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Energy » Page 2

Energy Storage 102: Technology and Value Chain

Posted on August 26, 2015 by Josh Lutton and Micah Sussman

This is the second in a series of posts on grid energy storage. In Energy Storage 101, we discussed how various customer types can benefit from storage.In this post, we discuss key storage technologies and identify the economic value chain for battery storage. Next week, we will examine, in detail, the economics of commercial behind-the-meter storage in Energy Storage 201.

Energy Storage Technologies

A variety of energy storage technologies have been/may be used for each the applications we described in Energy Storage 101. However, there are some technologies that are simply better for some applications than others. Here we will briefly examine the some of the more popular technologies:

  • Pumped hydro
  • Lithium ion batteries
  • Lead acid batteries
  • Sodium sulfur batteries
  • Flow batteries
  • Others (flywheel, compressed air, other batteries, etc.)

[Read more…]

Energy Storage 101: Applications

Posted on August 24, 2015 by Josh Lutton and Micah Sussman

Energy storage is one of the hottest topics in the energy world. SolarCity’s partnership with Tesla to provide solar-charged battery systems, the California PUC’s mandate of 1.3 GW of energy storage by 2024, and energy storage plants entering into PJM’s ancillary services markets are just some of the many examples we hear about every day.

While the headlines are clear, discussion of the details often gets murky. This is the first in a series of three posts, in which we explain the applications of grid electrical energy storage. Later this week, in Energy Storage 102, we will discuss the technologies and value chain in more detail. Next week, we will examine the detailed economics of commercial behind-the-meter storage in Energy Storage 201.

Important terms

Power and Energy

To understand the energy storage landscape, it is first important to draw a clear line between power and energy. Power, usually measured in kilowatts (kW) or megawatts (MW), is the load that a storage system or generator can serve at any instant in time. Energy, measured in kilowatt-hours (kWh) or megawatt-hours (MWh), is the amount of power that can flow over time.

Capacity

This is where terms in the energy industry can get confusing. When discussing the capacity of a power plant people mean the amount of power it can generate (MW). When discussing the capacity of a storage system, however, they mean the volume of energy it can store (MWh).

Response Time and Discharge Time

Response time is the time it takes for a system to provide energy at its full rated power. Discharge time is the amount of time a storage technology can maintain its output. A one MW battery that has a discharge time of five hours can provide five MWh of energy.

Depth of Discharge (DOD)

Depth of discharge is the percentage of capacity discharged. Deep discharges (>50% DOD) shorten the lives of some batteries, while others operate best this way.

Energy Storage Customer Types

Five major groups may be customers of grid-tied energy storage:

  1. Utilities
  2. Commercial users (including government and non-profits)
  3. Residential users
  4. ISOs
  5. Independent Power Producers (IPPs)

Some of these have a number of applications for storage.

[Read more…]

Utility Regulation and the Nobel Prize

Posted on November 11, 2014 by Josh Lutton and Matthew Gallery

Last month French economist Jean Tirole won the 2014 Nobel Prize in economic sciences. According to the Royal Swedish Academy of Sciences, he deserved the award because he has “clarified how to understand and regulate industries with a few powerful firms.”

With the increasing penetration of renewable energy driving conversations about appropriate utility rate and regulatory structures for the 21st century, in this post we explore three takeaways from Tirole’s work as they apply to electric utility regulation.

Jean Tirole: Three Key Takeaways for Regulation of Electric Utilities

1. Offer regulatory choices that provide incentives while avoiding the ratchet effect

Suppose regulators do not know the true potential of firms they regulate to reduce cost. If they offer cost-based, rate-of-return structures firms will have little incentive to reduce cost even when it is possible. On the other hand, if they offer fixed-price structures firms will have a strong incentives to reduce costs, yet depending on the price level allowed it may be the firms—not ratepayers—that capture the benefits.

Tirole showed that regulators can resolve this dilemma by offering firms a carefully designed menu of regulatory schemes and letting the firms choose between the options. Offered the two polar choices above, firms without good cost reduction opportunities would take the rate-of-return option, while firms with them would take the fixed-price option. A regulator can use a more sophisticated menu to ensure some of the benefits of cost reduction are shared with ratepayers.

