03/18/2021

[Article 5] Energy Storage Systems: Unique Economics and the Role of the Asset Manager

In the last three articles on energy storage, we discussed the information gaps challenging operators as they operate and maintain battery energy storage systems (BESS) and what can be done to close those gaps. In the second half of this series – starting with this week’s article – we shift the focus to asset managers, […]

[Article 5] Energy Storage Systems: Unique Economics and the Role of the Asset Manager

by Steve Hanawalt

In the last three articles on energy storage, we discussed the information gaps challenging operators as they operate and maintain battery energy storage systems (BESS) and what can be done to close those gaps.

In the second half of this series – starting with this week’s article – we shift the focus to asset managers, covering the information and tools they need to manage and optimize the performance of this new generation of energy storage systems.

This week, we’ll start by talking about the unique ways the storage asset class makes money for owners and share an overview of the role of the asset manager in the energy storage market. Next week, we’ll dive into the kinds of information the asset manager needs to be successful. The following week, we’ll discuss the tools asset managers need to help them manage energy storage assets.

I would like to thank Anand Narayanan, Vice President, Asset Management at Arevon for his contributions in writing this article. Arevon is a leading provider of asset management services to owners of utility-scale, industrial, and commercial renewable energy generation assets throughout North America.

The Unique Nature of the Storage Asset Class

Before we consider the information needs of energy storage system asset managers, let’s review how the storage asset class makes money in the market and how it differs from other renewable energy assets.

Though a BESS asset is like other renewable energy assets, its economic life is highly dependent on its operating duty. Solar and wind plants lose a fraction of their generating capacity each year due to irreversible losses and the slope of that lost capacity is generally considered linear. Not so with the lithium-ion (Li-on) battery storage system. How the asset is cycled and its operating temperature dramatically impacts the life of the battery. Put more concretely, the battery system can be cycled aggressively and last a few years or modestly and last many years.

In a very real sense, batteries are “consumed” – not operated. How a battery is scheduled against the market determines whether or not the project will be successful. We do not think that way about wind and solar plants which typically follow the same operating strategy from startup to retirement. Therefore, the energy storage asset manager is continually asking, “Is there a better way to schedule this asset into the market as market prices and operating costs become better known?”

How Energy Storage Systems Make Money

How do energy storage asset owners make money from this new asset class? Understanding the various ways one can generate revenue from an energy storage project will help us better understand the complex information needs of the energy storage asset manager.

Capacity Agreements

Under a capacity agreement, the seller is paid a fixed fee for their ability to supply capacity (energy) to an offtaker (usually a utility PPA). The payment structure under a capacity agreement is based on a fixed monthly fee ($/kW/month). As long as operating conditions in the agreement are met, the seller will be paid the same monthly fee, regardless of how much energy is delivered during the month. Under this kind of agreement, the asset manager needs to ensure the actual dispatching by the offtaker stays within the warranty and design limits.

Tolling Agreements

Tolling agreements allow offtakers to make use of the seller’s storage asset via a “toll” paid to the seller for the use of the system. Under this arrangement, the offtaker directly controls dispatching the system, making sure to adhere to the operating limits under which the system can be run (which is defined in the tolling agreement).

The buyer pays the seller a fixed monthly fee ($/kW/month) to operate the battery according to the buyer’s instructions for a set number of cycles per year. The buyer then schedules the BESS into the market and captures value from both energy and ancillary services Like will the capacity agreement, the asset manager needs to monitor when and how the system is dispatched to ensure that its design and warranty limits were adhered to during system operation.

Merchant Markets

In a merchant market, the seller does not have a long-term contract for delivering energy or ancillary services to a buyer and therefore is exposed to current market prices. Energy storage merchant markets currently allow sellers to engage in energy arbitrage by purchasing wholesale power from the market when rates are low, store it and then deliver it to the market when wholesale rates are high.

Sellers can provide ancillary services such as regulation and spinning reserve to the market where markets exist. Some services can be “stacked” and sold at the same time. The seller’s fee structure is variable based on market prices. Asset managers in merchant markets are constantly running what-if analyses and updating model assumptions to ensure they are maximizing revenue opportunities without unduly stressing the system batteries.

The Role of Asset Manager in the Energy Storage Market

Though the storage asset manager has many responsibilities, the most important is optimizing the financial performance of the asset in a safe and reliable manner.

Maximizing the Financial Performance of the Asset

The energy storage asset manager is charged with managing the financial and technical aspects of the asset while mitigating project risk. The financial asset is the sum of all the project contracts including the energy sales agreement(s), supply agreements, warranties, guarantees, project insurance and other commercial agreements. The technical asset is the physical equipment itself and its operations and maintenance.

Put simply, the financial objective of managing an energy storage asset is to deploy the asset into the market in a way that maximizes project cash flows. Optimizing the economic life of a storage asset is not usually the same as maximizing its life. To maximize project profitability the asset manager needs to constantly evaluate the current and future capability of the asset relative to its value in the market.

In some markets, this may mean exhausting the life of the equipment much faster than its original design specification through aggressive cycling; in other cases, it may mean extending equipment life via modest cycling and battery augmentation.

For example, a strong regulation market may warrant aggressive cycling and reducing the asset’s life, whereas a high-value capacity market may justify coaxing as many years as possible out of the equipment and minimizing costs.

Unlike other power markets, there are few long-term price signals available in the storage market. Will a robust ancillary service market emerge in the future? Probably. Will some off-takers be valuing additional firm capacity over the next few years? Likely. Does anyone know for sure? No. Therefore, the asset manager needs to be regularly evaluating different operating scenarios to determine which deployment strategy delivers the best returns given the changing market.

Overseeing the Technical Operations of the Asset

Though the day-to-day responsibility of operating and maintaining the asset usually falls with the operator, the asset manager ultimately is accountable for the safe and reliable operation of the facility. Is the storage equipment being maintained properly and is it being operated within the design and warranty limits? The following are a few items that require asset manager/operator coordination (for a full review of the operational data needs of the battery storage system, see my previous articles):

Maintenance Planning

The asset manager needs to have full visibility of upcoming planned maintenance of the system to ensure the operator is not taking a portion or all the battery sections offline during periods of high revenue opportunity. Specific outage intervals and plans require close coordination between operator and asset manager.

Monitor System Operational KPIs

The asset manager relies on the operator for proper technical operations and maintenance of the system. Nevertheless, the asset manager will want to review operational key performance indicators at least monthly to ensure the equipment is performing as intended. A few of most important KPIs for the asset manager are:

  • System availability
  • Operating cycles and charge rate
  • Average round-trip efficiency

Summary

This week we reviewed the unique ways the storage asset class makes money for owners and summarized the role of the asset manager in the energy storage market – from maximizing the financial performance of the asset to overseeing the technical operations. Next week, we’ll go into detail about the kinds of financial and technical information the asset manager needs to be successful. As always, your feedback is appreciated.

Authors

Steve Hanawalt is EVP and founder of Power Factors. For more articles like this, follow him on LinkedIn or check out the rest of our blog.

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