Key Capture Energy co-founder and CEO Jeff Bishop joined Episode 50 of the Factor This! podcast to break down how states should, and shouldn't, go about procuring battery storage, and why software is a crucial piece of the puzzle. Plus, stick around for the inside story of how Key Capture went from the brink of insolvency to raising $100 million. Subscribe wherever you get your podcasts.

It was the spring of 2016 and Jeff Bishop was developing wind projects when he came across an analyst's chart that caught his eye.

Battery storage, the analyst forecasted, would follow a similar cost curve to solar. Costs would plummet as deployment ramped up to support a grid ever more dependent on intermittent renewable energy resources.

"By July, I had quit my job," Bishop said.

He drained his savings to launch Key Capture Energy, a developer, owner, and operator of grid-scale battery storage projects. Bishop partnered with Dan Fitzgerald, a colleague from their days at EDP Renewables.

As it turned out, the analysts were right. Seven years later, battery storage deployment is booming.

A record 4,221 MW of utility-scale battery storage capacity was brought online last year, according to S&P Global Market Intelligence. That compared to 192 MW in 2015, a banner year of its own.

But the storage industry, despite its meteoric growth and successes, is still finding its way.

Developers and regulators face questions about how to best use batteries, and what policy structures are needed to facilitate deployment. Moreover, the industry is learning on the fly about how these assets actually perform under various state and utility demands.

Part of the challenge stems from the versatility of batteries. Their ability to serve variously as load and generation, transmission and distribution assets, leaves battery storage difficult to characterize. Batteries don't neatly fit into the same bucket as technologies like wind and solar that are familiar to regulators, utilities, and investors.

"It's really hard. It's really complicated," Bishop said on the Factor This! podcast from Renewable Energy World. "Everybody is approaching this in very, very different ways."

Those market conditions present a crossroads for battery storage. For the industry to continue to flourish, states and utilities must figure out how to appropriately procure and operate the assets, and everyone, Bishop said, is searching for answers.

Procurement patchwork

Two orders from the Federal Energy Regulatory Commission (FERC), 755 and 841, issued in 2016 and 2018, respectively, established a market for energy storage.

FERC's actions allowed energy storage to participate in frequency regulation and required wholesale market operators to fairly compensate the assets for the value they bring to the grid.

Since then, 11 states — California, Oregon, Massachusetts, New York, New Jersey, Nevada, Virginia, Illinois, New Jersey, Connecticut, and Maine — have implemented energy storage targets. Each taking a unique approach.

Setting a goal is easy. The hard work begins with defining how energy storage assets will be compensated and operated in the field.

"Rulemaking becomes insanely important," Bishop said, adding that while differing regulatory requirements increase the complexity of the battery storage development process, as opposed to a standard framework, "it's the right thing to do."

The primary forms of energy storage procurement are broken into three categories:

Resource Adequacy: Under a resource adequacy framework, used by California, states or utilities may establish specific targets or requirements for energy storage capacity to ensure grid reliability and meet peak demand. Storage providers can participate in competitive solicitations or auctions to secure contracts for a specified duration.

Resource adequacy provides a base level of revenue for energy storage asset owners, a structure that Bishop said Key Capture Energy support. The predictability lowers the cost of financing but requires asset owners to have a sound software suite in place to optimize around the capacity obligations.

Tolling (Power Purchase Agreements): In a tolling agreement, the offtaker/charging energy supplier essentially controls the energy storage asset. Tolling agreements are similar to power purchase agreements, which utilities and regulators understand due to exposure to wind and solar. But they don't appropriately value the attributes of energy storage, Bishop said. 

"There's really only downside," he said. "I like wholesale markets and I like sharing of risk. The more of these longer-term contracts that utilities have, the fewer market signals are actually there to protect ratepayers and give upside to (asset owners) that are good on the software side."

Despite their downside, tolling agreements are the "most common contracted revenue structure for front-of-meter, stand-alone storage assets in the United States today," according to Orrick's energy storage market update for 2021-22.

Index Storage Credit: New York's plan to square asset owner and ratepayer risk comes in the form of the Index Storage Credit. The New York State Department of Public Service (DPS) and New York State Energy Research and Development Authority (NYSERDA) unveiled the plan.

The framework aims to support Gov. Kathy Hochul's intention to increase the state's energy storage target from 3 GW to 6 GW by 2030.

Pari Kasotia, the senior director and head of policy for developer DSD Renewables, broke down the scheme in a recent piece for Renewable Energy World:

"The Index Storage Credit incentive is calculated by subtracting the strike price from the reference price. Strike price refers to the dollar amount that project developers need for project economics to work. NYSERDA will create a reference arbitrage price (the price of electricity purchased when it’s the cheapest) and a reference capacity price, which is calculated using the NYISO Installed Capacity spot auctions. The reference arbitrage price and the reference capacity price, together, form the reference price. The delta between the strike price and the reference price will constitute the incentive that NYSERDA pays the developers."

Like the resource adequacy structure, the Index Storage Credit gives asset owners a predictable revenue floor.

"We still get to use our software and be able to maximize the value of the project, while also having something very stable that we can get financing on," Bishop said.

Bishop said that Key Capture Energy supports New York's attempt to procure energy storage while distributing risk between stakeholders.

Some in the industry, however, bristle at the complex framework. Especially upset are those who have grown accustomed to the simplicity of the PPA. Under New York's plan, asset owners need a robust software infrastructure and, likely, additional headcount in the form of energy traders and performance engineers.

GO DEEPER: Check out the Factor This! energy storage podcast playlist, including episodes on battery storage, long-duration energy storage, gravity storage, and more. Subscribe wherever you get your podcasts.

Software is key to 'finding the edge'

Software is emerging as the key differentiator among battery storage owners, and it's a critical tool to navigating the patchwork of policies being implemented across the U.S. Asset owners can develop their own software suite, an expensive endeavor, or opt for a third-party solution.

It's a full circle moment for Bishop, who intended to begin his career in the tech industry before the dotcom bubble burst.

Bishop now describes Key Capture Energy as a tech company with infrastructure assets. Of the company's 90 employees, 15 spend the entire day coding to optimize battery storage systems.

"This company looks way more tech than I ever thought it would," he said.

Key Capture Energy chose to develop its own optimization software for a couple of reasons.

For one, timing played a role. The company scaled just as battery storage was finding its footing, and few alternative options existed in the market. For another, Bishop is apprehensive over sharing data with third-party vendors, who can then share that information his competitors.

"It's about continuously trying to find the edge," Bishop said.

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