By Richard Stubbe, Bloomberg New Energy Finance editor. This article first appeared on the Bloomberg Terminal.
Himanshu Saxena was appointed chief executive officer of the Starwood Energy Group Global LLC in November. He has been with the investment firm, which focuses on energy infrastructure, for 10 years and was named co-head of the business in 2015.
Starwood, based in Greenwich, Connecticut, manages equity commitments of more than $3 billion focused on natural gas, renewable power and transmission. It moved into energy storage in 2016 with a $100 million investment in Stem Inc., which develops, owns and operates storage systems at customer sites in exchange for recurring lease payments.
Saxena answered questions from BNEF in a phone interview on Feb. 19.
Q: It’s been about a year and a half since Starwood expanded into energy storage with its investment in Stem. How is the storage business changing?
A: The storage business has flourished and blossomed in the past year. You’re continuing to see more storage in different parts of the grid. You’re seeing it in California, in Ontario, other states and the Northeast as well. There is clearly a recognition that storage is here to stay and that it will play a more vital part in the energy supply chain.
Q: What are Starwood’s plans in the space?
A: We have been looking at a number of RFPs that have come out recently in different markets, in California and other places, where systems are looking for new battery storage. A lot of these are utility-scale grid storage, and they’re larger projects — 10 megawatts, 20 megawatts, 50 megawatts. There are two parts to the storage business model. One is the behind-the-meter, which we are doing with Stem, and the other is utility-scale, which is directly connected to the grid. We are not only working with developers but we are working with projects where we would be the developers. We’re tackling storage from all angles.
Q: The Federal Energy Regulatory Commission recently announced that storage will be eligible to compete on the wholesale side of the business. How important was that?
A: That was quite important because it allows storage to play in the same space as any other generator. It’s recognition that storage can be reliably dispatched from a distance. It allows batteries to be used to the fullest extent. There’s no reason why they shouldn’t earn all the revenue streams that are available, whether it’s on the regulation market, the energy market or even the capacity market. That should increase and accelerate the penetration of storage in different markets.
Q: Where are we on the curve for storage?
A: There are two facets: the technology curve and the cost curve. The technology curve is: Can you increase the round-trip efficiency? Can you integrate it better with the grid? Is it better for a battery to be integrated to a renewable resource or is it better for it to be directly on the grid? We know the batteries work; the question is how to make them work the best in different situations. On the cost curve, we continue to see a decline that is more than a hope. A lot of that is driven by the electric vehicle industry. Battery manufacturers will commit to a declining cost curve, offering you future prices that are dropping year on year. We didn’t see that with solar panels. That just shows they’re confident this is going to happen. That makes it easier for us as investors and developers to assume the price in 2020 will be less than it is in 2018.
Q: What’s been the effect on renewables and storage of major companies using power-purchase agreements?
A: The trend of corporates procuring renewable energy is strong and accelerating. Google and Amazon have led by a wide margin. We’re starting to see more RFPs and more announcements of successful PPAs. The tech companies started the trend, and then manufacturing companies, and then data-center companies, and now we are starting to see financial companies come in. They are picking up energy at a price that’s clearly low and a very good hedge for their power needs. Storage and renewables now go somewhat hand-in-hand, but they haven’t historically done that. Renewables have been around far longer. We haven’t seen a lot of announcements of corporates looking at battery storage. We’ve seen buyers with stand-alone systems look at batteries, and so we expect that corporates will be looking at batteries to meet their energy-supply needs.
Q: Last month in a BNEF interview, Andy Oliver of Renewable Systems Americas described solar-plus-storage as a “match made in heaven.” How does that sound to you?
A: Solar and storage together can be very effective. You started seeing this in island grids. In Hawaii, there were PPAs issued where there was a battery component to the solar system. In Florida, NextEra Energy is installing batteries on a solar farm to make more efficient use of the system. There is a broad question on whether the overall systems are better off having storage on a grid basis rather than behind the meter connected to solar farms. That remains to be seen. There is need for both. How much you would have on each is up for debate. When Tesla installed its lithium-ion battery in Australia last year, which was very widely advertised — a great marketing ploy by Elon Musk, I think he lives for that — you saw batteries being used on the grid level to inject and remove electrons from the system when you need it for overall system reliability. And they’re not directly connected to one asset, and I think that business model is also very powerful.
Q: Is there enough information on battery use that you have drawn any conclusions or been surprised?
A: The California ISO is reaching for these systems far more frequently and for shorter periods of time than people expected.
Q: California has also moved to support storage infrastructure with regulatory action. How much difference does it make what California is doing?
A: It makes a lot of difference. California started the national solar trend — it was the first state to have meaningful solar penetration and then renewable penetration in general. California tends to be at the forefront of encouraging new technologies. Its support of storage means there is demand out there, and it means utilities are willing to write long-term agreements for those systems, which means there are developers and manufacturers working on it, and that helps the industry move forward. The lessons learned in California will be applied all over the country and maybe the world.
Q: What about commodity prices, particularly lithium, nickel and cobalt?
A: It depends on how fast the electric-vehicle industry comes into play. If adoption of EVs is accelerated so that you see them in meaningful amounts by 2020, then you will have a pressure on those commodities. If it’s slower, then there will be more time for producers to incorporate that signal into their pricing and manufacturing.
Q: How much concern do you have that China is likely to be the dominant maker of batteries?
A: It depends on whose perspective you’re looking at. From the perspective of a developer of power systems, having cost-effective solutions is always more desirable. Historically, the U.S. has been really good at technological innovation and not that good in mass manufacturing. You see this in all different sectors. At the moment, there are still technological innovations to be done in batteries. It’s not just a question of mass manufacturing and reduced costs. As long as you are riding that curve, there will be room for manufacturing in the U.S. The moment you get to a point where technological improvements are small and you’re more about cost, you will have this move to China just like you had for solar panels.
Q: What have you seen from the Trump administration that has affected your view of renewables and storage?
A: We’ve seen the directive that came from the Department of Energy that was designed for plants that had large coal piles or uranium inventory on site. That was unanimously rejected by FERC, which concluded that we don’t have a reliability issue in the country of that magnitude. But the Trump administration hasn’t done much that changes anything. They’re not going to do anything with coal and nuclear, there hasn’t been any interest on anybody’s part to hurt renewables. The tariffs on solar will have a small effect on solar in the next few years but not enough to wound the industry critically. Wind and solar tax credits are here until 2020. It’s a very nice runway for renewables and the Trump administration isn’t changing that runway.