Background: Section 1703 of Title XVII of the Energy Policy Act of 2005 authorizes the U.S. Department of Energy (DOE) to support innovative clean energy technologies that are typically unable to obtain conventional private financing due to high technology risks. Up to $4 billion of loan guarantees may remain available to qualified projects under the DOE’s Section 1703 Loan Program.
To be eligible for a loan guarantee, a project must meet three basic criteria: First, the project must use or support renewable energy technology, including battery energy storage. Second, it must meet the Section 1703 statutory requirements of avoiding, reducing or sequestering anthropogenic emission of greenhouse gases. Third, it must employ a new or significantlyimproved technology as compared to technologies that have been operating commercially in their specific application for more than five years.
The DOE has used the Section 1703 Loan Program to provide $8.33 billion in loan guarantees to a next generation nuclear generation project in Waynesboro, Georgia and a $2.0 billion loan guarantee to support the Eagle Rock Enrichment Facility in Idaho Falls, ID. To date, however, the DOE has made no loan guarantees available to projects based on battery energy storage. In fact, the Section 1703 Loan Program appears ill-suited in focus and structure to support the kinds of multiple, small, distributed renewable energy projects that battery energy storage facilitates.
NAATBatt International believes that under Supreme Court’s recent Perez decision, the DOE has the legal authority to interpret the regulations implementing the Section 1703 Loan Program in order to make it more relevant and more useful to small, distributed renewable energy projects that rely on battery energy storage.
Proposal: NAATBatt International proposes that the DOE revise its Section 1703 Loan Program in order to permit the DOE to guarantee, in addition to traditional loans, the contingent warranty liability of battery manufacturers that sell advanced battery products to support the integration of distributed, renewable energy onto the grid. This revision would be consistent with the language and intent of the Energy Policy Act and would help address one of the principal challenges to widespread deployment of battery energy storage.
Battery energy storage is a critical and catalytic technology that will enable the integration of large quantities of distributed, renewable energy into the U.S. electricity system. But the widespread deployment of battery energy storage is hindered by the lack of historic data about the performance of advanced batteries on the grid over time.
Reliability is the principal concern of grid operators. Utilities, independent power developers, and electricity customers demand that major electricity infrastructure components have a proven history of reliable operation, usually of a decade or more, before deploying such components in significant quantity on the grid. The challenge to deploying battery energy storage is that many advanced battery systems that would appear to be best suited for renewable energy-supporting applications are the product of recent innovation and have extremely limited operating history. This limited operating history severely constrains the market for battery energy storage and the leveraged financing of projects that involve storage.
Battery manufacturers struggle today to address the limited operating history challenge by providing long-term performance warranties for battery systems in their sales contracts. These warranties are often based on extrapolated laboratory data and give cold comfort to customers and financiers. Moreover, only battery manufacturers that have strong balance sheets, often based on their sales in the consumer electronics market, can credibly make such warranties.
Section 1701 et seq. of Title XVII of the Energy Policy Act grants the DOE authority to provide credit support for renewable energy projects that is broader than the loan guarantees currently provided under the Section 1703 Loan Program. Section 1701 of the Act defines an obligation that the DOE can guarantee as a “loan or other debt obligation…” Those “other debt obligations” could include the contingent debt obligations of battery manufacturers arising pursuant to the warranties of the performance that manufacturers must give deploy their batteries on the grid.
NAATBatt International proposes that the DOE revise its Section 1703 Loan Program, consistent with the language of the Act and its implementing regulations, to help the advanced battery industry address its lack of operating history challenge. The essential elements of the revised program would be as follows:
- The DOE’s Office of Electricity will identify and draft a model performance warranty for advanced batteries that utilities, independent power developers and electricity customers in the United States would accept in order to deploy battery energy storage in support of frequency regulation, short duration demand response and fast ramping applications on the grid or behind the meter. The model warranty would be based on expected performance characteristics of lithium-ion batteries, though the performance characteristics of other battery chemistries could be included at a future time.
- The DOE will certify lithium-ion batteries produced by approved manufacturers as capable of meeting the performance characteristics of the model performance warranty. Certification will be based on a technical analysis and on the manufacturer’s compliance with Davis Bacon and other requirements of the Energy Policy Act. The certification process would be similar to the DOE’s highly successful Energy Star program.
- The DOE will use its Section 1703 Loan Program to provide a guarantee (which could be structured as a line or letter of credit) in a dollar amount to be determined for each applicant manufacturer of that manufacturer’s contingent debt obligations arising from its battery performance warranties–but not more generous than the model performance warranty specified by the DOE’s Office of Electricity–made to customers who use those batteries in applications supporting the integration of distributed, renewable energy on the grid or behind the meter.