Zhinan Chen, Ashish George, Michael Shapiro, Sarah Soeding

Competitive Landscape of the Energy Storage Industry: Market, Policy and LCOS Analysis for
CaesarEx

This report has been compiled for CaesarEx as a guideline for the market entry into the energy

storage market. CaesarEX, founded in 2013, is a high-technology energy storage startup with a patented

adiabatic compressed air energy storage and recovery system (A-CAES), CAT-G. This report aims to

highlight the competitive dimensions of the energy storage market and cast a light on the investment and

policy landscape of international energy storage markets.

Section 1 will give an overview over the startup and its distinctive technology and will introduce

the energy storage market with its trends. Section 2 will present the LCOS analysis of relevant storage

technologies including CaesarEx’s A-CAES system and explain the methodology and caveats of the analysis.

Section 3 will compare the most dominant energy storage technologies and analyze their competitive

advantages as well as their technical and environmental dimensions. Section 4 will describe the general

and evolving policy landscape of energy storage with a focus on CAES. In Section 5, we will give our final

recommendation for the market entry and competitive factors for CaesarEx.

Section 1 - Introduction to Energy Storage

CaesarEx

CAES is a bulk energy storage technology, which offers a fast response to demand, a large capacity

discharge and economies of scale. The ability to deliver electricity continuously on a large scale makes

bulk storage a viable technology to address peak demand to solve the intermittency problem with

renewables.

CAES systems work through the compression of air into underground caverns. Similar to other

storage technologies, the air is pressed into the underground in off-peak hours, when electricity is cheap.

Once energy is needed, the air is released from the cave and heated. This causes the air to expand, which

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turns an electricity generator1. As of now, this process is based on the diabetic method, where the heating

process is powered through natural gas – this releases carbon. Hence, most of the electricity generated

comes from combustion, not from the compressed air. The standard CAES system achieves up to 70

percent energy efficiency in heat-retaining systems, and up to 55 percent otherwise. However, it can

generate 3 times the output for every natural gas input and reduces CO2 emissions by 40-60 percent, so

it basically just achieves a faster generation of electricity from fuel. The diabetic technology does reduce

CO2 emissions, but still relies on natural gas and is thus not a fully clean alternative. Another method that

is being developed is isothermal (I-CAES). In this technology, a constant temperature is maintained

through storage in water, enabling air compression to a higher pressure without temperature variations2.

This eliminates the need for natural gas combustion. The startup SustainX has been experimenting with

I-CAES, but had to merge with General Compression in 2015 to save costs and seems no longer active.

CaesarEX has developed an adiabatic CAES (A-CAES) technology, which eliminates the use of fossil

fuels from the process and thus presents a clean and more efficient storage solution. Their invention is

based on the patented Compressed Air Turbine-Generator, (CAT-G). A-CAES uses a multi-stage set of axial

turboexpanders, which are set up in a closed cascade. A patented inter-stage heat exchanger converts

heat to electricity power at fairly low temperatures, which enables the heat to be stored in water instead

of escaping the system.

Introduction

The historic Paris Agreement in 2015 has set out a target to reach net zero emissions by 2050 in

order to prevent 1.5° C global warming. By now, 65 countries and major subnational economies have

committed to net zero emissions by 2050. Despite these efforts greenhouse gas emissions have continued

1
Zablocki, A. (2019, February 22). Fact Sheet: Energy Storage 2019. Environmental and Energy Study Institute. Retrieved from:
https://www.eesi.org/papers/view/energy-storage-2019
2
US Department of Energy (2012). Fact Sheet: Isothermal Compressed Air Energy Storage. Retrieved from:
https://www.energy.gov/sites/prod/files/SustainX.pdf

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to increase in 2018 by 3 percent to 55.3 gigatons CO2e3. The consequence is that global emissions need

to drop 7.6 percent annually from 2020 to 2030 to attain the 1.5°C goal of the Paris Agreement. The

premier source of GHG emissions are fossil fuels, which increased 2 percent in 2018 to account for 37.5

gigatons of CO2e emissions in 2018, 67.8 percent of total emissions. Decarbonization of energy is thus at

the core of combating climate change and has gained significant momentum.

In order to achieve this goal, the share of renewable energy needs to increase from 26 percent in

2018 to 85 percent in 2050. This is a six-fold compared to the levels set out in current plans. Global

investments of $332 billion in renewable technologies slowed down in 2018, 8% less than the previous

year.4 This added 171 gigawatts of new capacity, totaling 2,351 gigawatts, an increase of 7.9 percent over

the previous year. 5 China has the largest share of global investments of $100 billion, which however

signifies a drop of 32% to 2017 levels.

However, the introduction of renewables into the energy system presents an intermittency

problem, which poses the major challenge of maintaining a reliable, flexible and stable electricity supply

with an increasing demand for electricity. Weather-dependent renewable energies are limited by

intermittency and instability, creating a high variability in short and medium-term energy generation. This

necessitates the detachment of power generation from energy consumption, which makes electrical

energy storage a major enabler of the renewable energy transition. Currently, the global energy storage

capacity is only 9GW/175.8 GWh, 7.5 percent of energy generation capacity of renewables6.

Services of energy storage

3 Emissions Gap Report 2019. United Nations Environment Programme.

4 Fleming, S. (2019, February18). These 11 EU states already meet their 2020 renewable energy targets. World Economic Forum. Retrieved
from: https://www.weforum.org/agenda/2019/02/these-11-eu-states-already-meet-their-2020-renewable-energy-targets/
5 Renewable Capacity Statistics 2019. International Renewable Energy Agency.
6 Shrestha, P. (2019, August 1). Global energy storage capacity to exceed 1,000GW by 2040. Energy Live News. Retrieved from:
https://www.energylivenews.com/2019/08/01/global-energy-storage-capacity-to-exceed-1000gw-by-2040/

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 There are several services that energy storage can provide. Bulk storage technologies, such as

CaesarEx, focus on the provision of energy supply in times of peak demand and price arbitrage, to ensure

stability and solve the intermittency problem.

Electricity Storage Services. IRENA 2019.

The Energy Storage Market

Energy storage is gaining significant traction and is poised to explode over the next two decades.

