Three New Revenue Streams For Energy Storage To Tap In America's Organized Power Markets
- Jul 31, 2018 11:16 am GMTJul 30, 2018 10:30 pm GMT
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By Eric Gimon, Energy Innovation's Senior Fellow
Energy storage is surging across America. Total installed capacity passed 1,000 megawatt-hours (MWh) during a record-setting 2017, and the U.S. market is forecast to nearly double by adding more than 1,000 MWh new capacity in 2018 - adding as much capacity in one year as it did in the previous four.
However, this exponential growth has mainly been limited to vertically integrated utilities operating outside of the country’s organized power markets, which serve two-thirds of all U.S. electricity consumers. So how can energy storage plug into these markets?
In a word, revenue.
Energy storage can collect revenue in America’s organized power markets three ways: platforms, products, and pay-days. However, different projects will tap these potential revenue streams in different ways, and investors should seek nimble developers who can navigate a complex and evolving regulatory and market landscape.
In part two of this series, we’ll explore how storage will disrupt power markets as more and more capacity comes online, but first let’s cover the three ways it can tap the U.S. organized market opportunity.
Platforms: The Best Laid Plans…
Independent system operators (ISOs) go through a planning process where they identify opportunities for new transmission to improve reliability or market efficiency. Similarly, it’s normal to think about energy storage as a reliability asset, and it can become integrated as a lower-cost, non-transmission alternative to boost reliability.
Here's an example: A relatively isolated area on the grid must plan for losing a transmission line or local generator during peak demand. Rather than adding new transmission or local generation, building a storage project can carry a local grid through an emergency. If the economics add up, the project will then be built, and paid on a cost-of-service basis financed through transmissions charges.
If storage in this example plays the same role as transmission for so-called “reliability transmission expansion”, it should also enjoy an analog to “economic transmission” – transmission built to move surplus energy to constrained areas to create benefits for market buyers and sellers. But to date, only one such project exists within the U.S. independent system operators (ISOs), located near Baltimore on the PJM grid.
One reason ISOs have hesitated to fund such projects is that while “reliability” storage is tied to a definite risk of an emergency on the grid which determines how it will be used, “economic” storage requires instructions from the ISO about when to buy and sell power. ISOs worry this could challenge their market independence since the way they dispatch storage will invariably affect prices, and could make them look like self-dealing market participants.
However, ISOs already regulate power flow over transmission lines, which certainly affects power prices. When a new transmission project is proposed to relieve congestion in an area of the grid with high demand (and thus high prices), local generators are first in line to complain about lost revenue.
What preserves ISO independence in this case is transparent cost-benefit-analysis and security constrained economic dispatch with financial transmission rights – a standard methodology for fairly moving power across transmission lines and distributing revenue from arbitraging local price differences.
If or when markets start doing more multi-period dispatch, they can dispatch storage in the same way, according the transparent optimization, and assign financial storage rights to whomever pays the costs of economic storage.
Products: Fee for Services
While ISOs are uncomfortable paying for storage services through transmission access charges that passively incorporate storage into the grid, they have been receptive to storage competing to provide fixed services like fast frequency response, capacity, or regulation that projects can compete to provide on a “technology-neutral” basis. But keep in mind these services were defined by markets before batteries and other clean technologies like renewables changed the game.
Theoretically, fitting energy storage into these technology-neutral products should be simple. But storage resources are energy limited (they can’t just convert fuel to electricity ad infinitum), they must be charged, they take more energy to charge then they provide back, and they may be entirely driven by power electronics (no spinning inertia).
These differences mean existing market product definitions are often ill-suited to include storage, and while most incumbent participants often provide ancillary services for just a fraction of their revenues, storage projects dedicated to a single service (such as regulation) could have their entire business model upended by simple rule changes.
Storage resources also have attributes that are not always valued in markets, like how fast they can change their output, their ability to reduce air pollution, or the quick and modular pace at which they can be deployed. These attributes provide grid benefits but need revised power market rules to be properly valued. The standard equivalence for utilities between batteries and natural gas peakers seems to require a 1:4 power ratio, i.e. a 1 megawatt (MW)/4 MWh battery, so you might expect that product definition.
However, shoehorning batteries this way is not necessarily economically efficient – some peak needs may last longer, some may be more sporadic, and a battery’s highest value application may involve a different power ratio.
Collecting storage revenue by providing grid-need products will always be dependent on the fine print. As a new competitive entrant to most market, storage – especially battery storage – is not always in the best position to make sure rules value them at their best.
Pay-days: Profiteer or Just an Independent Businessman?
One way for storage resources to avoid being shoehorned into the wrong glass slipper is to compete directly in energy markets. What could be simpler than arbitrage: buy low, sell high?
Unfortunately, today’s markets just don’t provide enough revenue this way. Consider daily wholesale electricity price differentials in two ISOs with the most market spikes, California's CAISO and Texas' ERCOT, where crudely estimated annual revenues from buying low and selling high each day (with no roundtrip losses) come out to $10-20 per kilowatt-hours(kWh) year, not quite enough to be in the money yet but close to some of the prices we see coming out of vertical utilities like NV Energy’s recent announcement to add 100 MW of battery storage.
One thing is clear: The closer to a real-time market storage operates in, and the higher the power ratio, the more revenue is available from arbitrage. For example, a battery storage unit with a 4:1 power ratio and 20% round-trip losses operating in the 2017 Houston load-zone real-time market could be making as much as $57/kWh-year. This system would likely cost $300-400/kWh, making it an attractive investment, especially with high prices expected across ERCOT in coming summers.
This contrasts with other ISOs, and highlights the efficiency with which energy-only power markets can point to where investments have the most value.
Even if energy arbitrage revenues become sufficient to support storage investments, today’s markets still maintain some barriers. Not all ISOs offer the right kind of market “participation model” to offer efficiently in the markets. The Federal Energy Regulatory Commission’s (FERC) recent Order 841 directly addresses this, and the storage industry is eagerly awaiting new tariff structures and participation models in response.
Still, markets must contend with the fact that storage resources are energy limited, which begs the question: how should they play in markets? Most storage today bids on an opportunity cost basis, and will buy or sell from the market based on its state of charge: If the battery is low, its bids may not be structured to buy right away in case prices go lower, and if the battery is high and could provide power, its bids might make it more likely to wait for higher prices to discharge.
Opportunity-cost based bids may efficiently dispatch batteries for maximum system benefit, but such an approach inherently accepts a battery resource’s right to withhold its capacity. As more and more storage appears in markets as the marginal price-setting resource this may become an issue from a market-monitoring perspective.
The rapid pace of machine learning improvements mean storage bid patterns could be determined by software black-boxes that are impossible for market monitors and regulators to understand, or create strange market artifacts like stock market “flash crashes” we’ve seen with increased algorithmic participation.
One possible route to resolving these issues would be for ISOs to increase their use of probabilistic multi-period optimization in market dispatch algorithms. Then the ISO can be in charge of dispatching the battery in the most optimal way over time (hence multi-period), lowering the need for opaque and potentially problematic bid patterns.
Today’s Energy Storage Opportunity, Tomorrow’s Energy System Disruptor
Energy storage has jumped from tomorrow’s clean technology to today’s investment opportunity, but the industry’s true potential has yet to be tapped. As investors consider energy storage, they should seek nimble projects capable of navigating the complex and ever-evolving regulatory and market landscape.
And as more and more energy storage comes online, ISOs will need to evolve through new rules and market structures to accommodate the technology’s potential. In part two of this series, we’ll explore two ways energy storage will be a disruptor.