Q&A about U.S. Energy Storage Market and Installed Capacity

Q: What is the expected future installed capacity in the US market?

A: The overall installed energy storage capacity in the US is about 10GWh in 2021, with about 5GWh added in the first half of 2022. It is possible to reach 13-15GWh for the whole year, and 70-80GWh is expected in 2023-24. The previously forecasted installed capacity is much larger, and the current shortage of upstream raw material supply is affecting the project schedule, but the release of the anti-inflation bill is an unprecedented boost to the energy storage industry.

Q: Will raw material supply continue to affect future installations?

A: The high level of upstream oscillation will exist for a long time, and there is no possibility of returning to normal in the short term. But now the favorable policy and market demand will partially offset the high price of upstream raw materials, many owners have not looked at the installed cost hard to push forward.

Q: Will the revenue of U.S. energy storage projects rise with the price of electricity?

A: The revenue model for the energy storage market is a very volatile one. For example, the Texas blizzard of 2021 has unprecedented spot prices for natural gas. Projects with energy reserves reached very impressive yields at this time, and many energy storage projects in '21 earned 80-90% of their revenue during the blizzard. Overall, as the volatility of overseas electricity prices increases, the revenue space for energy storage projects is expanding. It is critical for energy storage projects to capture both high and low price opportunities. The ceiling for energy storage revenue is still very high if there is a black swan event that has a high impact on natural gas and electricity prices.

Q: What is the revenue model for U.S. energy storage projects? What are the main components?

A: In the California market, for example, the main sources of revenue are divided into several categories: the first major category is the demand issued by the government to fill the foreseeable future gap in the California electricity market. For example, Resource Adequacy, which can be seen as a variation of long-term capacity tariff contracts. Generally signed for 15-20 years, the state government and power operators will underwrite the price; the second is the spot market. Divided into day-ahead and mid-day markets, more work and more pay, if the project is responsive enough to earn more price tip. This is currently the most important source of income, which determines the income ceiling of energy storage projects; the third piece is the frequency regulation. Mainly in the new energy penetration rate is relatively high in the power market. Because of the gradual withdrawal of traditional energy in the process, the grid is increasingly unstable, the need for energy storage as an auxiliary asset to maintain grid frequency stability. This part of the auxiliary asset response speed requirements are very high. The previous thermal power plant start-up speed than the lithium-ion millisecond response speed, which is also an important part of the underwriting. Some places will give monthly contracts, but there are times when doing frequency regulation will take up capacity, thus affecting arbitrage in the spot market; the fourth piece is rotating backup. Both conventional energy and lithium storage are participating, and if a large power outage occurs, dispatch can get a very high price for power. One of the most important is the spot market piece, energy storage or by virtue of the spot market to the profit model run more through.

Q: U.S. energy storage is the main independent or and new energy supporting?

A: This year is a more important point in time, in 2022 before the relatively large table before the project are mainly light storage power plant. Before the IRA was released, the U.S. subsidies were only for PV projects, and energy storage as a package could get ITC. after the IRA was released this year, energy storage can also get ITC independently, which is a big advantage for independent energy storage.

Q: What is the specific form of ITC subsidies?

A: The U.S. Treasury Department's detailed guidance program is not yet available, and only the outline is currently available. People think it will take 6-12 months to get the official guidance manual, there is part of the uncertainty. But everyone is currently doing research work on the IRA, the bill is already the product of a bipartisan compromise, the possibility of landing is very high. itc subsidy requirements are still very much in place. There are two timelines, one is to take subsidies within 60 days of the release of the guidelines, within 60 days of implementation is 30%, if you can meet the requirements of the domestic supply chain can get an additional 10% incentive, if the project falls in the energy commons and other areas can get an additional 10% incentive, then the total is 50%. There are also some low-income areas can get up to 20% additional subsidies, so the maximum subsidy range can reach 70%. 60 days later is more detailed, 30% will be split into 6% + 24%, which 24% to meet the manpower requirements, to meet the education and minimum wage system, is the protection of the local industry, but also hope that the local practitioners have more and more incentives. The latter can also split the energy community subsidy from 10% to 2% + 8%, the low-income subsidy also needs to meet the domestic supply chain and manpower requirements. This timeline looks farther ahead, the current industry discussion is more intense, think this bill is a bit too hasty, because you can not rely on policy alone to promote local manufacturing, after all, the current East Asian lithium industry is the most mature. Now everyone is also waiting to see which of these policies can play ball, are evaluating and waiting for the official guidance guidelines to land.