Deployment has doubled from 2017 to 2018 to reach over 8 GWh, with leading countries Korea, followed

by China, the United States and Germany.7

However, projections vary widely, which can be explained by two differences in forecasting. First,

some forecasts only account for utility-scale front-of-the-meter storage and exclude behind-the-meter

(BTM) applications, such as electric vehicle batteries and other residential storage technologies. Second,

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Renewables 2019 Global Status Report

4
another uncertainty is the storage technology mix. Growth projections are currently focused on the rapid

expansion of battery storage technology due to falling costs. Compressed air storage is not being

accounted for. Another factor that adds complexity to forecasting are the many applications for energy

storage, which change the dynamics of electricity markets, add ancillary services and boost energy self-

sufficiency and resiliency of the grid.8

Figure 1 Energy Storage Projects according to the Energy Storage Database Project

Currently, only 2.5 percent of delivered electricity are cycled through a storage facility. This figure is

10 percent of delivered power in Europe and 15 percent in Japan. An analysis of the Global Energy Storage

Database Project shows that 1,301 energy storage projects are operational, 11 under construction and

158 announced. The United States account for 511, 4 and 104, respectively (Figure 1). California leads the

U.S. in energy storage with 300 operational projects (7.2 GW), followed by Virginia and South Carolina.

China has the biggest energy storage capacity, with almost 40 GW deployed in 2019. The leading

storage technology is pumped hydro, with 19.23 GW being deployed. An additional 31.15 GW are under

construction, including the $2.78 billion Fengning project in Hebei province which is set to be the world’s

8
Deloitte (2018). Supercharged: Challenges and opportunities in global battery storage markets.

5
largest.9 The US is the second largest market, with 31.2 GW of energy storage capacity installed in the US

in 2019. This makes up almost 3 percent of total energy generation capacity of 1098 GW.

The global energy storage market is projected to increase 122-fold by 2040, according to

Bloomberg New Energy Finance (BNEF).10 This implies an exponential growth of energy storage capacity

from 9GW/17GWh in 2018 to 1,095GW/2,850GWh by 2040 (excluding pumped hydro). In line with BNEF’s

estimates, Wood Mackenzie projects 63GW/158GWh deployment of annual energy storage capacity.11

Market growth is going to concentrate in the United States and China, who will dominate the market with

a combined share of 54 percent by 2024. This signifies a $38 billion investment volume in the next five

years.

Figure 2 Global cumulative energy storage installations (2019-2040). Bloomberg. Energy Storage Outlook (2019).

Energy storage markets have taken distinct shapes in different countries, and their dynamics need

to be understood to navigate forecasts. One needs to distinguish between front-of-the-meter (FTM)

9 Shaw, V. (2019, September 25). China set for 40 GW of pumped hydro storage next year. Retrieved from: https://www.pv-
magazine.com/2019/09/25/china-set-for-40-gw-of-pumped-hydro-storage-next-year/
10 Renewable Energy World Editors (2019, July 31). BNEF: Energy to storage increase 122X by 2040. Retrieved from:
https://www.renewableenergyworld.com/2019/07/31/bnef-energy-storage-increase-122x-by-2040/#gref
11 Colthorpe, A. (2019, April 10). Wood Mackenzie: US & China to be installing over half of global ESS by 2024. Energy Storage News. Retrieved
from: https://www.energy-storage.news/news/wood-mackenzie-us-china-to-be-installing-over-half-of-global-ess-by-2024

6
energy storage, which describes utility-scale solutions, and behind-the-meter (BTM) storage, which is

customer-facing.

The United States, China, Germany, Japan, and the United Kingdom are dominated by front-of-

the-meter (FTM). This development has been driven by regulatory reforms to create investment and

deployment incentives for utility-scale energy storage. Further, local storage technology manufactures,

and a rapid addition of renewable generation capacity have driven demand for FTM storage. Australia and

India are also seeing a lot of activity in the market, the latter is expected to emerge as the third largest

country market for utility-scale storage by 2022. In the United States, FTM grew 11 percent in the past

year and still represents the larger share of energy storage with 57 percent, with 394MWh deployed.

An interesting development is the solar-plus-storage market, which registered a 6-fold increase in

MW deployed in 2018. Australia, South Korea and the United States lead these developments, adding up

to 540 megawatts of FTM solar-plus-storage in 2018. In Europe, FTM solar developments are driven by

government auctions, which currently do not incentivize solar-plus-storage development. The lack of

effective pull policies for utility solar-plus-storage is represented in the marginal capacity of 6 MW of FTM

solar-plus-storage in Europe.

In 2018, behind-the-meter storage (BTM) matched grid-scale storage investments for the second

consecutive year, and deployment in both categories reached record levels with significant growth in the

United States, Korea, Japan, Australia and Germany.12 This trend can be attributed to several drivers,

including high demand charges, a reliance on solar power, changes in energy tariffs and lower storage

costs. Consumers can purchase and store energy during low-cost off-peak periods, and have full autonomy

over when to consume the power. In the United States, BTM registered a 198 percent year-over-year

growth in 2018. BTM is expected to account for over 50 percent of annual market value by 2021. In the

12 Munuera, L. and Fukui, H. (2019). Tracking Energy Integration. International Energy Agency. Retrieved from:
https://www.iea.org/reports/tracking-energy-integration/energy-storage

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United Kingdom, feed-in-tariff rates that compensate solar PV owners for excess generations drive BTM

storage demand, and virtual power plants (VPPs) are set up to aggregate demand. The biggest drivers of

residential storage have been government subsidies, favorable policies and expensive energy prices,

which especially drove deployment in South Korea. Overall, FTM energy storage will most likely remain

the biggest storage segment due to large-scale demand of energy storage and flexibility.13

Market Drivers of Energy Storage

The biggest growth driver of the market are rapidly declining costs and performance

improvements of storage solutions. This is driven by a sharp projected decline of cost of lithium ion

batteries to $62 per kWh by 2030, on top of an 85% reduction from $1160 per kWh to $176 per kWh that

we saw in the 2010-18 period.14 Outside costs, federal and state regulations are creating incentives for

the deployment of new market opportunities and value streams, which are going to be discussed in

Section 4. Other drivers are changing rate structures, the integration of electric vehicle charging facilities

into the grid, solar PV integration, resiliency/backup power and business model innovation.15

Energy Storage Technology Mix

Pumped Hydro Storage is the most popular bulk energy storage solution and account for 98 percent

of bulk electricity storage worldwide. 1.9GW storage capacity were added in 2018, totaling 160GW.

