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Is it worth extending the duration of merchant batteries?

Robin Duquette's picture
CEO, Pyxidr

Robin Duquette is CEO of Pyxidr, a firm dedicated to capturing value with data, analytics, and information technology through commercial optimization principles.Our current initiative is to put...

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  • Aug 31, 2020
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The short answer is no as long-duration merchant batteries are not yet cost-effective, and the associated margins (i.e., time spreads) are not large enough. For example, if we use the ERCOT West hub, the average values captured in day-ahead and real-time energy price arbitrage under normal conditions – since 2018 – are $15.80/kWh-year, $10.30/kWh-year and $6.05/kWh-year for batteries of 2-h, 4-h, and 8-h duration respectively. The capital cost of storing energy with chemical batteries today is at least $200/kWh, making it too expensive. Merchant batteries are most valuable today for providing flexible capacity than capturing time spreads.

Why ERCOT?

ERCOT (i.e., Texas) has about 25% of its installed capacity coming from intermittent renewable generation, which produces about 20% of the energy. It has minimal access to hydropower and therefore has to rely solely on thermal generating assets and demand to mitigate energy intermittency. For this reason, ERCOT has an effective capacity day-ahead market for regulation and contingency reserves to guarantee sufficient capacity to meet the residual load (i.e., load less renewable energy). The West hub has the highest share of wind and solar generation in ERCOT, combined with the lowest load. These features make this hub an ideal location for short-term merchant storage.

Actual renewable generation in ERCOT

Actual load in ERCOT

What is the intrinsic value of merchant batteries in ERCOT?

The intrinsic value of a merchant battery in ERCOT consists of optimizing the battery in relation to the day-ahead (energy and capacity) and real-time markets. Every day we have to decide for the next day how much power to buy and sell, and what ancillary services to sell and how much. Moreover, every five or fifteen minutes, re-optimizing the battery based on real-time energy prices and expected future prices.

We divide the associated revenues into three streams, namely time spreads, capacity, and price spikes. Time spreads are the margins made by buying energy at a lower price than selling in the day-ahead and real-time markets. The capacity is associated with the sale of ancillary services (regulation and contingency reserves) on the day-ahead market. And, price spikes are the margins when the supply and demand balance of ERCOT is tight, resulting in excessive prices (energy and capacity) for a few hours. We make this distinction to avoid contaminating the value of energy with that related to capacity. When the system is tight, any generating asset is very profitable. It is also the most vulnerable value when we build new generating assets.

We have developed a mathematical program to assess the intrinsic value of electrical energy storage assets and thermal power plants based on historical day-ahead and real-time prices. This value is quite close to what our dispatching and scheduling algorithms achieve in practice – we use a combination of approximate dynamic programming and deep learning to implement our algorithms.

Mathematical program to assess the intrinsic value

The following graphic shows the results of our assessment effort based on historical prices in ERCOT West hub between January 2018 and August 2020, where the break-even margin is the minimum resource price required by equity investors in the absence of other revenues.

Breakdown of the value associated with 100 MW merchant batteries in ERCOT

We can easily observe that the most significant sources of intrinsic value for merchant batteries are the capacity market and price spikes. Indeed, batteries do not need to burn fuel to provide regulation-down/up or responsive reserves, making them quite competitive for offering these services. When it comes to batteries, the cost of fuel is replaced by an opportunity cost. Without price spikes, the 4-h battery would not be profitable, and the 8-h battery is just too prohibitive now.

We provide more details on how merchant batteries get optimally dispatched into ERCOT in this dashboard, which we update weekly.

Our levelized cost analysis

Those are our main assumptions behind the break-even margins (or break-even resource prices).

Levelized cost analysis

Discussions
Matt Chester's picture
Matt Chester on Aug 31, 2020

Do you think it's going to be a breakthrough in the tech or the market/policy that takes them to their next level? 

Robin Duquette's picture
Robin Duquette on Aug 31, 2020

I suspect in markets with a diversified mix of thermal, wind and solar, the cost associated with storing energy will have to come down substantially to make long-duration (8+h) chemical batteries worth it. However, I don't know if we need a breakthrough or an improved supply chain.

Roger Arnold's picture
Roger Arnold on Sep 1, 2020

Thanks for this post. It's very helpful to see hard numbers for the value of battery storage of different durations in a real power market.

How do you think the values captured by merchant batteries would be affected by the introduction of virtual batteries? (I.e., applications with high energy intensity that could ramp their power draw up or down under real time control according to power availability.)

