Introduction and overview of the technology
Electricity markets are beginning to experience a rapid transformation as development and deployment of energy storage continue to grow at an accelerated rate. While industry stakeholders have been aware of potential benefits for some time, energy storage now appears to be at an inflection point. The current rise of energy storage financing and development opportunities mirrors the heightened interest in solar technologies that we observed nearly a decade ago.
Storage technologies present a unique opportunity to more precisely balance the supply and demand of electricity in a reliable, affordable and sustainable manner. Energy storage refers to the process of converting electrical energy to a storable form and then back into electricity when required. The term "energy storage" is a broad umbrella that applies to a range of technologies and applications.
Technologies can be loosely be classified into the following four categories based on the form of energy stored or the method of energy conversion: (1) mechanical; (2) electrochemical/electrical; (3) thermochemical and (4) thermal. Technologies within these categories differ significantly in a number of ways, including cost, scalability, maturity, efficiency, end-use applications and other characteristics. Certain technologies, such as pumped hydroelectric, are mature technologies with a proven track record of implementation and operation. Other technologies, such as certain forms of battery storage or fuel cells, are more novel with less cost and performance certainty. Each specific technology presents a unique set of benefits and advantages with respect to development and wider integration.
In terms of scale, energy storage projects are often categorized into "behind the meter" and utility scale, "front of the meter" projects. The former is typically used to reduce power costs and usage for residential or commercial loads. The latter will usually involve a power contract for voltage control or ancillary services with a governmental authority (such as the IESO) or a local distribution company or the direct sale of electricity into the commercial market. A third category of energy storage projects involves the integration of an energy storage facility with a more traditional generation facility (e.g. wind or solar) to mitigate the intermittent nature of certain renewable power sources.
Energy storage presents a number of direct and indirect benefits for the electricity system. Unlike more traditional power technologies that typically offer a limited range of services, energy storage technologies can provide multiple services and applications across the electrical system. For example, energy storage technologies can act as a load and as a generator to provide balancing services and fill in capacity shortfalls during spikes in electricity usage. Broader implementation of energy storage may facilitate deeper integration of renewables into the power grid by mitigating the intermittent quality of such energy generated from renewable sources. Energy storage can also improve the reliability, safety and security of the electricity grid through enhanced control of fluctuating voltage and frequency.
Legal Structure of an Energy Storage Project and Legal Issues to Consider
LEGAL STRUCTURE OF AN ENERGY STORAGE PROJECT
The contracts that will be entered into by a developer in respect of an energy storage project are generally similar to traditional renewable energy projects, as depicted in the diagram below.
Like other projects, an energy storage project is typically owned by a special purpose vehicle ("SPV") formed by the developer. The SPV will usually enter into a power purchase agreement (a "PPA") (sometimes referred to as a facility agreement or energy services agreement) with a creditworthy off-taker, who may be, as previously mentioned, a residential or commercial load customer (for "behind the meter" projects) or a governmental authority or local distribution company (for "front of the meter" projects). If the project is being built on land that is not owned by the developer, the SPV will need to enter into customary real property agreements to obtain the requisite real property rights (e.g. a lease or license) and ensure that it has all necessary access rights to the project.
For the construction phase of the project, the SPV will typically enter into an engineering, procurement and construction agreement with a contractor. These agreements will often provide for the procurement of project equipment by the contractor (rather than the SPV or developer directly entering into separate equipment supply agreements, which is a common approach for traditional renewable energy projects). Depending on the in-house capabilities of the developer, the SPV may also enter into operation and maintenance ("O&M") agreements and asset management/dispatch agreements with third parties.
RISKS OF AN ENERGY STORAGE PROJECT FROM A LENDER'S PERSPECTIVE
Although we have yet to observe any large-scale project financings for energy storage projects in Canada, we expect that such financings will substantially mirror the financing structure for renewable projects. Similar to other project financings, lenders will need to ensure the contractual matrix for the project hangs together and that there are sufficient, recurring revenues generated by the project to service debt. Lenders will assess the ability of the projects to support themselves without ongoing sponsor equity support. The SPV and the developer will be expected to grant customary security in favour of the lenders, including a pledge of the developer's equity in the SPV. As with traditional renewable project financings, lenders will expect to enter into direct agreements with the offtaker or load customer and relevant third party contractors and service providers.
