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Procurement, financing, and business models

Access to financing and the presence of financially viable business models for energy storage are prerequisites for supporting storage market development. Policymakers and regulators play important roles in designing and implementing financial incentives and enabling various potential storage business models.

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Access to affordable sources of capital is key to enabling storage deployment, as the bulk of costs associated with energy storage are typically CAPEX-related, whereas the operating and maintenance costs of storage tend to be lower than more conventional power system assets like thermal power plants.  In addition, financial incentives can lower the cost of developing storage systems, improve the return on investment, and attract investors to the storage industry. Multiple sources of capital and incentives can be combined into various business models and ownership structures to support storage market development more broadly. Considering the higher share of upfront CAPEX-related costs of energy storage, fully utilizing the storage system’s capabilities can have important implications for its economic viability. This may require that energy storage provide a wide variety of services to multiple stakeholders. For instance, helping a factory reduce its monthly demand charges may not yield enough bill savings over time to pay off its installation costs; however, reducing demand charges while also selling ancillary services to the wholesale market and receiving a fixed compensation for deferring a distribution infrastructure upgrade for the utility could make the project viable.

Financing and Incentives

 Common incentives include investment-based tax credits, tax deductions, tax exemptions (e.g. sales or property), accelerated depreciation, rebates, subsidized loans, and loan guarantees. Funding for incentives can come from government budgets, ratepayers, or international funders, among others. Alternatively, regulators and utilities can extend existing incentive programs for solar PV to include solar PV-plus-storage systems.

Table 1: Investment-based tax credit types

Production-based tax credits

  • Tax credit for every kWh of renewable energy produced
  • Earned over time with energy production (e.g., 10 years)

Investment-based tax credits

  • Allows storage system owner to claim a tax credit equal to a fixed percentage of eligible project costs, for example, 10% or 30%.
  • Percentage can adjust downward over time
  • Accelerated depreciation can lower your tax bill as well.

Tax exemptions

  • Eliminate or reduce the following taxes
  • Sales Taxes
  • Taxes on imported equipment
  • Property taxes on value of solar system

Upfront rebate

  • Reduces initial cost of installing
    a storage system

 

Performance-based rebate

  • Provides ongoing payments to system owner based on the system’s actual kilowatt-hour production

 

Loan guarantee

 

  • A contract between the creditors (public or private) and a borrower such as banks or other commercial loan institutions that the Federal government will cover the borrower’s debt obligation in the event that the borrower defaults.


Business Models

Storage business models include both customer-owned projects, projects owned by third parties who can more efficiently use the available tax credits and access capital, and utility-owned investments. For customer-sited storage projects, third parties can aggregate small distributed storage resources into a larger “virtual” resource able to participate in wholesale markets, where available, and offer valuable services to distribution utilities or the bulk power system. Some common business models for customer-sited energy storage have emerged in recent years including:

  • Bring Your Own Device: The customer or a third party (aggregator or installer) owns the energy storage device and offers services to utilities or power system operators in exchange for financial compensation.
  • Storage-as-a-Service: The utility or third party owns and controls the energy storage but offers a fraction of its stored energy to customers, when the utility is not using it, in exchange for regular payments from the end-use customer.

The customer-sited storage business model adopted will often depend on several factors including the capacity of utility customers to invest in energy storage, and the ability of utilities to invest, own, and operate energy storage systems behind-the-meter. The details of who owns the system, who makes payments to whom, and who assumes which risks vary between business models and specific pilot project implementations. In all cases, these novel business models have arisen to improve the overall utilization and economics of storage and to accommodate storage’s ability to provide multiple services to multiple parties at different times. Without these business models, it may be difficult for storage operators to fully utilize the system’s value because few customers need all of the services the storage system can provide.

In addition to customer-sited storage models, there are also emerging business models for distribution- and transmission-connected storage systems. These business models, as with those for customer-sited assets, are driven primarily by the fact that few if any individual power system stakeholders will need all of the services that a storage system can provide. Sharing the capabilities of these systems may take both technical and regulatory innovation to ensure that storage systems can provide services to multiple customers and that the storage system is properly compensated for services provided.

Utilities may procure storage through bilateral negotiations or competitive solicitations to meet renewable energy mandates or to serve important grid needs. Competitive solicitations in recent years have generated record-breaking low prices for storage projects deployed with solar and wind.

Reading List

A Framework for Readiness Assessments of Utility-Scale Energy Storage

National Renewable Energy Laboratory, 2021

Integration of greater shares of distributed energy resources and renewable energy are transforming the power sector. Energy storage technologies have the potential to help meet the additional challenges of this transformation, by increasing the flexibility of the power sector and contributing to system strength. This report is intended to inform energy storage investments through the development of a framework for energy storage readiness assessments.  The framework can help policymakers and regulators identify priority areas for energy storage policy and program development. This report addresses barriers and opportunities for utility scale energy storage. 

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