Does the New Massachusetts Clean Peak Energy Standard Get Energy Storage Over the Hump?

There is always a Next Big Thing.  First it was sliced bread. Then lots of other things, like the light bulb, automobiles, airplanes, refrigerators, washers and driers, the Broadway musical Cats, India Pale Ales, and, after 2008 in Massachusetts, solar PV.

Now the Next Big Thing is Energy Storage. And I don’t mean Energy Storage that is tied to solar PV and paid for by a combination of SMART payments and a generous Investment Tax Credit.  I mean stand-alone (i.e., not tied to solar PV), Behind the Meter (BTM), grid-tied Energy Storage that off-sets site loads.  The kind that can be widely deployed to charge when electricity is clean/cheap and discharge when energy is dirty/expensive.

To help the economics of Energy Storage projects, the Massachusetts Department of Energy Resources (DOER) recently filed with the General Court (i.e., in Massachusetts-speak, “Legislature”) the first of its kind Clean Peak Energy Standard, or CPS.  The CPS is “designed to provide incentives to clean energy technologies that can supply electricity or reduce demand during seasonal peak demand periods”. The DOER is hoping that the CPS will provide another arrow in the quiver of the pro-forma of Energy Storage projects and help make them more financeable.

It’s a novel idea from a state (or Commonwealth, I guess) that continues to push the envelope in terms of renewable and alternative energy.  The idea is that there is another payment for cleaning up the times when the grid is most expensive, and therefore most dirty, by deploying “cleaner” resources.  A number of technologies qualify but, let’s be honest, it’s largely aimed at providing another revenue stream for Energy Storage. Some dispute how effective this really is in terms of being clean, but I give credit to the state for trying.  It’s not easy being first and my money is on it being refined and improved over time.

The opportunity is immense.  There are thousands of sites in MA that have sufficiently high peak loads to support Energy Storage, if these projects can get to the point that they are “financeable” and easily replicable.  That would have a profound impact on reducing the need for traditional energy infrastructure (i.e., transmission and distribution lines, large substations like what has been proposed in Kendall Square, fossil fuel power plants, etc.), as well as “shift” low carbon energy to high peak demand times.  So, while others may see a mall or office building, I see Energy Storage. My family is super entertained as we drive down the street and I point out all these interesting Energy Storage possibilities!

But the question remains is BTM Energy Storage financeable?

To try to answer this, let’s leave out the CPS and break the other revenue streams into “Financeable” and “Upside” buckets.  In this scenario, “Financeable” means the revenue streams are well understood, reliable, expected to be there for years to come, and are cont (or at least not going anywhere).

“Upside” means the revenue streams that cannot be contracted and therefore cannot be counted for financing purposes.

And, to review, this only applies to Behind the Meter, customer-sited Energy Storage.  Not some big system out in a field someplace, or Energy Storage attached to a SMART application.  I am focusing on stand-alone BTM because, in my opinion, the biggest opportunity from an infrastructure and carbon-shifting perspective lies in siting storage at the point where energy is used. Others may disagree with this premise but I am the one writing this piece so I get to make the rules.

Financeable Bucket

1. Installed Capacity (ICAP) charge – unfortunately, these values are way down right now because they are tied to Forward Capacity Market (FCM) values, which are at historic lows.
2. Utility demand charges – well understood but difficult to assume more than 25% of the capacity of the Energy Storage system. Therefore, it doesn’t provide a lot of value, especially in NGRID territories where demand charges are relatively low.
3. Utility Connected Solutions Demand Response Program – Very valuable at $225/kW per year but only guaranteed for five years, so it’s limited from a financing perspective.
4. Forward Capacity Market payments (FCM) – Very low values for the foreseeable future.

Upside Bucket

1. ISO Revenues, including:
   • Energy
   • Frequency Regulation
   • Reserves

So, where does the Clean Peak program fit?  Is it in the Financeable Bucket or the Upside Bucket?  Many of the comments filed on the program urged the DOER to move it into the Financeable Bucket by creating a floor price similar And, in response to those comments, DOER made some important changes to the regulations, including a provision that would adjust the supply demand dynamics of the market to mitigate falling prices based on the supply of Clean Peak Energy Credits (CPECs) generated.  The DOER also increased the value of the credits; they are now worth in excess of $100,000 per year per MW, depending on duration.

But were the changes enough to move the Clean Peak into the Financeable Bucket?  And is there enough value in the Financeable Bucket to really move the needle, especially with historically low FCM and ICAP values?

The ones to answer these questions are likely the folks on Wall Street; the ones with the money.  My bet is that, eventually, we will see widespread deployment of stand-alone, BTM Energy Storage projects, and the CPS is an important step in that process.  But I think we may need more long-term certainty in some of the revenue streams to really make it happen.

Author: Matthew Wolfe, Managing Partner