Enhanced Cost Recovery for Utilities

Local Market
Utility-Scale Batteries

Challenge: Utilities are accustomed to conducting pilot projects to test the feasibility and reliability of new technologies. But pilot project capacities are typically small—less than 1 megawatt — and utility-scale battery pilot projects must be larger in order to truly demonstrate the value of the technology. For example, a 100-megawatt natural gas plant seeking to invest in utility-scale battery technology would require a 20-megawatt battery for accurate results in its pilot project. With an estimated cost of over $30 million, this is an unusually large pilot project. Funding a project of such magnitude presents a challenge because utilities require regulatory approval to recover the costs of large investments.

Solution: Leasing grid-scale batteries is an innovative option that could be made available to utilities by a state’s utilities commission. Rather than structure the pilot as a one-time capital expense, regulators could authorize utilities to lease the equipment from battery companies during the demonstration phase. If, at the end of the lease period, the batteries have not performed as expected, the equipment could be returned to the company. The state could allow cost recovery for the lease, which represents much less money than a one-time capital expense. Additionally, this structure forces battery companies to bear the risk of technology that does not perform as promised. Another mechanism that could be employed to assist in cost recovery for large pilot projects is increasing the amount that utilities are permitted to recover from ratepayers under existing programs. A state legislature could increase the amount recoverable from ratepayers for utility-scale battery projects, in order to enable larger demonstrations and pilots. On-bill accelerated repayment is another method to aid cost recovery for utility-scale projects. This would allow the utility to recover a larger percentage of the overall cost of the installed battery system in a shorter period of time.