Capacity additions were in China, Austria and the United States. Lithium ion batteries are the current

storage technology that is being bet on, totaling 3GW of storage capacity in early 2019. 16 Conventional

CAES (C-CAES) has been explored in the past, however as the dominant diabetic method it is not GHG

emission free, it did not satisfy the goal of achieving clean energy.

13 Colthorpe, A. (2019, April 10). Wood Mackenzie: US & China to be installing over half of global ESS by 2024. Energy Storage News. Retrieved
from: https://www.energy-storage.news/news/wood-mackenzie-us-china-to-be-installing-over-half-of-global-ess-by-2024
14 Goldie-Scot, L. (2019, March 05). A Behind the Scenes Take on Lithium-ion Battery Prices. BloombergNEF. Retrieved from:
https://about.bnef.com/blog/behind-scenes-take-lithium-ion-battery-prices/
15 May, HJ. (2019, September 16). Nothing standing in the way of energy storage's 'explosive growth': Navigant. Utility Drive. Retrieved from:
https://www.utilitydive.com/news/nothing-standing-in-the-way-of-energy-storages-explosive-growth-navigan/562901/
16 May, HJ. (2019, September 16). Nothing standing in the way of energy storage's 'explosive growth': Navigant. Utility Drive. Retrieved from:
https://www.utilitydive.com/news/nothing-standing-in-the-way-of-energy-storages-explosive-growth-navigan/562901/

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 Figure 1 Technology mix in storage installations, excluding pumped hydro, 2018, in percent. IEA. Energy storage (2019).

Not surprisingly, pumped hydro also dominates the US storage market with 92 percent of the

operational energy storage. Excluding pumped hydro, battery storage accounts for 54 percent of capacity,

quadrupling from 241 MW in 2013 to 963 MW in 2017. Thermal energy increased by 31 percent to 664

MW in 2017, while compressed air makes up around 120 MW without substantive growth in the last few

years.

The CAES market still remains underdeveloped and is thus still very consolidated, competitive,

and capital intensive. North America and Europe are currently the most advanced market for CAES

technology. Active players in the United States include Siemens CAES, Hydrostor, Apex CAES, and Ridge

Energy Storage & Grid Services.

Figure SEQ Figure \* ARABIC 3 Technology mix in storage installations, excluding pumped hydro, 2018, in percent. IEA.
Energy storage (2019).
As of 2019, the only two operating CAES facilities: one in McIntosh, Alabama and one in Huntorf,

Germany. The McIntosh plant, which was built in 1991, has 110 MW of energy storage. Both CAES systems

are diabatic. A 317 MW CAES plant, the Bethel Energy Center by APEX CAES, is under construction in

Anderson County, Texas, which is anticipated to be complete by Summer 2020.17 Hydrostor is building

two A-CAES plants in Goderich, Canada and Angas, Australia, both to be completed by 2020. 18

17 Bethel Energy Center. Retrieved from: http://www.apexcaes.com/project

18 Hydrosto. Retrieved from: https://www.hydrostor.ca/

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Section 2 - Levelized Cost Analysis

To calculate the levelized cost of storage (LCOS), we replicated the methodology from Lazard’s

Levelized Cost of Storage Analysis—Version 4.0. Version 5.0 was released in November 2019, and minor

updates were made to the methodology. Lazard had calculated the levelized cost of storage for grid scale

lithium ion, vanadium flow, and zinc flow in its Version 4.0 analysis, and did not explicitly show these

values in its Version 5.0 analysis. Our analysis sought to expand upon the Lazard study in order to compare

those existing grid scale storage technologies to other more nascent grid scale storage technologies,

including the adiabatic CAES storage that is being proposed by CaesarEX.

Lazard’s calculation of levelized cost is based on a few key assumptions that vary by technology,

and several assumptions that are held constant across technologies in order to maintain consistency.

Those variables that were differed by technology include the power rating (in MW), the power duration

(in hours), the operating days/year, the installed cost, operations and maintenance (O&M) costs, the

charging costs, and the efficiency. Additional variables related to the capital structure were kept constant

across technologies for consistency. Lazard assumes 20% debt at a cost of 8% and 80% equity at a cost of

12%. Additionally, they assume a combined tax rate of 40% (note this was kept even after the Tax Cuts

and Jobs Act of 2017 significantly lowered corporate tax rates for historical consistency with prior LCOS

calculations), a 7 year MACRS depreciation schedule, and a project life of 20 years. We note that the reality

for any individual project is likely to be different from these assumed inputs. However, the consistent use

of these inputs allows us to compare on a levelized basis.

From these variables, we are able to create a cash flow analysis for different technologies based

on the different inputs. The levelized cost of storage is calculated as the annual revenues required to

achieve an equity IRR of 12% (the assumed cost of equity), after considering all other costs. In our

replication of Lazard’s analysis, we ended up with results that were less than 5% off from Lazard’s

calculated amounts, given the same inputs (see Appendix 1a and 1b), owing to small differences in the

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calculated O&M costs. Given that O&M costs are not a significant driver of the levelized cost of storage

calculation, we proceeded with our model as a near replication of Lazard’s. We additionally conducted as

sensitivity analysis (see below) in order to assess the strength of our model.

In order to expand Lazard’s analysis of the levelized cost of grid level storage for those

technologies beyond the three assessed by Lazard, we used inputs from a World Energy Council report,19

from news and reporting around new technologies, and data from CaesarEx. To the extent data was not

fully available, we were required to make reasonable assumptions. For each technology, we also showed

a range from worst case estimates to best case estimates. The results, which include the Lazard’s figures

from its Version 4.0 analysis of lithium ion, vanadium flow, and zinc flow, are shown in the chart below.

The detailed inputs can be found in Appendix 2.

