Drivers of the Commercial Energy Storage Market

Distributed energy storage in the commercial sector growing at 34%
Published: Thu 20 Mar 2014

Within the next six years, distributed energy storage in the commercial sector is expected to surpass 720MW in the US- a 34% cumulative annual growth rate. This marks the beginning of a sustainable growth opportunity, according to a GTM report.

The report lists four factors which are driving the commercial energy storage market:

Demand charge reduction for commercial and industrial customers

Under current commercial utility rate structures, commercial customers with highly variable, “peak” loads could benefit from an energy storage system designed to lower peak demand and subsequently reduce demand charges. In addition, storage can be used to reduce high consumption on partial peaks. This will be of real economic value to the commercial sector especially when coupled with midday peaking solar PV.

However, utility rate restructuring and reform represents a long-term risk which project developers should be aware of. This risk has the potential of chasing financiers.

Maintaining the flexibility to capture new opportunities and value streams as regulatory and technological breakthroughs occur will be significant in limiting the risk of reliance on a single value stream.

Synergy between solar PV and energy storage

The prolific growth of solar PV, specifically at the distributed level, calls for a greater need for the deployment of distributed energy storage. In our article, Cheaper Solar Installations-Watershed Moment for Distributed Generation and Renewables, we report how cheaper solar module prices are causing a drop in solar installations. This is obviously creating a tipping point for the distributed generation sector.

From a technical perspective, storage can be used to smooth the output and variability of solar energy and may ultimately lead to solar receiving larger capacity credits, or potentially helping to avoid capacity charges.

In addition, some project developers have started deploying systems which share common power conditioning equipment such as inverters. From an economic perspective, three private letter rulings from the Internal Revenue Service have allowed energy storage devices to capture the 30% federal investment tax credit when coupled with renewable energy generating assets under certain conditions, and one of those projects is a combination of PV and battery storage.

Frequency regulation in select markets

The Federal Energy Regulatory Commission’s issuance of Order No. 755 in 2011, which required wholesale markets to evaluate and implement a pay-for-performance formula for frequency regulation, has been arguably one of the largest initial catalysts for the energy storage market. Order No. 755 has been further augmented by Order No. 784, which requires ancillary service providers in vertically integrated markets to take into account both speed and accuracy when determining regulation requirements.

However, further clarity is needed around the participation of aggregated, behind-the-meter resources in ancillary service markets. To date, PJM is the only market which has revised market rules to help facilitate the inclusion of this class of resources. In addition, it is important to remember that FERC allows each Independent System Operator/Regional Transmission Organisation some degree of flexibility in interpreting and implementing orders.

Therefore, a lucrative wholesale opportunity in one market may not translate to a lucrative opportunity in another.

State-level incentives

Incentives such as California’s Self-Generation Incentive Program (SGIP) and NYSERDA’s Program Opportunity Notices (PONs) have helped accelerate the project pipeline in multiple states. In California, over 600 advanced energy storage project applications are pending approval, totalling over 27MW of potential new capacity. More than one-third of these projects include solar PV. In our article, California’s Energy Storage Mandate-Will Others Follow?, we discuss how California has created a market literally overnight by issuing an energy storage mandate.

While it is highly unlikely that the full SGIP project pipeline will be realized, these state-level incentives represent a major step towards a sufficiently substantial project pipeline to mobilize private capital.

“The commercial energy storage market is still in its earliest days, but we're starting to see real opportunity emerge for companies that can selectively pursue attractive markets and successfully monetize multiple value streams,” says Shayle Kann, Senior Vice President of GTM Research. “Growth in early markets such as California and PJM will be vital in helping the market scale and getting investors comfortable with the complexity of financing energy storage in the US."