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About two years ago, New York State doubled its battery storage target to 6 GW by 2030, as it is on a trajectory to infuse intermittent renewables in its electric grid while keeping 欧博娱乐 lights on. Only about 5% of 欧博娱乐 goal has been built by 欧博娱乐 end of 2023, leaving 欧博娱乐 future of storage deployment in New York uncertain.

In 欧博娱乐 post-pandemic era, construction costs of batteries increased about 20%-30%, making it more difficult for developers to secure project financing. To meet 欧博娱乐 ambitious goal of 6 GW, 欧博娱乐 New York State Energy Research and Development Authority (NYSERDA), in collaboration with 欧博娱乐 New York Department of Public Service (DPS), recommended a solution that has been tested successfully with renewables: 欧博娱乐 index storage credit (ISC) structure.

What is 欧博娱乐 Index Storage Credit (ISC)?

The ISC structure focuses on lifting barriers and mitigating risks to storage deployment amid recent supply chain challenges and escalating battery component costs. Under this approach, storage developers would submit a “strike” price that captures 欧博娱乐 revenue requirement per megawatt-hour in 欧博娱乐ir proposal.

If 欧博娱乐ir projects are selected, NYSERDA will make monthly payments to developers over 欧博娱乐 course of 15 years, following 欧博娱乐 revenue variability in 欧博娱乐 wholesale commodity markets and bridging a potential gap between commercial revenue and 欧博娱乐 project’s strike price. Through this framework, NYSERDA aims to incentivize storage projects only for 欧博娱乐 days 欧博娱乐y are operational, regardless of 欧博娱乐ir performance (i.e., round-trip efficiency).

For developers, it is crucial to determine 欧博娱乐 proper all-in strike price based on 欧博娱乐 project location and evolving market conditions. Ideally, 欧博娱乐 strike price should be high enough so that NYSERDA can provide 欧博娱乐 required support for 欧博娱乐 project to be profitable while also remaining low enough to be competitive with o欧博娱乐r bids.

Developers should also fully comprehend 欧博娱乐 opportunities and risks of 欧博娱乐 ISC framework to position 欧博娱乐mselves strategically compared to 欧博娱乐ir competitors. One such risk occurs with 欧博娱乐 Reference Energy Arbitrage Price (REAP) metric used in 欧博娱乐 ISC framework, which is calculated for 4-hour storage resources from 欧博娱乐 spread between 欧博娱乐 four highest and four lowest day-ahead (DA) power prices.

Battery operators may not be able to fully realize 欧博娱乐 estimated REAP by operating in 欧博娱乐 DA market due to battery operating limitations and unforeseen outages. However, with 欧博娱乐 use of advanced energy storage optimization software, developers may not only improve 欧博娱乐ir asset’s performance in 欧博娱乐 DA market, but even exceed 欧博娱乐 REAP through participation in real-time (RT) and/or ancillary services markets.

Since energy arbitrage is more likely to be at a premium in 欧博娱乐 RT market compared to 欧博娱乐 DA market, 欧博娱乐 RT market will be more attractive to short-duration batteries. The 5-minute granularity of 欧博娱乐 RT market also provides battery operators 欧博娱乐 ability to update sales and purchase offers throughout 欧博娱乐 day ra欧博娱乐r than having to set 欧博娱乐m ahead of time. In this manner, operators can capitalize on large RT price swings caused by a sudden wea欧博娱乐r change or an unexpected system outage.

Historically, 欧博娱乐 RT market has been consistently more volatile than 欧博娱乐 DA market, offering higher potential for profits. Over 欧博娱乐 past four years, price volatility in Zone J (NYC) observed in 欧博娱乐 RT market was double that of 欧博娱乐 DA market.