We can see that pumped hydro storage generally has the lowest levelized costs. This is consistent

with the technology having been proven and in existence for almost ninety years, suggesting there has

19 https://www.worldenergy.org/assets/downloads/Resources-E-storage-report-2016.02.04.pdf

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been room for significant learning. Gravity storage, which is a lot newer, and is based on lifting heavy

objects either by cranes (like Energy Vault20), or by rail (like Ares21), has a higher levelized cost. CaesarEx’s

technology has a lower levelized cost of storage than gravity, though slightly higher than existing chemical

storage. Under the best-case scenario, its cost falls within the range of existing vanadium flow storage.

This is a positive indication that CaesarEx’s technology can be competitive with other forms of bulk energy

storage.

We conducted an additional sensitivity analysis to better understand what the main drivers of the

LCOS. Using the best case LCOS for CaesarEx as the base case, we adjusted the each of the inputs by 10%

up and down,22 holding all other inputs constant, and then recalculated the LCOS to see the effects. The

tornado chart below shows the results of this sensitivity analysis.

This sensitivity analysis tests not only those inputs that vary by technology, but also those inputs

that are kept constant across technologies. This was done in order to test potentially how sensitive an

20 www.aresnorthamerica.com/ares-performance
21 www.power-technology.com/features/gravity-based-storage/
22 This is true for all inputs, except for the combined tax rate, which we brought down from 40% to 25%.

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actual cash flow model would be to the different assumed inputs. For example, a change in the combined

tax rate from 40% to a more reasonable 25% (this does not include any credits for storage), would result

in a lower LCOS by about $8/MWh, all else equal. Of course this would benefit all types of storage.

Other variables that were held constant across technologies for the sake of consistency may result

in significant variation in the levelized cost, should they turn out to vary by technology. For example, we

held the term of the project constant at 20 years. We can see that an additional 2 years of production

would lower the LCOS by about $7/MWh. It is likely, given the CaesarEx’s technology, that the project

could last well beyond 20 years, indicating that the cost shown under the best case scenario is too high,

all else equal. Conversely, the cost of equity is a variable that was held constant across technologies. In

fact, the cost of equity would realistically vary with the risk involved with the project. A more proven

technology like pumped hydro storage will likely require a lower cost of equity than a newer technology

like that of CaesarEx. We can see that this has a greater potential impact on overall cost. CaesarEx should

take the cost of capital into consideration as they pursue financing. To the extent they finance more of

the project with cheaper debt, they can lower their overall costs.

The inputs that have the greatest overall impact on the LCOS are the construction costs, power

rating and duration, and days availability. Days availability was held constant across technologies due to

an absence of reliable data. To the extent that CaesarEx’s technology can be used for more of the year

(i.e. have less downtime) than other technologies, this could significantly improve its overall costs. The

other important lever on overall cost is, unsurprisingly, the total upfront construction costs of the project.

While this is a major lever, CaesarEx should consider the totality of costs, and where they can most easily

find improvements in order to improve their overall competitiveness.

While the initial results from levelized cost of storage show positive indications for CaesarEx’s

technology relative to other technologies, an LCOS analysis does not present a complete picture. We have

presented a range of LCOS based on the inputs we have, along with the sensitivity to those inputs. The

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LCOS analysis will not show the different ways in which storage can be of value. Just as a levelized cost of

energy (LCOE) comparing wind, nuclear, and gas fired energy creates a common metric for comparison,

but does not take into account the different ways in which those energy sources are needed and deployed,

an LCOS analysis does not take into account the different ways different storage technologies may be

deployed. For example, LCOS creates a common value for lithium ion technology and for CaesarEx

technology even though these may be used at different scales and over different durations as shown in

the figure below, and therefore may be used for different purposes.

Source: IRENA Energy Storage and Renewables: Costs and Markets to 2030

In other words, one cannot compare technologies on levelized cost alone. One must consider

environmental risks and benefits, scale, and use of the storage technology. We will discuss these factors

in a later section.

An LCOS analysis is also a static metric based on an average set of inputs at a point in time. It

therefore does not include variations in input costs or benefits in different regions. Nor does an LCOS give

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a sense of the potential cost reductions over time. In general, new technologies lower cost over time. As

discussed briefly above, pumped hydro storage has been in existence for a longer period of time, and

therefore there has been opportunity for cost improvements. While the CaesarEx technology has not been

around enough to determine the shape of the learning curve, there are potential benefits of deploying

the technology in terms of learning that could reduce future costs.

Section 3 - Competitive Advantages of Energy Storage Technologies

The LCOS analysis showed that lithium ion, flow, and pumped hydro are storage technologies

that are cost-competitive with compressed air energy storage. In this section, we will compare the

environmental risks and performance parameters between these technologies, as well as between

diabatic and adiabatic compressed air technologies. Comprehensive life-cycle analyses that include

production stage, use stage and end-of-life stage is needed when comparing environmental impacts

across different technologies.

Pumped Hydro

When renewable energy production is relatively active and electricity demand is low, renewable

energy is used to pump water to higher elevations. As electricity demand increases and energy

generation slows down, water runs down the slope and drives turbines to generate electricity. The

environmental risks of pumped hydro are usually linked with the land use changes caused by it. The

construction of pumped hydro facilities might damage bio-habitats and the original landscape, which

leads to risks for spreading of species. These risks could potentially be mitigated with careful selection of

the location. The building of pumped hydro facilities needs a large amount of concrete and steel, which

is linked to energy and resource consumption issues. The greatest safety risk relating to pumped storage

is dam safety. If it occurs, dam failure can affect downstream communities and the environment, with its

impact potential likely to be far greater than a battery safety incident.23 However, as is mentioned

23
https://www.entura.com.au/batteries-vs-pumped-storage-hydropower-are-they-sustainable/

15
before, pumped hydro has been commercialized a long time ago and has a relatively low LCOS

compared to other technologies. To conclude, pumped hydro is an energy storage technology with

lower costs but great environmental risks on the ecosystem.

Lithium-ion Battery

Lithium-ion batteries have raised a series of environmental, safety, and geopolitical risk

concerns. First, the extraction and disposal stage of lithium-ion batteries have negative environmental

impacts on land and water. There has been a large number of water contamination cases during lithium

mining process. As the global demand for lithium-ion battery increases, such impacts are likely to be

intensified. Second, the minerals that are needed in lithium-ion batteries, lithium and cobalt, are mostly

found in Australia, Chile and Argentina, whereas China actively participates in the production and

assembling process of the batteries. Thus, the security of the raw materials supplies largely depend on

geopolitical factors. Finally, the toxicity and explosion hazards of lithium-ion batteries pose threat to

both human health and the environment. Therefore, though utility-scale lithium-ion storage won’t

utilize large pieces of land, it has significant environmental risks on water, air, and biodiversity.

