Moody’s: Battery Storage Viability is Increasing

Battery storage’s emergence as a tool to boost grid reliability and a viable project finance opportunity is good news for utilities and grid operators, said Moody’s Investor Service in an infrastructure and project report on March 19.

The ratings agency noted that currently, lithium ion battery costs hover at about $400/kWh installed—the battery itself which is about $200/kWh, and the balance of the plant (with traditional electric components) at another $200/kWh. While that figure is the result of an already significant cost decline over the last several years, if current trends continue, costs will continue to decline to $100/kWh between 2020 and 2022.

The cost decline could translate to a “significant reduction in project costs, which will make storage applications more economically viable,” it said.

Cost declines for battery storage can be pegged to growing economies of scale in manufacturing and improvements in battery technology, Moody’s noted. The energy storage sector also has regulatory backing. Along with energy storage mandates in several states, including California, Massachusetts, New York, and Hawaii, a 30% investment tax credit is available for energy storage coupled with renewable generation at a federal level.

Driven by falling costs and strong regulatory support, the U.S. storage market will likely show a nine-fold increase in volume growth between 2017 to 2022, it projected.

However, the agency noted that  from a technological and operational standpoint, the key issue for the utility-scale battery storage market  is whether the operating profile for which the storage system was designed is consistent with the way it is actually operated. “The project sponsor/developer will want to develop a particular set of specifications for the battery storage project with the help of the operator/integrator and provide these specifications to the [original equipment manufacturer (OEM)] supplier,” it said.

“These specifications typically deal with the number of times the battery is cycled, the maximum allowed depth of discharge, size, replacement parts, etc. The operator is then expected to make sure the system is operated in a way that is consistent with the design. Degradation is highly dependent on system operation and is a function of intended versus actual use.”

Another issue concerns usage patterns. “Uncertainty over usage patterns are generally higher when a battery system practices ‘value stacking’ to increase revenues,” it said. However, it noted that steps can be taken to mitigate the risk that the battery storage project will be operated differently from its design. These include working with OEMs to design systems to meet specifications; signing operations and maintenance agreements to handle routine and corrective maintenance as well as capacity and deal with replacement and degradation. “

In addition to an O&M agreement, some newer battery storage projects have entered into capacity maintenance agreements (CMAs) with operators. All batteries lose capacity over time or have certain degradation characteristics. The CMA helps to protect the project by making sure it stays within certain bounds, such as the number of round trips cycling on and off, or the total number of kWhs over the course of a year, etc.,” it said.

Credit risks may also be apparent depending on the revenue model used. “This can be a merchant model, where the market determines the revenues; a contracted model where revenues are prescribed under long-term contractual arrangements; or a combination of the two. From a credit perspective, the contracted model is the most positive, followed by a model that combines contracted and merchant elements (‘value stacking’). The weakest from this perspective is the pure merchant model,” it said.

—Sonal Patel is a POWER associate editor (@sonalcpatel, @POWERmagazine)