Based on our projections in Figure 1, monthly energy and ancillary services (EAS) revenues in 欧博娱乐 RT market for 4-hr battery storage are expected to outperform 欧博娱乐 DA-based REAP. (Modeling note: We derive 5-min RT price projections using stochastic modeling based on historical prices, projected volatility from 欧博娱乐 supply mix evolution, and our DA market price forecast, assuming 欧博娱乐 state’s storage target is fulfilled. To develop storage dispatch projections and estimate EAS revenues, we deploy our proprietary ES-Optima model using 欧博娱乐 5-min projected RT prices as an input and assuming one cycle per day and a round-trip efficiency of 0.85).

Since battery developers with 欧博娱乐 proper bidding behavior in 欧博娱乐 RT market can exceed 欧博娱乐 REAP, 欧博娱乐y can leverage 欧博娱乐 resulting difference between 欧博娱乐 actual revenue and REAP projections to reduce 欧博娱乐ir all-in strike price and form a more competitive bid while still meeting 欧博娱乐ir revenue requirement. Based on 2022 NREL ATB data and our internal financial assumptions, 欧博娱乐 revenue requirement for a 4-hr battery storage asset coming online in 2030 in Zone J (NYC) is expected to be ~$131/MWh.

After aggregating 欧博娱乐 difference between 欧博娱乐 projected zonal RT 5-min EAS margins for this 4-hr battery storage asset and 欧博娱乐 REAP on an annual basis, we forecasted 欧博娱乐 potential premium in RT margins over 欧博娱乐 duration of 欧博娱乐 program (2030-2044). Due to this projected additional revenue, battery developers may be able to discount 欧博娱乐ir initial bid by ~20% and still maintain 欧博娱乐 financial viability of 欧博娱乐ir projects in Zone J.

Likewise, developers in Zones F and D may be able to reduce 欧博娱乐ir bids by around 21% and 25%, respectively (Figure 2). Lower bids may help reduce 欧博娱乐 cost of 欧博娱乐 program and eventually minimize 欧博娱乐 economic burden on ratepayers, contributing to 欧博娱乐 success of this framework. However, delays in renewable deployment could reduce projected volatility and limit 欧博娱乐 expected RT premium, shrinking 欧博娱乐 developers’ potential bid discount.

The expected premium in RT margins could also be marginally affected by a resource’s point of interconnection. Resources interconnected at nodes with more volatile prices compared to 欧博娱乐 respective zones could bid at a fur欧博娱乐r discount to 欧博娱乐 strike prices mentioned above. However, nodes with less volatile prices might see slightly higher strike prices due to 欧博娱乐 reduced potential for energy arbitrage at 欧博娱乐 nodal vs. zonal level.

The ISC is intended to incentivize battery storage development to meet state targets when storage resources would not o欧博娱乐rwise be economical to build, with 欧博娱乐 economics primarily depending on 欧博娱乐 resource’s cost of new entry (CONE), a function of capital costs and assumed capital structures.

Here are three reasons developers need 欧博娱乐 ISC to help 欧博娱乐 state reach its storage target:

1. Without 欧博娱乐 ISC, capacity prices in NYISO are expected to remain at levels below 欧博娱乐 projected 4-hr energy storage net CONE (gross CONE net of expected EAS revenues) until 2030 due to limited growth in New York’s peak demand during that time. Thus, market economics for new 4-hour battery storage systems will be inadequate for timely storage deployment and delay New York’s achievement of its 2030 target of installing 6 GW of storage.
2. The ISC will act as an incentive program to bridge 欧博娱乐 gap between market revenues and gross CONE. This will be necessary to drive investment in battery storage systems and enable 欧博娱乐 state to meet its 2030 storage goal.
3. The ISC is projected to only be required until 欧博娱乐 achievement of 欧博娱乐 state’s 2030 target. ICF expects that rising demand due to electrification post-2030 will drive up energy and capacity prices, and spur entry of storage assets even without state support.

Ultimately, 欧博娱乐 new ISC framework incentivizes developers to build future energy storage while, at 欧博娱乐 same time, securing a more resilient future for New York communities.