Notwithstanding such similarities, certain unique features of energy storage projects distinguish energy storage financings from traditional renewable project financings. For example, given the heightened risk profile and lower degree of revenue certainty for energy storage projects, we expect that lenders may demand: (i) a lower debt to equity ratio than the standard 80/20 ratio that we are accustomed to seeing for traditional renewable energy projects; or (ii) cash sweeps to the extent that the project earns revenues that exceed the expected revenues in the financial model.
Given the novelty of certain emerging energy storage technologies, we expect that lenders will rely heavily on the input and expertise of independent engineers to assess technological risk and to ensure that the developer's maintenance plan is sufficiently robust. The expertise and creditworthiness of developers, operators and asset managers will be of particular importance for lenders.
CONTRACTUAL RISKS FROM A DEVELOPER'S PERSPECTIVE
Certain contractual risks may arise in relation to an energy storage project from a developer's perspective, including risks relating to the "host", revenue risk and guarantee risk.
Host risk arises primarily in respect of "behind the meter" projects, as such projects are typically reliant on a single load customer or "host" whose primary business is industrial or commercial in nature. The following risks may arise as a result of this reliance on a single host:
- The host could cease to operate the business or change its business operations in a way that does not allow the developer to utilize the nameplate capacity of the project. To mitigate this risk, the developer will want to ensure that its PPA provides for a termination right in favour of the developer and an obligation for the host to pay liquidated damages that reflect the revenue that would have been paid if the business change has not occurred (i.e. the remaining value of the contract).
- Insolvency risk is heightened given that the host is a corporate entity, rather than a governmental authority or energy utility.
- The host may require the site (including the project) to be shutdown for safety and maintenance reasons. The developer will want to ensure that its PPA provides adequate compensation during this period for lost revenues.
- The developer rarely has a consent right over a sale of the site by the host or a change of control of the host. While the host should not be released from its obligations, the sale could nevertheless result in a change of business operations that adversely affects the project or a new host with a different credit profile from the original host (which could result in increased insolvency risk).
- Assistance from the host will typically be required by the developer in order to obtain its interconnection and regulatory approvals. An unresponsive host may result in significant schedule delay, which may ultimately trigger termination rights under the PPA. To mitigate this issue, the developer will want any milestones under the PPA to be automatically extended for host delay.
As noted in our earlier commentary on lender risks, an energy storage project may be susceptible to significant revenue variability. For a "behind the meter" project, the developer will often receive a negotiated percentage of one or more of the following revenue streams: (i) customer savings from the operation of the facility (relating to timeof-use electricity price arbitrage or, in Ontario, savings from reduced global adjustment charges), (ii) participation in demand response programs, (iii) the sale of environmental attributes from the project in jurisdictions where those attributes have value, and (iv) if the customer is an energy utility, emergency dispatch revenue when the project is requested to provide power due to an emergency event causing electricity grid reliability concerns. This approach departs from traditional renewable PPAs where the off-taker is obligated to simply "take or pay" for power up to the contracted amount at the contract price.
The risks posed by revenue variability are heightened when combined with performance guarantees in the energy storage PPA.
It is not unusual for customers to demand that the developer guarantee a certain amount of savings from the project or guarantee certain levels of project performance or availability. If the developer agrees to provide such guarantees, the developer will need to be particularly diligent about ensuring that the project is properly maintained and that there is no degradation of performance over time. The developer should also: (i) ensure that any performance guarantees are adjusted to reflect unearned savings due to force majeure or issues caused by the host; and (ii) to the extent there is an O&M provider, pass on this risk by negotiating a back-toback performance guarantee in the O&M agreement.
Overview of Developments in Canada
Alberta's first transmission connected energy storage project was completed in September 2020. As of the date of publication, 10 additional energy storage projects are listed within the Alberta Electric System Operator's ("AESO") connection queue.
