Demand, Technical Capability and Cost Converge to Drive Interest in Energy Storage
Energy storage is a broad concept. It includes many different technologies and proposed applications linked by a common principle: retain electricity generated for use at a later time. Common household items — your car, phone or computer — contain batteries that have performed this function for many years. However, the application of this principle to the wholesale and retail supply of electric energy has only recently gained traction.
So, why is energy storage trending? Because there is a convergence of need, technical capability and cost.
Energy storage is versatile. Pumped hydroelectric storage projects – typically large-scale facilities that are limited by geography and access to water – take advantage of low “off-peak” pricing to pump water into a reservoir that will then be used to run turbines to generate electricity during peak demand periods when prices are greater. Other technologies, including chemical and mechanical storage, are used to provide a host of services, often at the same time, including frequency regulation, peak shaving, resiliency and integration of renewable resources.
The first wave of energy storage projects targeted competitive frequency regulation in the PJM market, a regionally operated wholesale electric market that includes all or part of 13 states and the District of Columbia. The most recent wave of demand has been fueled by procurement requirements mandated by states concerned about the effect of an ever-increasing concentration of solar and wind generation resources, which introduce intermittency into the operation of electric supply systems. Increasingly, direct end-users interested in managing load or ensuring a more robust electric supply have supported additional deployment of distributed energy storage resources.
The term “battery” is often used as a synonym for “energy storage,” but an energy storage resource, even a battery-based energy storage resource, is more than a battery. Equipment and software required to improve the rate of charge, rate of discharge, round-trip efficiency, resource management and other featured characteristics have improved.
In addition, the technology used for energy storage – whether a lithium ion battery, a flow battery or other form of technology – has improved incrementally. These improvements have relied heavily on the deployment of energy storage resources around the world. As a result, the safety, efficiency, reliability, durability and lifecycle of energy storage resources have improved. As evidence of these improvements, a mining operation in Australia paired a 30 MW/11.4 MWh system with its existing 178 MW gas-fired plant to increase efficiency and reliability. In California, software allowed for the aggregation of distributed energy storage resources capable of being dispatched as an operational 100 MW resource.
Cost and Revenue
Technical improvements, of themselves, will not drive the market. The cost of energy storage resources and the assurance of revenue from the use of energy storage resources dictate if and when energy storage projects are deployed. Per the Energy Information Administration’s May 2018 report on battery storage market trends, approximately two-thirds of the 708 MW of large-scale (sized 1.0 MW or greater) battery-based energy storage capacity in operation in the United States was placed into service since 2015. Why? Price. Various reports indicate that the price of energy storage has dropped by as much as 80 percent since 2010. With costs declining for both battery packs and balance of plant, financial modeling for stand-alone energy storage resources or add-on resources to renewable projects becomes more attractive.
Reliable revenue is the other side of the modeling equation. A single stream of revenue is usually not sufficient to support the capital costs for deployment of an energy storage resource. Therefore, developers assemble a collection of services or “use cases” to meet revenue hurdle rates. The term is known as revenue stacking and requires close coordination to ensure that a single resource can meet each of the primary use cases. Because the obligations of one use case can affect the ability to perform the obligations on another use case, revenue stacking is a bit like stacking marbles. Improved software has allowed for better coordination, and reductions in battery costs have allowed developers to install additional capacity economically.
Finally, regulatory certainty matters as well. As noted above, the initial wave of energy storage projects was deployed to take advantage of revenue from market-priced frequency regulation in PJM. In January 2017, however, PJM abruptly changed the market signal for regulation, undercutting the revenue stream from such services for energy storage systems. Because so many energy storage resources are deployed in organized wholesale markets and provide price-competitive services into those markets, the tariffs (the terms and conditions applicable to those markets) matter a great deal.
The Federal Energy Regulatory Commission issued a rulemaking in February 2018 in response to complaints that the existing tariff rules prevented energy storage resources from offering products that they were capable of offering. The rulemaking may provide increased certainty to support additional energy storage deployment, once the required changes take effect.
While the convergence of need, technology and cost have led to significant interest in energy storage resources in recent years, these projects remain complex. Large-scale investment from the equity and debt markets, necessary to grow and mature the market, will require mastery over uncertainty. Sophisticated and experienced developers who understand the complex risks arising from technology, revenue stacking and the regulatory environment, and who can efficiently control or mitigate those risks, will be best positioned to attract this capital and establish a leading position in the industry.
Joshua Belcher is counsel in Eversheds Sutherland (U.S.) LLP’s Houston office. He can be reached at firstname.lastname@example.org. Kyle Wamstad, associate in Eversheds Sutherland (U.S.) LLP’s Atlanta office can be reached at email@example.com.