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Q&A - Spearmint Energy: Navigating battery energy storage in the US

15 January, 2024

Battery Storage

Spearmint Energy is a US-based green merchant services company that develops, owns, operates, and trades battery energy storage, solar, and wind assets to reduce grid volatility, increase system resiliency, and reduce carbon emissions.  

inspiratia speaks to Andrew Waranch, President and CEO of Spearmint Energy, on its approach, challenges, and opportunities in the battery storage sector. 

"Battery energy storage is the future, ending the need for traditional natural gas peakers," says Waranch.

What is Spearmint Energy's role and focus in the renewable energy sector?

Spearmint Energy's goal is to meet the significant demand for Battery Energy Storage Systems (BESS) in the US, emphasising strategic storage development. 

The Spearmint platform consists of three core strategies: battery project development, energy storage offtake, and renewable power trading. 

We believe the most significant gap in the renewable sector lies in the offtake for renewables, particularly in battery energy storage adoption. 

Research indicates a projected demand for BESS in the US ranging between 100GW - 500GW over the next 15 years. Our estimate leans closer to 350GW. Despite numerous firms planning 20 to 40GW of storage each, the collective demand in the US surpasses these figures, underscoring the enormity of the challenge. 

Consequently, Spearmint's role involves strategically locating storage facilities. We begin by evaluating potential sites based on factors like pricing, congestion, and interconnectivity before initiating development. 

In addition to site selection, we pioneer innovative approaches to monetise tax credits associated with recent regulations, positioning ourselves at the cutting edge of environmental finance. This optimization expedites our projects more effectively. 

Regarding renewable trading, the Investment Tax Credits from the Inflation Reduction Act (IRA) are expected to significantly amplify renewable construction in the US. Presently, solar and wind power buyers primarily comprise utilities with long-term power purchase agreements (PPA) and various investment banks. While corporate buyers, including retail stores, automakers, and manufacturers, are expanding their presence, the demand still outstrips supply projections for the next decade. 

Addressing storage, there's a notable gap in offtake solutions. As the US contemplates substantial investments in storage infrastructure, the challenge remains: who will provide the offtake solutions? We envision Spearmint's role expanding to facilitate offtake for BESS and other renewables nationwide. 

How does Spearmint Energy navigate the dynamics of storage development and trading to ensure economic viability? What specific strategies does the company employ in this context? 

The imminent surge in demand for offtake, which is anticipated to double or even triple, presents a unique challenge.

Although the demand for PPAs for solar and wind energy is rising, the number of credible offtakers is not increasing at the same rate. This disparity creates a vast market supply without a proportional growth in demand. To bridge the gap, Spearmint provides offtake solutions for battery energy storage and, eventually, for solar and wind projects. 

These offtake agreements serve as financial guarantees, ensuring revenue certainty for asset developers. This revenue assurance facilitates project financing, whether through long-term debt, short-term debt, or equity investments. Traditionally, securing project finance involved finding a creditworthy entity willing to provide a rental or PPA, thereby assuring lenders of the project's viability. However, the rapid growth in subsidies, tax credits, and market demand often outpaces the availability of credible offtakers. Spearmint addresses this challenge by offering creditworthy, long-term offtake solutions, enabling developers to secure the necessary financing for their projects. 

What are the specific challenges and opportunities that Spearmint Energy faces in the renewable energy sector? 

We are navigating several challenges in the evolving renewable energy landscape. A notable obstacle stems from the rapid influx of capital from institutional investors into both debt and equity sectors, fuelling expansive growth among developers nationwide. As these developers rapidly expand their teams from five to potentially hundreds of employees, the challenge intensifies, given that utilities, Independent System Operators (ISOs), and other interconnection agencies cannot scale at a comparable rate. 

Consequently, the industry grapples with a time crunch. Although stakeholders are eager to expedite processes, inherent delays persist, such as those stemming from engineering studies and utility evaluations. Typically, a conventional gas-fired power plant requires several years for approval and subsequent construction. However, an unprecedented volume of projects are now competing for simultaneous connections, straining utility resources and grid infrastructure. 

This surge in demand exacerbates the grid's existing limitations in workforce capacity as well as substation equipment availability and manufacturing. Consequently, while the market's growth trajectory is robust, the supporting infrastructure and regulatory processes lag, resulting in a bottleneck effect.

As a result, Spearmint Energy faces the same challenges around delays as other industry participants, which will continue until demand more evenly balances the capabilities and limitations of existing grid infrastructure. 

What criteria does Spearmint Energy consider crucial in selecting locations for energy storage developments? 

Our location selection process is meticulous and rooted in several key criteria.

Firstly, we conduct comprehensive nodal congestion studies. These studies involve modelling the entirety of the US power grid, where electrical engineers assess the potential impact of a new project on the interconnected nature of the grid. Given the addition of a power plant in one area can have ripple effects throughout an entire region, our studies aim to predict the cumulative impact on pricing and congestion, considering other assets that might be developed in the vicinity. 