Robin Duquette's picture
Robin Duquette on Sep 1, 2020

Thanks for your comments! In effect, ramping capabilities from thermal plants, industrial processes, demand-side management, etc., are subject to reducing merchant batteries' value. However, the opportunity cost (or actual cost) for thermal plants for providing such capabilities is currently relatively high (i.e., either the spark spread is too negative or too high). For instance, a CCGT in ERCOT is more profitable today for producing energy than providing ancillary services (see http://pyxidr.com/flexbank/edb_dashboard.html).

Bob Meinetz's picture
Bob Meinetz on Sep 3, 2020

Robin,

At 87% efficiency batteries will effectively make any energy stored from thermal plants produce 13% more emissions than generating straight to the grid. Seems any attempt to price carbon in coming years could make using batteries to store energy significantly less profitable.

Are most grid batteries charged by a grid mix, or a 100% thermal mix? Nearly all seem to be installed next to gas plants.

Also, though representing power in units of "megawatthours per hour" (MWh/h) is unique, the "hours" cancel - better would be simply "megawatts" (MW).

Robin Duquette's picture
Robin Duquette on Sep 3, 2020

Thanks, Bob, for your comments. A battery can be charging energy produced by a CCGT at a lower heat rate than the peaker required for the peak hours. In which case,  a battery can lead to the same amount of emissions produced (or less).
I suspect the primary rationale for installing large batteries next to gas plants is to leverage the grid's connection.
I'm using MWh/h to express an average over an hour (e.g., load given in MWh/15-min). But, I agree it is equivalent to using MW.

Matt Chester's picture
Matt Chester on Sep 3, 2020

A battery can be charging energy produced by a CCGT at a lower heat rate than the peaker required for the peak hours.

Can you share more about this-- why is the heat rate able to be different?

Robin Duquette's picture
Robin Duquette on Sep 4, 2020

You may have a situation where a CCGT charges a battery at 55% efficiency to avoid ramping down (or shutting down). The energy stored is used to displace peaking generation that has an efficiency of 38%. In this scenario, an 87% efficiency battery will produce 20% fewer emissions than the peaker. It is one reason we build in the past pumped storage stations to arbitrage on-peak generation with off-peak generation.

Bob Meinetz's picture
Bob Meinetz on Sep 4, 2020

Robin in your opinion, is the value of grid batteries limited to replacing peaker gas plants and coal, then? If they're replacing any grid mix with stored gas generation, they're a big step backwards from an emissions standpoint.

"I suspect the primary rationale for installing large batteries next to gas plants is to leverage the grid's connection."

So it would be great to know whether they're being charged by a direct connection to local generation or a grid mix (or both). There seems to be a perception grid batteries are storing 100% renewable energy to be sold after the sun sets, without much evidence of that occurring in practice. It would require batteries be on-premises at a wind or solar farm, and it's often more lucrative to sell stored energy for ancillary services during the day.

In California on Aug. 14, prices for imports before the blackouts reached $3,800/MWh - a potential goldmine for storage facilities. Especially, when PUCs are permitting utilities to double-charge customers for both gas generation and its storage.

Robin Duquette's picture
Robin Duquette on Sep 8, 2020

Solar is often coincidental with a higher load and, thus, not much renewable energy to displace in a reasonably diversified system (e.g., CAISO). Storage (in a diversified system) is more valuable in the context of wind, where we can use it to move off-peak generation to on-peak hours.
Any good battery optimizers should seek to maximize the margin that means seeking the lowest and highest prices. The lowest prices are not always set by solar generation (they could be set by a thermal plant avoiding a shutdown during the off-peak hours).

Jim Stack's picture
Jim Stack on Sep 3, 2020

Robin, You might want to check the Tesla battery storage. They are almost under the magic $100/ kWh . QUOTE=The capital cost of storing energy with chemical batteries today is at least $200/kWh, making it too expensive.

In FACT Tesla is having a battery day Sept 22 nd 2020  where they will tell how they have lowed the cost per kWh and increased the life of their Power Packs to 20 years. They have many Mega Watt and some Giga Watt installations that have paid for themselves in 2 years., That is a great ROI. 

Robin Duquette's picture
Robin Duquette on Sep 3, 2020

Thanks, Jim, I'll check Tesla's battery day.

Robin Duquette's picture
Thank Robin for the Post!
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