➤ AES increases focus on renewable and battery storage development
➤ Plans to install 12,000 MW of renewables and cut carbon emissions 50% from 2016 levels by 2022
➤ Renewable contracts mitigate impact of fossil fuel investments at Latin American plants
AES Corp. is ramping up investment in renewable energy and battery storage as it aims to reduce its carbon output by 50% from 2016 levels by 2020, with the ultimate goal of reducing its carbon footprint 70% by 2030. The company, which plans to achieve these goals in part by bringing 12,000 MW of renewables online by 2022, co-owns storage company Fluence Energy LLC with Siemens AG. The two companies merged their storage businesses in 2018. AES is also planning to double its 200-MW storage fleet, which will include solar-plus-storage technology and standalone projects.
S&P Global Market Intelligence spoke with AES President and CEO Andrés Gluski regarding the company’s increased focus on renewable energy and battery storage, its divestment from coal-fired generation in the U.S. and its strategy for investing internationally. This an edited transcript of the interview.
S&P Global Market Intelligence: How has AES approached transitioning to a more renewable-focused company?
Andrés Gluski: This is pretty transformational because our mission now is accelerating a safer and greener energy future. About three years ago we really started making the shift. It's been a process, in some cases, of buying renewable development companies, acting as a catalyst to accelerate their growth, coming up with some new products in the market and either selling or retiring 80% of any merchant coal plants.
AES Corp. President, CEO and Director Andrés Gluski sees rapid growth ahead for energy storage systems.
We are setting out a goal of lowering our carbon CO2 footprint by 50% off our 2016 base by 2022 and by 70% by 2030. We feel we're on the right track to achieve this. We have a contracted coal plant in Hawaii, one in Maryland and one in Puerto Rico. We have some coal plants at [Indianapolis Power & Light Co.] in Indiana. That's a regulated, integrated utility. But we have sold or shut down all of the rest. We'll have some coal for a while because some of these contracts are long.
AES is a leader in a number of technologies and this is only going to accelerate. We really see a shift into the [renewable] sector. More renewables, a lot more energy storage. And conventional energy has a role to play, but the future is batteries and renewables. We have sold down [Sustainable Power Group LLC's] operating assets and are taking that money and reinvesting it in development projects that require more work and more risk but also higher returns.
Would AES be interested in acquiring a storage business as your focus shifts in that direction in a deal similar to the company’s investment in sPower?
I don't think that is a capability we would need to go out and buy.
With more of a focus on renewables, does AES plan to be active in every state in the U.S.?
We choose our markets. We have AES Distributed Energy, which is doing very well. It's separate from sPower and it tends to do smaller projects, community solar-type projects. Distributed Energy is very strong in Hawaii, sPower is very strong in California. Distributed Energy is strong in New York, doing more in Massachusetts, sPower is stronger in Virginia. In terms of states in the country, we're probably in less than 20. You want to have a critical mass and make sure you're really reaping economies of scale.
Are most renewable projects financed off balance sheet or is AES an active project finance borrower?
We have project debt on these, on almost all of them we have project debt.
What does the debt-to-equity ratio tend to be for these projects?
It depends on the contract, but for a long-term contracted solar farm you're talking 70% to 80% levered.
Are there types of storage where it is more difficult to get lenders on board?
Absolutely. To be frank, in our case, we've been able to get financing because our systems have been up and operating for many years. But if you're trying a completely new technology it's going to be tougher. We have solar-plus-battery-storage projects financed. Some new projects that will be financed are just stand-alone storage.
Is AES's commitment to renewables and environmentally-friendly generation as strong when it comes to the company's international portfolio?
Yes, it's absolutely as strong. We have a product that we're selling that we call green blend-and-extend. We have contracted thermal plants in South America and Mexico and talking to the offtakers, who can be large industrials, mining companies. We basically say 'You're paying us for capacity. A thermal plant will provide the capacity but if you give us a long-term contract for a renewable [project], it's lower than the marginal cost of burning the fuel.' In that case, we basically lower their carbon footprint, not by 100% [in tons of CO2 per MWh], but it could be 50%, 60%, and also lower their cost of energy.
When everyone talks about renewables you're just talking about energy, but you need electricity 24/7, so how do you bridge that? One way is conventional energy, but you can also do it with lithium-ion batteries. We have a joint venture with Siemens, we are already in 18 countries and we have already sold or installed 800 MW. AES has more than 200 MW of energy storage in our own fleet and we're building 200 MW more so we see the lithium-ion batteries really exploding because that's a way you can really go further in the reduction of your carbon footprint because then you don't need that thermal backup in many places.
It looks like storage is going to be taking up more and more of your time as the technology evolves and becomes cheaper.
Exactly. In solar, we commissioned the world's first truly 24/7 solar on the [Hawaiian] island of Kauai last year and this has five-hour batteries.
In Southern California, where you have a spike in demand when everybody gets home, the ramp-up to meet that demand is very tough for a thermal plant because they have to warm up. They're not instantaneous. Batteries are instantaneous. [The market for batteries] has grown by a factor of 20 over the last five years and I think it's going to grow by at least 10 times over the next five years.
How feasible would a transition to 100% renewable energy be?
It is going to require a lot of capital. The future being more renewable depends on how wealthy a country or a system is and how much they're willing to invest in batteries.
I honestly think this is a technology that's ripe. We've been operating them for more than 10 years in some very difficult places like in the desert of Atacama in Chile. We know that they operate well. Our energy storage facilities in the Dominican Republic helped keep our plants online during Hurricanes Irma and Maria.
We know these things are very robust in what they can do. I think it's a matter of scaling up to drive down prices. It's like what happened in solar. Most of the drop in solar panel prices until very recently was scale economy, it wasn't necessarily technological breakthrough. We know the technology works, it's a question of reaching scale to continue to drive prices down.
Prices have dropped, for the whole system, about 75% over the last five years. If they continue to drop in the next five years, say 50%, then more and more of those applications will be feasible. But to give an idea of the scale, the amount of energy storage that you would need in India to accommodate 200 GW of renewables [that are planned to be built by 2023] is between $30 billion and $50 billion. You're talking about real money.
Do you think that, short-term, even in the U.S., it would be more expensive to rapidly replace fossil fuels with battery storage?
I think it's going to depend on the location, it's very site dependent. It'll depend how big the duck curve is, how fast the ramp-up is, whether they're burning coal or natural gas, the price of natural gas at that hub. I think that as time goes by you're only going to have more situations where [renewable energy] is the low-cost alternative.