In August 2019, the AESO released its Energy Storage Roadmap, which sets out a plan to facilitate the integration of energy storage technologies into the AESO's Authoritative Documents and the AESO's grid & market systems. Highlights of the regulatory initiatives undertaken in 2020 to implement energy storage into Alberta's grid include the following:
- The Energy Storage Learnings Forum was organized to gather industry leaders to discuss and share learnings from energy storage integration in other jurisdictions. Additional consultation is expected to take place in 2021 to: (i) discuss economic modeling; (ii) share experiences in commissioning and testing of new technologies or configurations; and (iii) process efficiencies within existing frameworks.
- The AESO is currently hosting stakeholder engagement sessions on tariff treatment for energy storage with regard to the AESO's Bulk and Regional Rate Redesign. The AESO intends to file with the Alberta Utilities Commission ("AUC") an application for bulk and regional rate design by June 2021 with stakeholder consultation occurring in Q1 and Q2 of 2021.
- On October 1, 2020, the AESO released its Longterm Energy Storage Market Participation Options Paper (the "Paper"). The Paper discusses longerterm initiatives to address the unique aspects of energy storage integration that are not addressed within the current market rules. The AESO is hosting stakeholder engagement with the intention of releasing a long term energy storage market participation draft recommendation in Q1 2021.
- On October 14, 2020, the AESO announced that it is planning a technology pilot project targeted at any new technology that is capable of meeting the fast frequency response ("FRR") technical requirements. Lessons learned will be made public and will inform the Long Term FFR design and the Energy Storage Road Map. The AESO intends to run the procurement through an open process with a target of 20 to 40 MW from 1 to 3 service providers. Providers will be required to respond within 12 cycles (0.2 seconds) when a system frequency of 59.5 Hz is detected.
To assist developers, the AESO's Information Document #2020-013, Energy Storage Guide ("Information Document") provides the current AESO Authoritative Documents and ISO Rules that apply to energy storage projects. Such rules and guidance apply in the interim as the AESO works on longer term initiatives to address the unique characteristics of energy storage integration. Significant highlights from the Information Document include:
- The AESO intends that any reference to a generating source asset within the ISO Rules applies to an energy storage facility.
- Normal operating limits will be included in the applicable functional specification for the energy storage facility. Real-time stage of charge information will be provided to the AESO through Supervisory Control and Data Acquisition.
- A hybrid site is considered to be a site with a combination of an energy storage facility co-located with at least one other generating unit or aggregated generating facility that is not an energy storage facility. A pool participant of a hybrid site may choose to offer all the generating facilities on site as a single source asset; or offer each generating facility as a separately registered source asset.
- A renewable hybrid site is considered to be a site with a combination of an energy storage facility co-located with a wind or solar aggregated generating facility. A pool participant of such a site may choose to offer the energy storage facility as a source asset separate from the wind or solar aggregated generating facility; or offer all generating facilities on site as a single source asset.
- For the purposes of applying the requirements for Alberta reliability standards, a battery energy storage facility will be considered an aggregated generating facility. This means if a battery energy storage facility is installed with another aggregated generating facility and system access service(s) for the facilities is provided through a common switchyard, then the combined maximum authorized real power rating of the facilities will be used to determine the applicability of a reliability standard for each of the facilities.
From 2013 to 2017, the IESO issued a number of RFPs targeted at procuring energy storage capacity. The RFPs were designed to promote early-stage, proof of concept energy storage technologies.
In 2018, the IESO created the Energy Storage Advisory Group ("ESAG"). ESAG's work culminated in a report issued in December 2018 entitled "Removing Obstacles for Storage Resources in Ontario". The report indicated that one of the largest regulatory obstacles to the integration of energy storage facilities in the IESO administered markets is the minimum MW threshold to connect energy storage resources at the wholesale level (1 MW). Further ambiguities regarding registration and authorization requirements were also identified.
In Fall 2019, the IESO initiated the Storage Design Project ("SDP"). One of the mandates of the SDP was to identify and refine a matrix of interim and long-term design issues for the integration of energy storage resources at the wholesale level. As such, the SDP's work was limited to energy storage facilities registered to participate in the IESO's administered markets and excluded storage resources not within the jurisdiction of the IESO market rules such as behind-the-meter facilities.
