Alex Pischalnikov and Zach Pollock | powergrid international | 17 october 2016
This article first appeared in POWERGRID International.
The rapidly expanding market for energy storage has historically been segmented by use case and the stakeholders poised to benefit from the application of these use cases. Particularly for distribution utilities, who are in de-regulated states and do not own generation, energy storage is viewed as a potential solution for solving a specific and oftentimes specialized engineering problem, and economics are evaluated secondly (and against typical utility infrastructure investments). Conversely, the use cases for behind-the-meter energy storage are normally driven by some combination of cost saving opportunities and revenue generation (typically through demand response or frequency regulation). Despite the maturity of these early use cases, on both the utility and customer side of the meter, these benefits are finite and the opportunities are fleeting at best. Today these investments are developed in parallel, not fully realizing the complementary benefits that may be shared by distribution utility and customer driven use cases.
From a utility perspective, deploying battery storage on circuits projected to exceed capacity ratings as an alternative to circuit reconductoring or new substation construction have been key utility use cases, but typically do not pencil out compared to traditional “wires” investments. However, the benefits of these capital deferrals and mitigations are often based on principles of regulatory accounting, and may not be a straightforward assessment which allows the full value of the storage resource to be captured due to the fact that frameworks typically limit concurrent benefit realization – particularly if these benefits accrue across multiple stakeholders. By way of traditional accounting methodology, using storage to solve a specific technical issue, which may occur for only a few hours a year, is leaving additional value on the table during the times when that problem does not exist.
Battery storage is increasingly being considered as an alternative to mitigate impacts of intermittent distributed energy resources like solar photovoltaics (PV). As the grid transforms to accommodate more distributed, bidirectional and intermittent power flow, distribution system engineers will need to first identify the issue at hand and then pick from an increasing toolkit of solutions to mitigate it. As the costs of energy storage continues to decline, it is likely that storage will become a more viable solution in a portfolio of options but it is also important to note that solutions can be provided by other emerging technologies including smart inverters and power electronics devices. Hence, there is no guarantee that cheaper storage alone will lead to more deployment as many industry analysts have speculated.
In an ongoing effort to promote innovation and stimulate the commercial deployment of the technology, some U.S. states have passed legislation which requires utilities to procure cost-effective energy storage. California’s monumental mandate for its investor owned utilities to procure 1.3 gigawatts of energy storage set a precedent and spurred massive activity in the industry. Oregon followed suit with a much smaller requirement of 5 MWh for each investor-owned utility to have in service by the beginning of 2020. Most recently, Massachusetts Gov. Charlie Barker signed into law H. 4568, which could make the state the first in the east to have a utility scale energy storage procurement requirement. These bills are certainly key enablers for the industry, and should be evaluated by other states to assess how they may fit into their overall grid modernization and energy policy objectives in the short-run. However, these mandates do not necessarily provide long-term certainty and may also serve to confound pure project economics.
On the customer side, use cases for behind-the-meter energy storage are dictated predominantly by economics stemming from avoided costs or revenue generation opportunities that are presented by demand-based rate structures. In some instances, such as utilizing storage for demand response, benefits may be composed of both of these benefit streams. The principal value proposition for commercial customers is straightforward – electricity bill savings through demand charge reduction or time-of-use rate optimization. Still, these use cases are inherently opportunistic and there is no guaranteed long-term certainty around their benefits.
Conversely, as utilities continue to modify their residential rate structures, residential energy storage will become more economically viable through TOU rate optimization and demand charge management. Institution of residential demand charges or reducing net metering excess generation to wholesale rates bolster the business case for pairing storage with existing solar systems. Hawaiian Electric (HECO) recently had its first customer “self-supply” PV system go online, which allows customers to draw power from the grid but does not provide compensation for selling back to the grid for net excess production, as is the case with most traditional net metering tariffs. With Maui having already reached its “grid-supply” net metering cap and Oahu and the Big Island close to 70% of allotted capacity, it is expected that more customers will chose the “self-supply” option and pair it with energy storage systems to bolster the business case.
In certain states, the economics of energy storage can be enhanced by subsidies and incentive programs. A prominent example of a subsidy for distributed energy storage is California’s Self Generation Incentive (SGIP) program, which provides incentives for both qualifying commercial and residential systems. Recently, customers have increasing opportunities to realize additional revenue through providing grid services. Regulatory and market reform promoting aggregation of distributed energy resources for grid services has been ongoing in places such as Texas, New York, California, and others. However, these opportunities are immature and are small in comparison to the revenue streams which exists for traditional generators.
On the wholesale side, market opportunities for energy storage have been small, finite niches of the ancillary services markets in a select few regions, most notably PJM’s frequency regulation market. As of April 2016, PJM had a total of 246 MW of interconnected battery storage projects. Motivated by FERC Order 755, which directed market operators to better compensate fast responding resources, PJM provided significant clarity to project developers through its establishment of the dynamic regulation market (RegD). In turn, this has recently led to increased competition and saturation amongst market participants. In the broader wholesale markets, the current low commodity price environment has made storage significantly less competitive in comparison to traditional fossil fuel alternatives. The lower marginal cost to run these generators for meeting peak demand creates a much smaller spread between and on and off peak prices, diminishing arbitrage revenue.