Q: Many projects will wait and see?

A: There are not too many projects on the sidelines. Places like California have a very significant power shortfall over the next three years and will have to add more storage to meet the energy shortfall. So far the pace of end-user developers is accelerating.

Q: What level of revenue will the California project achieve without considering subsidies?

A: It depends mainly on the type of project. The main standard in the industry is 10%-15% IRR. ITC subsidies may pull up 5%-10%, depending on how it works.

Q: What is the approximate initial investment cost of a large energy storage project in the US?

A: The current system integration of energy storage projects is very high. The cost is mainly in the battery side part, accounting for 60%-70%.

Q: You can see many local manufacturers in the integrator segment. Will the future U.S. energy storage market be dominated by local manufacturers or will there be opportunities for domestic manufacturers as well?

A: From the whole industry chain, Chinese manufacturers completely occupy the middle and upper reaches, the U.S. integrator tier1 is mainly Tesla and Influence, these companies in the middle and upper reaches of the equipment supply is also mainly Chinese manufacturers to do. From the core side to calculate the Chinese manufacturers accounted for more than 80%. From the integration side to calculate not so good. From the point of view of the shipment volume alone, most of the integrators may be dominated by local manufacturers. But the U.S. market is still a very high barrier to entry, mainly Ningde, Sunshine, KELU these old faces, but energy storage is a very large market, Tesla or CATL is not able to eat all the market share, we all have the opportunity.

Q: How do you see the prospects of Chinese PCS manufacturers in the United States?

A: We are not very optimistic about the prospects of Chinese PCS manufacturers in the United States. In terms of industry chain, the PCS segment is not very friendly to Chinese manufacturers. On the one hand, if we take into account the IRA subsidy, the cost advantage of Chinese manufacturers is not obvious in the future. Now PCS freight and tariffs are already a big burden for domestic manufacturers. At present, the development of domestic manufacturers in the AC side is not as fast as the battery side. Because the AC side involves the problem of connection with the power grid, many projects do not use the products of Chinese companies because of political factors, the next 2-3 years may be more difficult.

Q: Is it more difficult for domestic manufacturers to do the EMS software?

A: EMS is not a question of whether the product can be done or not, it is simply not allowed to be touched by Chinese manufacturers. From PCS to EMS, some terminal owners are not willing to let Chinese manufacturers participate. The battery side is because the U.S. does not have a local industry chain, so there is no way but to use domestic manufacturers.

Q: Are the subsidies also related to localization?

A: On the one hand, it is the subsidy from ITC. The amount of subsidy a developer can get is related to the proportion of local manufacturing. On the other hand is the very high amount of subsidies for the locally manufactured equipment itself. And Chinese companies are also carrying very high tariffs and freight costs. Although the whole lithium chain is a very long one, and it is very difficult to establish in the US in the short term, so it won't have much impact.

Q: How difficult is it for a new manufacturer to enter the U.S. energy storage market?

A: Large-scale energy storage projects are a to B market. The technical content, local standards, and power security are all very delicate and demanding, which is the technical level of difficulty; the second is the supply chain difficulty, which is an industry with a very strong horse-trading effect, and the oligarchs will certainly occupy the major share in the future (for example, the first few account for 60%-70%). Another aspect of the end-owners actually do not want to change partners frequently, especially the integration side of the hardware. On the one hand, security, the second aspect is that they are less sensitive to cost. The first two years of low-cost strategy has opportunities, but these two years is still very difficult. Of course, it also depends on the company's ability to control the supply chain, now if you have better control over the upstream core or lithium resources, there are definitely still opportunities, because the market volume is very large, if the head can not eat all, then the next manufacturers also have opportunities.

Q: The United States energy storage project development and construction cycle is about how long?

A: The development and construction cycle is relatively long. But independent energy storage is already much better than optical storage. First of all, land acquisition is a key factor, and getting land in the U.S. is a long and difficult process. Some of them have to be approved by the Department of Energy, and the preliminary work for a project of several hundred MWh may take 1-2 years. The prep process then begins with supplier selection and locking in your own solution to move forward with the project. As energy storage becomes an immediate need in some U.S. regions, the process is expected to get faster and faster, after all, the land needed for energy storage projects is not as high compared to PV. And the US is also a relatively large country, the speed of project advancement is still much better compared to Europe.

Q: Considering the 1-2 year development cycle, will next year's projects include many projects that were postponed this year?

A: Yes. Especially this year, many light storage projects were postponed, and the price of components rose too much. If the owner's account can not be evenly calculated can only be suspended, for example, there is a project in Hawaii this year directly abandoned, this has not been encountered before.