In February 2020, the SDP released an interim design document putting forward temporary measures for addressing energy storage participation barriers in the IESO-administered markets. A long-term design document was subsequently released on September 15, 2020. The latter design document recommended certain IESO market rule and market manual amendments to effect the proposed temporary measures, including regulatory requirements for energy storage resources at every stage of IESO market participation from registration to operations.
Those IESO market rule and manual amendments were brought to the IESO's Technical Panel in October 2020, where they were approved for recommendation to the IESO Board of Directors. The market rule and manual amendments were then approved at the December 2020 IESO Board meeting and are effective as of January 18, 2021.
The September 2020 long-term design document was intended to provide only a high-level roadmap for how the IESO will treat storage in the IESO-administered markets going forward, once IESO tool upgrades are made to fully integrate storage resources following the implementation of the IESO's Market Renewal Program ("MRP"). Further market rule and market manual amendments, which will be required to permanently integrate energy storage participation in the IESO-administered markets, are not expected to be developed and implemented until after the implementation of the MRP.
It is anticipated that bringing distributed energy resources ("DERs") and behind-the-meter resources into the IESO-administered markets will be addressed through other avenues such as the IESO's Market Development Advisory Group, the IESO's Innovation and Sector Evolution White Paper Series, and possibly the Ontario Energy Board's ("OEB") stakeholder consultation on DERs. Some coordination between the IESO and the OEB will therefore be imperative to the successful integration of energy storage resources into Ontario's electricity markets. For example, the long-term design document suggests that the OEB and Government should consider any necessary revisions to new settlement amounts or uplift charges needed to implement energy storage participation in the IESO's administered markets.
How the long-term vision for the integration of energy storage resources fits into the IESO's future procurement policies, as contemplated in the IESO's recently released three-part approach towards procuring resource adequacy, also remains to be seen.
Furthermore, it remains to be seen if and to what extent the recent hiatus of the Industrial Conservation Program (ICI) in Ontario will have on the development of behind-the-meter energy storage resources by Class A participants given that most of such project development to date has been for the purpose of decreasing Global Adjustment payments.
In December 2020, Hydro-Québec announced that it has launched a subsidiary named EVLO Energy Storage Inc. ("EVLO") which designs, sells and operates sustainable energy storage systems. EVLO has developed lithium iron phosphate batteries that are used in energy storage systems intended for power producers, transmission providers, distributors and commercial and industrial users in relation to medium and large scale energy storage. EVLO has also developed power control and energy management software.
Some Hydro-Québec projects have already incorporated the technology that EVLO offers, including:
- the Quaqtaq off-grid system pilot project on renewables and energy storage in Northern Québec, which includes rooftop solar panels;
- Québec's first microgrid project located in Lac-Mégantic which includes solar panels, energy storage units and energy efficiency tools, and which can operate independently from Hydro-Québec's main grid; and
- Hydro-Québec's photovoltaic solar generating station connected to the grid with an installed capacity of 8 MW in La Prairie.
EVLO also has signed a memorandum of understanding with Innergex in order to provide the lithium iron phosphate battery that will be used as part of Innergex's Tonnerre project located in BourgogneFranche-Comté, France, which involves the installation of a 9 MW storage system in the transmission system operated by France's national transmission provider Réseau de Transport d'Électricité ("RTE") under a long-term agreement between RTE and Innergex.
While the Province's electricity infrastructure has been predicated on the significant storage capacity of BC Hydro's legacy hydroelectric facilities, the Province may soon look to alternative sources of storage capacity. As part of its Clean Power 2040 consultations, BC Hydro will consider the potential for utility-scale batteries and pumped storage to provide additional capacity as the utility plans for the 2030-2040 time horizon. British Columbia is already home to three operating electrochemical energy storage projects, as well as a significant planned pump hydro storage project. According to one recent study, based on current rate structures, the use of electricity storage systems for behind-the-meter applications would start to be profitable in British Columbia from 2025 onwards.
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