Tirole also showed that regulators must be able to offer long-term contracts for high-powered incentives (such as fixed prices) to be optimal. If regulators can ratchet prices down after firms have made investments, firms will avoid making investments that require longer payback periods. To avoid this ratchet effect, such regulators should offer only modest incentives in the short run.

2. Incentives for firms offering network access should depend on competitors’ output

Regulated firms often control access to an intermediate good that other companies can use to compete in end markets. If the regulated firm’s profit is dependent only on its own level of output (or assets) it has an incentive to overstate the cost of providing access to such companies to foreclose that competition. Therefore, Tirole says “the regulated firm’s incentive scheme should depend not only on the firm’s cost and outputs but also on the output produced by its competitors”!

3. platform markets require network externalities and are sensitive to price allocation

Tirole has been a leader in the study of platform markets, such as those for video game systems, operating systems, payment systems, and newspapers. He defines such markets as those in which:

(a) the amount users benefit from the platform depends on the number of other users of the platform (i.e., video game developers prefer platforms with many gamer customers), and

(b) the volume of transactions depends not only on the total price level, but on the distribution of prices between parties that use the platform (i.e., advertisers and subscribers to a newspaper are charged different prices).

As we will see below, New York would like to set up a platform market for distributed energy resources.

Implications

Several states, including Arizona, California, Hawaii, Massachusetts, Minnesota, and New York are considering changes to their regulatory frameworks for electric utilities to manage or encourage the use of distributed energy resources, fairly allocate costs, and improve efficiency.

Let’s look at how some of the takeaways from Tirole’s work could be applied in two of these states: New York and Hawaii.

[Read more…]

SolarCity Customer Acquisition Cost and What Really Matters

Posted on May 7, 2014 by Josh Lutton

We are regularly asked to comment on customer acquisition cost (“CAC”) in the solar industry because we’ve calculated it for so many firms.

In 2012 we published a report on CAC called Solar Marketing Effectiveness.  We concluded the average CAC was $5373 / customer, or $0.89 per Watt.  We have since helped several firms with CAC on a proprietary basis and the numbers we’ve seen in those projects aren’t too different.

It’s not uncommon for us to get objections that go something like this: “SolarCity says their customer acquisition cost is only $2500.” or “Other sources say it is only $0.50 or $0.60 / Watt.  Why are your numbers different?”

In both cases it comes down to how expansive the definition of CAC is.  Our approach is not unlike that of a sculptor.  We start with a solid block of material—all costs, as captured in a company’s books—and we cut away everything that is not CAC.  Thus, we are unlikely to overlook certain acquisition costs just because we forgot or did not know to ask for them.

How straightforward this is depends on the financial detail we have.  If we have access to a company’s general ledger, we can review each transaction to determine if it is related to customer acquisition.  It can be more difficult if we only have access to the P&L.  Some lines on the P&L may contain certain expenses that are CAC and others that are not.  For example, a company might have one line for “marketing & advertising” and another for “salaries & wages”, but that doesn’t give us enough information because we should realize that some—but not all—of the salaries and wages line is for the marketing and sales teams.

Nonetheless, it is often possible to make an CAC estimate from financial statements and other reasonable assumptions.  For example, we estimate that SolarCity’s residential customer acquisition cost in for the quarter ended March 31, 2014 is about $1 / Watt installed or $0.70 / Watt booked.

[Read more…]

What is the Solar Cost of Capital?

Posted on February 10, 2014 by Josh Lutton

In a previous post, I said Woodlawn Associates believes solar project sponsors (i.e., equity investors other than tax equity) expect to earn an 8-11% after-tax internal rate of return on their investments.  As I said in that post:

Whether 8-11% is a good deal for the financier depends on its cost of capital.  If a financier’s cost of capital is 10%, the net present value of its investment is essentially zero.  On the other hand, if its cost of capital is 5-7%, the NPV of each solar system is several thousand dollars.

So how does one determine cost of capital for a project sponsor?  First, we have to understand what we mean by “sponsor”.  I use the term to mean the company that invests regular equity in project companies, which is usually a holding company subsidiary of a parent solar financing company:

Figure 1: Simplified Subsidiary Structure of Solar Finance Company,
and Sources of Capital

Solar Cost of Capital Figure 1

In this post I will first examine the cost of capital for project companies and then for sponsors/holding companies (the green boxes in Figure 1).

[Read more…]

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