Flow Battery

Flow batteries store and discharge energy by utilizing the energy differences in different

oxidation states of certain elements. Flow batteries uses chemicals such as vanadium, which is safer for

the environment compared to lithium-ion batteries. In addition to lower environmental impacts, flow

batteries are also better than lithium-ion ones because of their independence of energy and power

rating, fast response, room temperature operation, and extremely long life.24 However, the previous

LCOS analysis shows that its cost is still higher than the lithium-ion battery at the current stage.

Compressed Air

24
Dassisti, Michele, et al. "Vanadium: a transition metal for sustainable energy storing in redox flow batteries." Reference Module in Materials
Science and Materials Engineering. Elsevier BV, 2016.

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 The compressed air energy storage differs from other battery technologies in that they do not

cause environmental harm through the mining process and use of toxic materials. However, as

mentioned before, the traditional diabatic compressed air energy storage technology does not store the

heat generated during air compression process. It burns fossil fuels again when the air is released to

drive the turbines. Therefore, the usable energy converted to electric power is actually stored in the

fuel, not in the compressed air. Traditional compressed air technology generates greenhouse gases,

which is not desirable when energy storage technologies are used to help promote renewable power

generation and reduce emissions of greenhouse gases.

However, the adiabatic compressed air technology that CaesarEx is using avoids this problem by

capturing and storing the heat in water. Thus, no fossil fuels are burned, and the energy that is used to

drive the turbines is from the compression process. According to CaesarEx’s calculation, for every 1% of

energy storage market penetration, greenhouse gas emissions will be reduced by over 18.5 million tons

in the US and 32.5 million tons globally. Based on the central estimates for the social cost of carbon of

the US Government Interagency Working Group, this is roughly equal to avoiding $925 millions in the US

and $1.625 billion cost of carbon worldwide.25

There are still two minor environmental risks linked with the A-CAES technology. First, the land

use changes might affect local ecosystem. Second, the process of building the facilities might be energy-

intensive. These risks could be mitigated by conducting environmental impact analysis before siting and

constructing the plants.

25
https://www.edf.org/true-cost-carbon-pollution

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 Environmental risks Maximum cycles Efficiency LCOS
(batteries) or ($/MWh)
lifetime

Lithium-ion Toxicity, water usage and 1,000-10,000 85%-95% $204-298

contamination, energy
consumption, explosion
hazards

Flow Toxicity concerns still exist 12,000-14,000 60%-85% $257-390

Pumped Hydro Land use changes 30-60 years 70%-85% $155-268

Diabetic Global warming 20-40 years 25%-40% $390-508

Compressed Air

Adiabatic Relatively environmentally 30 years 70% $469-492

Compressed Air friendly

Comparative advantages of different technologies26

Above is a table summarizing the comparators of different technologies. It is worth mentioning

that though it’s easy to quantify the other parameters, many of the environmental risks are not likely to

be compared with each other directly. There are two reasons why such comparisons are hard to

achieve. First, different technologies utilize natural resources in different ways. For example, the

traditional diabetic compressed air technology creates environmental burdens by burning fossil fuels

and emitting carbon dioxide, but it doesn’t use any toxic materials. Though the production of lithium-ion

batteries does not directly cause air pollution concerns, it could potentially result in water

contamination issues. Second, these technologies are used to serve different purposes and have

different life spans. For example, pumped hydropower storage is typically designed to serve longer term

26
https://www.eesi.org/papers/view/energy-storage-2019

18
requirements, whereas utility-scale lithium-ion batteries are more likely to be used for shorter terms.27

Therefore, further sensitivity tests are needed when conducting quantitative comparison between the

environmental impacts of different technologies. In addition, because of the different applications and

different environmental risks of the technologies, they are not completely mutually replaceable.

Therefore, it is necessary to study the policies and regulations of different markets to fully understand

the comparative advantages of these technologies.

Section 4 - Policy and Regulatory Landscape of Energy Storage

United States

Growth in energy storage in the United States has been driven by state mandates and regulatory

actions (especially in California) and is currently limited to projects owned by utilities. Wholesale markets

have not yet captured the benefits of energy storage. A recently released Order 84128 of the Federal

Energy Regulatory Commission (FERC) is an effort towards stimulating access to wholesale markets and

enabling energy storage technologies to participate in them. Under the order, consumers or companies

with energy storage are eligible to sell it through wholesale power markets as an available source of

electricity. This suggests that there will be opportunities for smaller power sources to participate in the

grid and establish a new market segment, which seems to be intention of FERC. Another incentive includes

availability of locational marginal price29 (areas with higher congestion face higher LMP) to energy storage

plants that purchase from wholesale and resell.

Federal law currently offers up to 30% business Investment Tax Credit (ITC)30 if the energy storage

system is paired with a solar energy generation resource. Stand-alone energy storage systems are not

currently eligible for this tax credit, although Order 841 mandates extension of the tax credit to such

27 Immendoerfer, Andrea, et al. "Life-cycle impacts of pumped hydropower storage and battery storage." International Journal of Energy and
Environmental Engineering 8.3 (2017): 231-245.
28 https://www.greentechmedia.com/articles/read/ferc-energy-storage-wholesale-markets#gs.UwWIqWkC
29 https://www.ferc.gov/media/news-releases/2018/2018-1/02-15-18-E-1.asp#.XfqPT-hKg2x
30 https://www.greentechmedia.com/articles/read/congress-introduces-energy-storage-tax-credit-bill

19
systems. Most regulations are centered around battery systems but the applicability can be extended to

other storage technologies. To be eligible for the tax credit the storage facility needs to be ‘charged by a

renewable energy system more than 75% of the time’. The level of tax credit available depends of the

amount of renewable energy purchased. A system charged by renewable energy 80% of the time is eligible

for the 30% tax credit multiplied by 80%, equaling 24%. Systems that are charged by the renewable energy

system 100% of the time on an annual basis can claim the full value of the tax credit. Although the ITC

system is being phased down, it could be an appropriate time for CeasarEx to utilize the policy thrust

provided by Order 841 and also claim benefits of higher tax credits. The phase down of the ITC is such that

after 2019, the amount will incrementally step down to 26% in 2020, 22% in 2021 and 10% in 2022. The

impact of an extension of the federal ITC to stand-alone storage systems would be particularly significant

for developers, eliminating the need to develop and construct additional renewable energy resources.