Other market operators have actively been trying to develop products to appropriately compensate storage resources for the value they can provide, yet reaching consensus among stakeholders and developing these services has been a slow process. In August 2011, CAISO began a stakeholder initiative to design a flexible ramping product, which was intended to allow the ISO to procure sufficient ramping capability via economic bids. The amended tariff was filed with FERC on June 4, 2016 and is currently awaiting approval. Additionally, the CAISO is currently exploring a flexible resource adequacy initiative which would allow storage to provide flexible capacity.
In the case of third parties developing and financing these projects, it is challenging to build a strong investment pipeline based on traditional contracting mechanisms or merchant market participation. This issue is in part due to inherent technology cost risk, but also because there is a lack of wholesale market products that compensate energy storage for the services it can provide.
Energy storage is a unique resource, in that it can provide capacity, energy, and ancillary services to the grid irrespective of its physical location. However, the engineering constraints of making a system simultaneously available to provide all of these services – under a particular contract structure – are substantial. These business realities coupled with regulatory hurdles make the ability to stack energy storage value streams difficult in practice, leading to the storage owner or developer not being able to monetize the asset to its technical capability.
The following recommendations address some of the unique economic and engineering challenges that characterize energy storage which will need to be solved to move the market forward, taking into consideration the priorities of utilities, developers and customers.
- Utilities should take a cross-functional approach to developing a storage deployment strategy, soliciting expertise across the organization to build a unified plan to first pilot, analyze, iterate and then install storage at scale. Taking into consideration where it is needed across the service territory and by which stakeholders (which can include customers).
- Evolve the “Emerging Technology” groups that have been formed by many utilities to develop technology adoption strategies that are then transferred to the broader organization. Some utilities have created proprietary methods of evaluating and deploying energy storage by working with various technologies, developers, and use cases. Duke Energy and Southern California Edison are good examples of companies with mature capabilities in this area.
- Distribution utilities should design and pilot programs that incentivize customers to both install and allow utility control of behind-the-meter energy storage. Although regulatory constraints may exist in certain jurisdictions, the utility is well suited to balance a portfolio of behind-the-meter resources to meet grid needs. Whether this is achieved through direct control of the resource or compensates the customer for performance, these type of solutions are beneficial to all parties and are indicative of the level of collaboration required between utilities and developers to fully monetize the value of energy storage.
POLICY & REGULATION
- State legislatures and PUCs should thoroughly examine the potential that energy storage may have in lowering energy costs, improving resiliency, and enabling the achievement of grid modernization initiatives. Driven by this analysis and guided by lessons learned from California and Oregon, policymakers may choose to design their own utility procurement programs to expedite adoption and commercialization.
- Due to regional market differences for distribution utilities, distributed storage and other DERs are compensated differently across these areas, making it difficult to assess storage cost and performance metrics uniformly and develop standardized market rules and tariffs. This can be partially addressed by standardizing around a set of ancillary services across metrics, where performance metrics may vary over time but the long-term goal of the services remains consistent (e.g. outcome-based performance).
- Regulators should take a lesson from the solar industry and seek to avoid conflicting, and polarized policy decisions. As has been observed from state debates over NEM policy, lack of uniform policies inhibit developers and financiers from providing certainty to customers. Similar, bespoke regulation can slow commercialization of energy storage technologies. While state-level policy will never be unified, regulators should work to collaborate to identify aspirational polices across states that are directionally consistent and inclusive of stakeholder feedback.
- To further the adoption of distributed energy storage, targeted, transparent and predictable incentives should be developed for both Residential and C&I customer segments. The recently re-designed California SGIP may serve as a model for states that wish to promote battery storage installations.
CONTRACTING & VALUATION
- An industry standard valuation methodology, with accepted ways to assess the reality of how value streams can all be prioritized and realized. This includes quantification of non-standard benefits provided by energy storage, which may include reliability and environmental benefits.
- A standardized and transparent energy storage contracting process to help all parties involved better understand expectations and commitments. Developing a set of essential terms and provisions similar to those established in the EEI Master Contract or ISDA Master Agreement would in turn help mitigate uncertainty and unlock financing options, making more storage projects possible. San Diego Gas & Electric has made their standard energy storage PPA publicly available online, which has helped to set expectations and expedite negotiation when an award has been granted.
- Development of common standards for integrating batteries and balance of system components will allow for easier, faster, and more cost effective deployment. The Modular Energy Storage Architecture (MESA) Alliance represents significant strides in bringing stakeholders together to create a non-proprietary set of specifications and standards, with notable members including Duke Energy, Parker Hannifin, and LG Chem, amongst others. Even so, more efforts like these are necessary to promote interoperability of components while giving insight into measuring the performance of batteries and energy storage management systems.
- Energy storage software system capabilities need to mature in order to realize the full value that these assets can deliver. Particularly, applications that can integrate measuring asset operational performance with load forecasting and rate impact modelling can offer significant value to utilities or developers.
The market for energy storage has developed in parallel over the last few years with use cases both in front of and behind-the-meter motivating different investment opportunities. Simultaneously, several regulatory and market initiatives are underway which clearly acknowledge that grid modernization will be an encompassing process inclusive of customers and other historically passive stakeholders. This convergence of stakeholder interests will require extensive collaboration between all parties involved in order to maximize cost-effective energy storage investments, with consideration given to the utility regulatory model of the state in question. Ultimately, the prevailing energy storage business models of the future will be those that realize its full technical and economic potential. Critical to achieving this will be clearly identifying complementary and mutually exclusive use cases and ensuring these tradeoffs are evaluated in a transparent, repeatable process which may enable sharing these benefits across multiple stakeholders.
Alex Pischalnikov and Zach Pollock are energy and utility experts at PA Consulting Group