Energy storage systems: buildings, batteries, and real estate investing

This is my third blog post focusing on smart building technologies and our Smart Building Strategy. As I’ve mentioned in my previous posts, we have a responsibility to evaluate and apply market appropriate, state-of-the-art, smart-building technologies and innovations in our real estate investments to generate optimal value and returns for investors. In this post, I’d like to discuss current advancements in energy storage systems — in particular battery technology and their applications in commercial real estate.

You might be aware of the recent advances in battery technology related to everything from cell phones or electric cars – with batteries continually getting lighter and more reliable. But less publicized is that battery technology is making an impact in many areas of commercial real estate.  There are multiple types of battery technology systems, but lithium-ion has emerged as the leader comprising 95% of energy storage deployments in 2015. Price, performance, and safety improvements are making lithium-ion batteries the ideal choice for stationary energy storage in buildings.  These advancements in battery technology are enabling many new benefits for tenants and real estate investors, such as reduced energy costs, greater power reliability, or improved environmental performance.

How? Utilities in many areas are looking to manage energy loads during peak periods and improve overall grid reliability. Battery systems offer a potential solution, in that they provide the ability to curtail the use of grid power during peak demand times. When installed at a property, the battery system is fed energy by the utility grid up to its capacity and can then be used to supplement or replace grid power as necessary. In essence, you’re creating onsite energy reserves that can be used during periods of high-energy demand or in situations where grid power is unavailable. Just as you would structure your cash flows to build a fund reserve, this creates a “savings account” for energy that can be tapped when needed by building tenants or even the local utility – and it happens dynamically throughout the day, storing or releasing energy on a minute by minute basis.  As a bonus, this can smooth out energy flows from renewable energy such as solar and wind that are subject to the weather, enabling utilities to better manage the grid, and accelerating the adoption of environmentally friendly, clean-energy sources.

This is a win/win for the utility and the customer. Utilities reduce grid demand, while customers can reduce their costs by lowering demand charges. The returns vary by region, with California, New York, and Kentucky as three states that typically have utility rate structures (such as high demand charges) and incentives that create a financial opportunity.  For example, small to medium sized commercial utility customers in Kentucky could see a 13% rate of return on the installation (through avoided demand charges) on a one-hour capacity battery system, and 9% on a two-hour system. Connecticut, Massachusetts, and New Hampshire are just some of the states emerging with similar financial returns.

Toward that end, we recently partnered with LBA Realty to install a 1.3 megawatt (MW) energy storage system at Park Place, a 2.1 million square foot, mixed-use complex based in Irvine, CA. Stem, an energy storage system provider, developed the project, which provides automated energy demand management capabilities reducing demand costs at the property. The software platform rapidly deploys battery-stored energy during peak demand and charges the batteries during low demand, optimizing the storage system to maximize savings.  After installation in 2016, this is now the largest indoor energy storage system in the United States.

Does this strategy make sense for other real estate investments? I believe that there are a few factors to consider before deciding to invest in an energy storage project using advanced battery technologies:

  • What are the electricity load requirements, and are they erratic or stable? An energy storage solution may not have much impact on the bottom-line if the energy load is predictable and consistent.
  • Where is the facility located? Certain U.S. markets provide a more favorable payback because of their high demand charges. Look at California, New York, Hawaii, and Kentucky to start. Additionally, sensitive locations with a history of power outages may make good candidates.
  • Does the facility have enough space to house the batteries? Battery systems can take up a large amount of space, so the location onsite and the available square footage need to be considered.
  • Does insurance cover this? Although considered safe, lithium-ion technology is still flammable so liability insurance coverage should be reviewed.
  • Would onsite energy storage provide a competitive advantage for the facility? The increased reliability from energy storage may help drive leasing interest from tenants with critical building systems and operations.

In the coming years, I expect that battery technologies will continue to evolve and improve in safety, capacity, longevity, and price. We are continuously tracking these trends and identifying where battery systems, among other technologies, can play a larger role throughout our portfolio to enhance strategic positioning and potentially the financial return for our clients and investors.

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