In addition to federal programs, seven states have adopted direct financial incentives for owners

of energy storage systems: Arizona, California, Florida, Maryland, Nevada, New York and Wisconsin.

Financial incentives are in the form of tax credits or exemptions - Energy Storage Tax Credit in Maryland

(based on the costs of installation), property tax exemption in New York for residential customers. Rebates

and/or Time-of-Use (TOU) rate plans are available in Arizona, California, Florida and Nevada and pending

in Hawaii. Wisconsin offers a grant program funding energy storage projects, the Energy Innovation Grant

Program, which is budgeted at $5 million for 2019.

To evaluate the policy landscape for energy storage, the Energy Storage Association 31 (trade

association) made an evaluation of Regional Transmission Operator’s (RTO) compliance with the FERC

directive. The assessment found that RTOs have varying experience with energy storage and the

regulatory conditions for promoting storage were varied. FERC’s intent to have energy storage resources

31 https://energystorage.org/policy-statement/overview-of-ferc-order-841/

20
operating on the bulk power system requires regional grid operators to establish participation models for

electric storage.

According to this analysis, CAISO has the best framework for storage participation in its wholesale

market. There was uncertainty in existing market rules (application of transmission charges to storage)

for MISO. PJM’s lack of state-of-charge (SOC) parameters and requirement of a ten-hour capacity duration

have been noted as major obstacles. NYISO introduced changes in sub-hourly dispatch to enable flexible

use of storage but rules also prohibit storage from participating in both wholesale markets and utility

programs as well as having barriers to entry for resources smaller than 2 MW. The ISO New England was

noted as technology neutral but lacks clarity on SOC parameters and a clear mechanism for enabling

storage participation.

FERC is facing lawsuits 32 by state and industry actors as state agencies view it as a shift in

regulatory authority from the states to FERC. Other concerns are that outside parties would purchase and

deploy battery technologies not connected to the grid, cutting into power companies' control and revenue,

32 https://www.eenews.net/stories/1061039111

21
especially in light of decreasing costs of storage technologies. Storage resources are eligible to provide all

capacity, energy and ancillary services and regional grid operator is required to revise its tariff to establish

a participation model for electric storage resources that consist of market rules that properly recognize

the physical and operational characteristics of electric storage resources.

China

China issued the first national-level guiding-policy document covering energy storage - “Guiding

Opinions on Promoting Energy Storage Technology and Industry Development”.33 The policy is a narrative

description recognizing that the industry is yet to move out of demonstration stage and calls for the

development of standards and systems solutions. It mentions that policy lags behind the industry’s speed

of growth with lack of policies to lower cost and address safety of energy storage systems. Safety is a

major concern due to the fire hazards of battery storage34 China is facing, so it is also focusing on power

or hybrid applications that involves physical storage.

The policy document is structured around three key points:

● Importance of energy storage in relation to development priorities such as smart grids, high

renewable energy grid-penetration, and the “Internet of Energy.”

● Set development goals and key tasks over the upcoming 10 years.

● Outline necessary supporting policy directions to be enacted to achieve these goals.

Over a 10-year period, the policy describes two stages of development – the first half to work on ensuring

domestic storage technology production reaches international standards and creation of a standards body.

The second half of development (in the next 14th Five Year Planning Period) to show a mature industry

with world-class, internationally competitive technology.

33https://chinaenergyportal.org/en/guiding-opinions-promoting-energy-storage-technology-industry-development/
34https://www.thetruthaboutcars.com/2019/06/bev-fires-encourage-china-to-get-serious-about-battery-safety-vehicle-monitoring/

22
 China will also be exploring and testing all currently existing storage technologies it believes is

commercially viable. Demonstrations are planned for:

● 10 MW/100 MWh-grade CAES

● 10 MW/1000-MJ grade flywheel

● 100 MW-grade lithium ion battery

● 100 MW-grade vanadium flow battery

The guidance document also requires state/regulatory agencies to establish policies governing

pricing mechanisms, technology standards, intellectual property protections, and battery material

recycling. According to CNESA,35 CAES projects will exceed 2 GW by 2023 from the current 11.5 MW. China

is also in the process of introducing electricity spot markets and according to China’s National Energy

Administration, the ancillary services market will be transitioning from a basic compensation mechanism

to a market integrated with spot energy prices by 2020. This could provide further push to valuing the

many services provided by the energy storage sector.

European Union

The Electricity Market Directive of the EU Clean Energy for all Europeans package seeks to

establish a modern design with cross-border trade and competition for the EU electricity market.36 It aims

for a flexible and more market-oriented electricity policy framework to integrate a greater share of

renewables and enable greater consumer participation in energy markets. The directive aims to reduce

barriers to energy storage, and mandates ‘non-discriminatory and competitive procurement of balancing

services and improved rules in relation to network access and charging.’ Additionally, a limit of 550g

CO2/kWh has been set for power plants in capacity markets beyond which subsidies will not be provided.

Risk mitigation through energy storage deployment is an important policy dimension in the EU electricity

35 http://en.cnesa.org/white-paper-access-multyear
36 https://ec.europa.eu/energy/en/topics/technology-and-innovation/energy-storage/overview#content-heading-0

23
system. The newly created Electricity Coordination Group is tasked with monitoring security of supply,

study risks and simulate crisis scenarios to prepare risk preparedness plans that would.

The Netherlands

The Dutch Climate Act was adopted, establishing a clear pathway to full decarbonization by 2050,

with a first target of a 49 percent decrease in carbon emissions by 2030 (compared with 1990 levels). This

has resulted in a draft Climate Accord (a national initiative with multiple stakeholders) with 600 concrete

measures identified to realize the target, including a substantial role for various energy storage

technologies. There has been an increase in interest in energy storage projects from both project

developers and (project) financiers, both for hybrid ‘renewable plus storage’ projects and for stand-alone

energy storage projects. The act also mentions the need for solutions to mitigate sustained periods of

darkness and low wind conditions during winter, which is a cue for energy storage solutions.