One key aspect of our evaluation is our assessment of injection and withdrawal capabilities. This entails determining whether a specific location allows for efficient power charging and discharging from a battery. Some locations might facilitate easy charging but pose challenges for power generation, or vice versa. Identifying sites with optimal interconnection availability and adhering to ISO regulations without any violations remains a priority. We seek locations that not only align with grid requirements but also offer viable solutions to existing challenges while ensuring profitable returns. 

Moreover, our decision-making process incorporates pricing dynamics. We analyse potential locations based on their economic feasibility, assessing factors like the availability of cheaper wind energy during specific times or the ability to generate power during peak demand hours. This dual-focus approach considers both technical feasibility and economic viability. 

Additionally, we delve into regulatory analysis, evaluating state-specific or ISO regulatory landscapes. We remain attuned to evolving market rules, regulations, and macro supply-demand trends within a region. This multifaceted approach ensures that our location selection aligns with both technical requirements and market dynamics, optimising our investments and contributions to the renewable energy landscape. 

How has the US IRA made an impact on these factors? 

The US IRA has significantly influenced the dynamics of battery development across various states. Before the IRA's enactment, states like California and Texas were the only places it was favourable to build storage due to economic and regulatory considerations. However, the IRA has made it economically feasible to establish battery storage facilities across almost every state in the US. 

While the IRA facilitates battery development and encourages solar and wind energy initiatives nationwide, it also introduced challenges related to interconnection demands. Specifically, in regions like PJM Interconnection, despite the IRA's positive impact, the substantial project queue might take three to four years to achieve clarity. In essence, while the IRA promotes renewable energy growth, it simultaneously intensifies development demand pressures, necessitating strategic planning and execution for development and trading entities like Spearmint. 

In terms of market presence, which regions will Spearmint Energy target for expansion? What factors contribute to these choices? 

There are approximately seven or eight distinct grid regions in the US, including those governed by ISOs and areas without ISO oversight. Among them, Texas and California stand out financially for battery development. However, California presents challenges due to its stringent regulations and expensive project acquisitions, making it less of a focus for Spearmint despite some ongoing projects. Conversely, Texas' Electric Reliability Council of Texas (ERCOT) market offers lucrative opportunities with a lower barrier to entry, and we are positioned at the forefront of development efforts there. We anticipate robust returns over the next three to four years, with market stabilisation likely by 2026-2027. 

In the Southwest Power Pool (SPP) and the Midcontinent ISO (MISO), we have identified significant potential owing to abundant renewables and congestion, which has led to the initiation of substantial projects. The New York ISO presents attractive state and ISO collaboration prospects, and we are primarily considering potential acquisitions in that region. By contrast, in the PJM, complexities arise from evolving capacity auction dynamics and a backlog of solar and wind projects in the Southeast. Given its regulated nature, we opt out of this market. 

Regions like the Pacific Northwest and parts of the Desert Southwest offer limited opportunities due to connectivity challenges, primarily with California. However, the Desert Southwest is simultaneously a good market for development, and we anticipate shifting Spearmint's focus to these areas gradually.

We believe that within the next three to four years, areas experiencing prolonged permitting delays, such as MISO and PJM, will resolve their bottlenecks. This resolution could catalyse accelerated development thereafter. 

How does Spearmint Energy approach financing options? Are there any noteworthy trends or market changes influencing the company's financing strategies? 

Securing an offtake agreement enhances our financing options by mitigating merchant revenue risk, thereby attracting a broader range of investors. Currently, there's significant interest from various equity and debt investors in the renewable sector. European investors, particularly under the Sustainable Finance Disclosure Regulation for Article Eight or Nine infrastructure, along with Asian investors benefiting from a low cost of capital, are notable contributors. Additionally, US pensions and endowments with an ESG mandate further bolster this capital influx. 

The landscape includes banks, insurance firms, private credit entities, private equity, and various utility investors eager to finance storage assets, particularly those operating on a merchant basis. Although this merchant market segment may appeal to a more limited 20% of these investors, the overall interest remains robust, ensuring ample financing opportunities for Spearmint. 

What is Spearmint Energy's perspective on co-location projects? How is the company approaching and developing plans in this context? 

Co-location presents a promising avenue for optimising energy resources in specific scenarios. While there are locations where integrating different renewable energy sources, such as wind or solar, with storage proves beneficial, it's essential to navigate the intricacies of existing infrastructure and permits. The feasibility of co-location varies based on the region, state regulations, and the initial structure of interconnection permits. 

Each co-location project demands a tailored approach, considering various factors like grid requirements, existing assets, and regional energy dynamics. For instance, in areas like California, where certain gas-fired peaker plants operate intermittently due to agreements with the grid, integrating batteries could enhance efficiency. Given that these peaker plants have limited operational hours, batteries can fill the gap by providing consistent energy during idle periods, maximising utilisation. 

However, it's crucial to note that co-location isn't universally applicable. Some regions or existing renewable facilities might pose challenges in integrating additional assets due to predefined interconnection agreements or infrastructure constraints. Therefore, while we recognise the potential benefits of co-location projects, Spearmint adopts a case-by-case evaluation approach.  

 

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