility-facing services.
Just in the past six years, U.S. regulators have authorized numerous opportunities for grid-facing or utility-facing contracted services. California created the Southern California Edison Preferred Resources Program, the statewide Demand Response Auction Mechanism for aggregated load reduction, and numerous peaker plant replacement solicitations. New York and Consolidated Edison opened the Brooklyn Queens Demand Management program. Looking ahead, there are many additional avenues for the customer to market that could be driven by the Federal Energy Regulatory Commission’s forthcoming Distributed Energy Resources Order or by state policies for “non-wires alternatives” and peaker plant replacement.
Stem has pioneered the customer-sited energy storage business model for nearly a decade.
Our first systems began operation in 2012, and since 2014 we have had customers with cosited solar and storage. Of our current 900+ systems installed or under contract across six US states, Japan, and Ontario Canada, over 100 have solar and storage onsite. Stem also invented storage project finance in 2013, and now has the largest storage project finance pool at $650M, backed by Generate Capital, Starwood Energy Group, and Ontario Teachers’ Pension Plan. Moreover, Stem has successfully worked with many top-tier banks and tax equity providers brought to us by our Partner Network.
Stem works with a range of finance partners to build confidence with the concept of evolving added value. It comes down to the financing structure: using a heavily debt-financed project lacks the upside from additional services, whereas other structures allow for potential future value.
Don’t make your projects harder doing it alone
The race is on to add storage to solar systems in the face of changing rates and rules, and solar developers need to speedily execute on projects to capture these short-term state and federal incentives. The Massachusetts SMART is a prime example. The best-positioned solar developers and financiers are looking for partners that have financed storage before, in large volumes, and with large established finance partners.
Financing storage is hard but we know how to do it. Don’t try to do it alone.