With a potential of 180 GW of offshore wind capacity in the North Sea, various initiatives are

currently being developed to create the North Sea Wind Power Hubs, with a prominent role for energy

storage on ‘power link islands’ and involving various national grid managers for both the electricity and

gas networks. According to a report by energy systems transition center (ESTRAC),37 mechanical energy

storage such as compressed air or gas (CAES) or pumped hydro are regarded more mature and efficient

technology, although these offshore application at a large scale still needs significant time and

investments. Specific mention has been given to offshore underground gas storage (UGS), power-to-gas

(P2G), compressed air energy storage (CAES) and hydrogen in promoting grid stability.

Germany

Storage capacity in the German energy market is still mainly provided through large pumped

hydro storage facilities. There is interest in battery storage for electric vehicles, residential sector, for

secure services for industrial customers and ancillary services. More than 20 large scale battery storage

37 https://www.tno.nl/media/9413/sensei_strategies_towards_an_efficient_future_north_sea_energy_infrastructure.pdf

24
systems (1 MW to 48 MW) are operating in Germany, and several large-scale systems are expected to be

commissioned. The Energy Transition policy (Energiewende) is a key driver (60% RE by 2030). The

regulatory framework is still highly complex and requires case-by case consideration, especially when

energy storage is to be operated in multi-use scenarios (storage is currently double-taxed, as both

consumer and generator).

Section 5 - Conclusion and Recommendations

Based on our analysis, the United States currently has the most clear and certain regulatory and

incentive environment, with subnational region of California being the most developed. Ideally, additional

policies specific to incentivising the bulk energy storage industry as a whole, such as a storage investment

tax credit, would be most helpful in promoting CaesarEx’s storage solution. If that is not possible,

extending the solar ITC, and taking advantage of solar plus storage is the best way to capture this existing

tax benefit. We can tell from the LCOS calculation that reducing the tax rate from 40% to 21% reduces the

levelized cost by about $10/MWh, further reducing this tax burden could help further lower cost and raise

the competitiveness of storage.

Another policy ideal would be for the implementation of a carbon tax set at the social cost of

carbon. Such a policy would make renewable energy more competitive, and indirectly drive a greater

demand for bulk energy storage.

Absent any of these policies, CaesarEx should focus on those items that could reduce its overall

cost in order to compete with other forms of storage. While there are non-financial benefits that A-CAES

has over other forms of storage, as discussed in Section 3, the overriding concern for utility buyers will be

cost. Therefore, CaesarEx should consider those cost levers that are most effective in raising overall cost

given the effort involved in control those costs. The sensitivity analysis shown in Section 2 is a great place

to see what levers could be most effective. For example, reducing the overall cost of capital below what

is assumed in our baseline model could be an effective way to reduce costs. Cheaper and more debt could

25
be available through application for loans from the Department of Energy. Reducing the cost of equity

could be driven down by reducing the perceived risk to investors. A greater online presence informing

people of the benefits on proof of concept of the technology could be part of this strategy. A pilot

demonstration project is probably the most effective way to demonstrate the technology, and prove the

cost assumptions. A pilot could eventually also prove the longevity of A-CAES storage, proving to investors

that the benefits last longer than the presumed levelized 20 years. This could be a very effective way to

prove the cost competitiveness of CaesarEx’s technology.

26
Appendix 1a: Lazard Analysis
Appendix 1b: Reproduction of Lazard’s Analysis
Key Assumptions
Scenario 1
Low

Power Rating (MW) 100

Duration (Hours) 2
Usable Energy (MWh) 200
100% Depth of Discharge Cycles/Day 1
Operating Days/Year 350

Capital Structure
Debt 20%
Cost of Debt 8%
Equity 80%
Cost of Equity 12%

Taxes
Combined Tax Rate 40%
Contract Term/Project Life (years) 20
MACRS Depreciation Schedule 7

Initial capital cost-DC ($/kWh) 180

Initial capital cost-AC ($/kW) 62
BESS Equipment Cost ($) 36
PCS Equipment Cost ($) 6
EPC Costs ($) 7
Total Initial Installed Cost ($ MM) 50
Total Initial Installed Cost ($/MWh) 248

Augmentation Cost % of ESS 4.20%

O&M Cost ($/kWh) $ 0.250

O&M Escalator 2.50%
Extended Warranty Start (year) 3
Warranty Expense % of BESS 0.80%
Warranty Expense % of PCS 0.80%

Charging Cost ($/MWh) $ 42.000

Charging Cost Escalator (%) 2.25%
Efficiency (%) 90%

0 1 2 3 4 5 6 7 7 0 0 0 0 0 0 0 0 0 0 0 0 0
MACRS 28.57% 20.41% 14.58% 10.41% 8.68% 8.68% 8.68% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
12/31/2019 6/30/2020 6/30/2021 6/30/2022 6/30/2023 6/30/2024 6/30/2025 6/30/2026 6/30/2027 6/30/2028 6/30/2029 6/30/2030 6/30/2031 6/30/2032 6/30/2033 6/30/2034 6/30/2035 6/30/2036 6/30/2037 6/30/2038 6/30/2039 6/30/2040
Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
Operations Flag 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0
Charging Cost Escalator 1.0000 1.0225 1.0455 1.0690 1.0931 1.1177 1.1428 1.1685 1.1948 1.2217 1.2492 1.2773 1.3060 1.3354 1.3655 1.3962 1.4276 1.4597 1.4926 1.5262 1.5605
O&M Escalator 1.0000 1.0250 1.0506 1.0769 1.1038 1.1314 1.1597 1.1887 1.2184 1.2489 1.2801 1.3121 1.3449 1.3785 1.4130 1.4483 1.4845 1.5216 1.5597 1.5987 1.6386

Capacity (MW) 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 -
Total Generation ('000 MWh) 70 70 70 70 70 70 70 70 70 70 70 70 70 70 70 70 70 70 70 70 -
Levelized Cost of Storage ($/MWh) 178.5 178.5 178.5 178.5 178.5 178.5 178.5 178.5 178.5 178.5 178.5 178.5 178.5 178.5 178.5 178.5 178.5 178.5 178.5 178.5 178.5
Total Revenues 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 -