Q: Is there any profit model for light storage projects?

A: Energy storage is not strictly speaking a power generation asset, it can only be charged through the grid side to get energy. In the U.S., 70%-100% of light storage projects are strictly required to come from the PV side. This limits the trading policy of energy storage in the power market. Because the PV generation curve is very predictable, there is a lot of power generated during the day, but there is no way for PV to generate power at night when electricity prices are high. So some PV storage projects are very big, but their revenue model is not as good as small projects.

Q: Will there be more independent energy storage projects next year?

A: Yes. For example, many projects of integrators like Atlas are leaning towards stand-alone storage. The movement of the head players largely indicates the trend of the industry.

Q: Before the IRA Act, is there an ITC subsidy for PV plants built and then equipped with energy storage?

A: Before IRA is no, energy storage can only be part of PV to get subsidies, PV power plant built and then with energy storage is no subsidies. In the IRA out, this part of the storage can be counted as independent energy storage is to wait and see, this part can not take subsidies have not been determined.

Q: Is it true that a lot of the incremental energy storage projects next year will come from the demand for supporting stock PV?

A: More from independent energy storage. The growth rate of independent energy storage will certainly be much higher than optical storage, from the current rough outline, the policy is more friendly to independent energy storage than optical storage.

Q: What is the percentage of pre-meter storage involved in PPA?

A: There is no PPA concept for stand-alone energy storage, and PPA is more for light storage, because stand-alone energy storage is not used as a generation asset, but only an auxiliary generation asset for modeling. A large percentage of independent energy storage revenue comes from capacity contracts, and vendors with strong capabilities can get more revenue in the spot market, and FM revenue is downward overall. Because the market is more stable, but more and more people are involved. The spot market is definitely the main revenue growth point in the future, because the size of the spot market will become bigger and bigger.

Q: local manufacturing requirements are industrial and commercial, household storage, large storage are there? Is it true that the higher the local ratio the more subsidies?

A: At present, the electric vehicle industry is 40% local manufacturing ratio requirement. But now the definition of the energy storage industry is not very clear, and no official guidelines have been issued.

Q: The Federal Reserve has been raising interest rates, does it have a big impact on the pre-meter energy storage market IRR?

A: I think there will be some impact, but it will not be a very big deterrent. Because the entire investment in energy storage will be reflected in the bills of electricity users, that is, the investment costs are ultimately borne by the user. The current power shortage in the U.S. in California, for example, is visible to the naked eye and does require these energy storage assets to fill, so it is expensive to get on.

Q: The U.S. pre-meter energy storage market in California and Texas accounted for more than 60%, looking backward to other states development potential is not large?

A: California was a monopoly until 25 years ago. Now look at the Southwest market (Arizona, New Mexico, etc.) the opportunity is better, because these places have better light. There are also good opportunities in these markets in the East Central PJM and New York areas. Because the local area has set a quantitative energy storage installation target, so it will be full steam ahead. Other regions are not as aggressive as these places, but all have opportunities.

Q: Is the integrator offer also linked to the core price?

A: Nowadays, it is generally a case by case negotiation, and there are deviations in each project cycle and delivery time. Regardless of the timeline need to have a locked core and customers to talk, upstream core stable supply is now the most important issue for integrators. Price linkage we are also trying, but it is more difficult. Because now the upstream is very strong, upstream manufacturers are not willing to use the price linkage to lock their profit margins, they still want more of a case a negotiation. Now we will sign some framework agreements, but it is not too easy to say to what extent the price linkage will be.

Q: Will IGBT modules be a limiting factor?

A: IGBT is mainly PCS, PCS have sufficient stock, the contradiction is not obvious.

Q: Why is the share of energy storage battery not very high in Japan and Korea?

A: The main reason is the technical route. Japan and South Korea before the main ternary, and now energy storage everyone use LFP.

Q: Electric vehicles in the United States out of the IRA bill to limit the production of batteries outside the United States, will it be expanded to energy storage batteries?

A: Definitely will be expanded, but the speed of advancement and the speed of industrial reflux is related. If they find that the upstream material reflux can't be done later, it may not be done. But if they do well, then they will continue to push forward. So people are waiting to see whether to go to the U.S. to build a factory, and the window period may be 1-2 years.

Q: Is there still a shortage of PCS in the US?

A: It mainly depends on the owner. Some owners see that you are from China and unconditionally do not use, even if they use more expensive solutions, they do not use Chinese manufacturers.