Total Charging Cost (3.3) (3.3) (3.4) (3.5) (3.6) (3.7) (3.7) (3.8) (3.9) (4.0) (4.1) (4.2) (4.3) (4.4) (4.5) (4.6) (4.7) (4.8) (4.9) (5.0) -
Total O&M (1.6) (1.6) (1.9) (1.9) (1.9) (1.9) (1.9) (1.9) (1.9) (1.9) (1.9) (1.9) (1.9) (1.9) (1.9) (1.9) (1.9) (1.9) (1.9) (1.9) -
Total Operating Costs (4.9) (5.0) (5.3) (5.3) (5.4) (5.5) (5.6) (5.7) (5.8) (5.9) (5.9) (6.0) (6.1) (6.2) (6.3) (6.4) (6.5) (6.6) (6.8) (6.9) -

EBITDA 7.6 7.5 7.2 7.1 7.1 7.0 6.9 6.8 6.7 6.6 6.5 6.5 6.4 6.3 6.2 6.1 6.0 5.8 5.7 5.6 -

Beginning Debt 9.9 9.7 9.5 9.2 9.0 8.7 8.3 8.0 7.6 7.2 6.8 6.3 5.8 5.3 4.7 4.0 3.4 2.6 1.8 0.9 (0.0)
Debt Interest (0.8) (0.8) (0.8) (0.7) (0.7) (0.7) (0.7) (0.6) (0.6) (0.6) (0.5) (0.5) (0.5) (0.4) (0.4) (0.3) (0.3) (0.2) (0.1) (0.1) 0.0
Debt Principal (0.2) (0.2) (0.3) (0.3) (0.3) (0.3) (0.3) (0.4) (0.4) (0.4) (0.5) (0.5) (0.5) (0.6) (0.6) (0.7) (0.7) (0.8) (0.9) (0.9) -
Debt Service (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) 0.0

EBITDA 7.6 7.5 7.2 7.1 7.1 7.0 6.9 6.8 6.7 6.6 6.5 6.5 6.4 6.3 6.2 6.1 6.0 5.8 5.7 5.6 -
Depreciation (12.1) (8.6) (6.2) (4.4) (3.7) (3.7) (3.7) - - - - - - - - - - - - - -
Interest Expense (0.8) (0.8) (0.8) (0.7) (0.7) (0.7) (0.7) (0.6) (0.6) (0.6) (0.5) (0.5) (0.5) (0.4) (0.4) (0.3) (0.3) (0.2) (0.1) (0.1) 0.0
Taxable Income (5.2) (1.8) 0.3 2.0 2.7 2.6 2.6 6.2 6.1 6.1 6.0 5.9 5.9 5.8 5.8 5.7 5.7 5.6 5.6 5.6 0.0

Tax Benefit (Liability) 2.1 0.7 (0.1) (0.8) (1.1) (1.1) (1.0) (2.5) (2.4) (2.4) (2.4) (2.4) (2.4) (2.3) (2.3) (2.3) (2.3) (2.3) (2.2) (2.2) (0.0)

After-Tax Net Equity Cash Flow (39.7) 8.7 7.3 6.1 5.3 5.0 4.9 4.9 3.3 3.3 3.2 3.1 3.1 3.0 2.9 2.8 2.8 2.7 2.6 2.5 2.4 0.0

IRR for Equity 12.0%

Appendix 2: LCOS Inputs
Scenario 1 2 3 4 5 6 7 8 9 10
CaesarEX CaesarEX Pumped Hydro Pumped Hydro Flow Battery Flow Battery Gravity Gravity D-CAES D-CAES
Best Case Worst Case Best Case Worst Case Best Case Worst Case Best Case Worst Case Best Case Worst Case
Power Rating (MW) 100 100 700 700 10 10 8 8 100 100
Duration (Hours) 8 8 4 4 1 1 8 8 8 8
Usable Energy (MWh) 800 800 2800 2800 10 10 64 64 800 800
100% Depth of Discharge Cycles/Day 1 1 1 1 1 1 1 1 1 1
Operating Days/Year 330 330 330 330 330 330 330 330 330 330

Capital Structure
Debt 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%
Cost of Debt 8% 8% 8% 8% 8% 8% 8% 8% 8% 8%
Equity 80% 80% 80% 80% 80% 80% 80% 80% 80% 80%
Cost of Equity 12% 12% 12% 12% 12% 12% 12% 12% 12% 12%

Taxes
Combined Tax Rate 40% 40% 40% 40% 40% 40% 40% 40% 40% 40%
Contract Term/Project Life (years) 20 20 20 20 20 20 20 20 20 20
MACRS Depreciation Schedule 7 7 7 7 7 7 7 7 7 7

Total Initial Installed Cost ($ MM) 547.234 640.910 490.000 1,050.000 10.000 35.000 55 55 547 641
Total Initial Installed Cost ($/MWh) 684.043 801.137 684.04 801.137

Augmentation Cost % of ESS 4.20% 4.20% 4.20% 4.20% 4.20% 4.20% 4.20% 4.20% 4.20% 4.20%

O&M Cost ($/kWh) $ 0.16 $ 0.17 $ 9.80 $ 15.75 $ 0.15 $ 0.53 $ 25.00 $ 27.50 $ 0.17 $ 0.19
O&M Escalator 0.00% 1.00% 0.00% 1.00% 0.00% 1.00% 0.00% 1.00% 0.00% 1.00%
Extended Warranty Start (year) 3 3 3 3 3 3 3 3 3 3
Warranty Expense % of BESS 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80%
Warranty Expense % of PCS 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80%

Charging Cost ($/MWh) $ 42.000 $ 42.000 $ 42.000 $ 42.000 $ 42.000 $ 42.000 $ 42.000 $ 42.000 $ 42.000 $ 42.000
Charging Cost Escalator (%) 2.25% 2.25% 2.25% 2.25% 2.25% 2.25% 2.25% 2.25% 2.25% 2.25%
Efficiency (%) 70% 40% 85% 70% 85% 60% 90% 75% 40% 25%
2 3 4 5 6 7 7 0 0 0 0