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Here Are Two Ways Energy Storage Is A True Power Market Disruptor

By Eric Gimon, Energy Innovation's Senior Fellow

The term “market disruptor” is seemingly thrown around for every new technology with promise, but it will be quite prescient when it comes to energy storage and U.S. power markets.

New U.S. energy storage projects make solar power competitive against existing coal and new natural gas generation, and could soon displace these power market incumbents.  Meanwhile, projects in Australia and Germany show how energy storage can completely reshape power market economics and generate revenue in unexpected ways.

In part one of this series, we discussed the three ways energy storage can tap economic opportunities in U.S. organized power markets. Now in part two of the series, let’s explore how storage will disrupt power markets as more and more capacity comes online.

New projects in Colorado and Nevada embody “market disruption”

True market disruption happens when existing or incumbent technologies can only improve their performance or costs incrementally and industries focus on achieving those incremental improvements, while an entirely new technology enters the market with capabilities incumbents can’t dream of with exponentially falling costs incumbents can’t approach.

As energy storage continues getting cheaper, it will increasingly out-compete other resources and change the mix of resources that run the grid.  Recent contracts for new solar-plus-storage projects signed by Xcel Energy in Colorado and NV Energy in Nevada will allow solar production to extend past sunset and into the evening peak demand period, making it competitive against existing fossil fuel resources and new natural gas.

In fact, energy storage can increasingly replace inefficient (and often dirty) peaker plants and gas plants maintained for reliability.  This trend isn’t limited to utility-scale power plants – behind the meter (i.e., small-scale or residential) energy storage surged in Q2 2018, installing more capacity than front-of-meter storage for the first time.

Energy storage’s economic edge will accelerate in the future. Bloomberg New Energy Finance forecasts utility-scale battery system costs will fall from $700 per kilowatt-hour (KWh) in 2016 to less than $300/KWh in 2030, drawing $103 billion in investment, and doubling in market size six times by 2030.

Tesla’s Australian “Big Battery” shows how storage will upend the existing order

But energy storage won’t disrupt power markets simply because of its continued cost declines versus resources it could replace, but also because of its different deployment and dispatch characteristics.  It won’t merely replace peaker plants or substation upgrades, it will modify how other resources operate and are considered. This will require a change in regulations at all scales for the power grid, as well as in power market rules.

Consider the Hornsdale Power Reserve in South Australia, otherwise known as the “Tesla Big Battery.”  This 100 megawatt (MW)/129 megawatt-hour (MWh) project is the largest lithium-ion battery in the world.  Through South Australian government grants and payments, it contributes to grid stability and ancillary services (also known as “FCAS”) while allowing the associated Hornsdale Wind Farm owners to arbitrate energy prices.  A recent report from the Australian Energy Market Operator shows that in Q1 2018, the average arbitrage (price difference between charging and discharging) for this project was AUS $90.56/MWh.

This exemplifies “value stacking” where the Hornsdale Power Reserve takes advantage of all three ways storage can earn revenue in organized markets with a hydrid compensation model under its single owner/operator (French company Neoen).  Hornsdale is already impacting FCAS prices in Australia, with prices tumbling 57% in Q1 2018 from Q4 2017.

Value stacking for reliability contracts plus market-based revenues (or “Storage as a Transmission Asset”) is also actively being debated by California’s CAISO market.

Because energy storage provides countless benefits at both the local and regional level, in ever-more overlapping combinations, it will create contentious debates and innumerable headaches for power market regulators in coming years.   In 2014, observers were treated to a family feud, as Luminant (generation utility) and TXU (retail power provider) argued against battery storage being installed by Oncor (poles-and-wires utility) for competitive reasons.  More recently, Luminant has argued against AEP building energy storage to relieve transmission bottlenecks to remote communities in southwest Texas because they are “tantamount to peak-shaving and will result in the distortion of competitive market signals.” In California, policy makers are struggling with how to adjust rate structures so behind-the-meter storage projects can meet the state’s emissions reduction goals tied to the subsidies they receive.

Meanwhile, batteries are being combined with more than transmission, wind, and solar projects.  In Germany, a recently closed coal-fired power station is being used simultaneously as a grid-tied storage facility and “live replacement parts store” for third-generation electric vehicle battery packs by Mercedes-Benz Energy.  German automotive supplier Bosch and utility EnBW have installed a storage battery at EnBW’s coal-fired Heilbronn plant to supply balancing power market when demand outstrips supply.

Today, inflexible coal plants often receive these type of “uplift” payments when they are committed by power markets to meet demand or for reliability reasons, but can only offer resources in much bigger chunks then economic dispatch would warrant.  This puts billions of dollars at stake the eastern U.S., where power market operator PJM is considering dramatic changes in rules to pay higher prices to these inflexible plants.  What if in the future, these plants might be required to install or sponsor a certain amount of energy storage capacity in order to set marginal power market prices?

Event today, hybrid combinations of storage and other resources are changing the game in subtle but important ways.  Mark Ahlstrom of the Energy Systems Integration Group recently outlined how FERC’s Order 841 allows all kinds of resources to change the way they interact with wholesale power markets, their participation model, in a unforeseen and unpredictable ways.  For example, the end-point of a point-to-point high-voltage DC transmission line could use a storage participation model to bid or offer into power markets.  Some demand response resources are already combining with storage today “to harness the better qualities of each resource, and allow customers to tap a broader range of cost-reduction and revenue-generating capabilities.”

A recent projection from The Brattle Group underscores this point, forecasting that Order 841 could make energy storage projects profitable from 7 GW/20 GWh, with up to 50 GW of energy storage projects “participating in grid-level energy, ancillary service, and capacity markets.”

Power market disruption is the only guarantee

Eventually the hybrid storage model may become a universal template for all resources, creating additional revenue through improved flexibility.  For example, a hybrid storage-natural gas plant could provide power reserves during a cold start – even if a gas plant was not running, reserve power can come from energy storage while the gas turbine fires up.

If fixed start times for some resources, which are constraints that are accepted facts of life today, could be eliminated by hybridizing with storage, then standard market design might start requiring or incentivizing such upgrades to reduce the mathematical complexity and improve the precision of the algorithms that dispatch power plants and set prices today.

As utility-scale batteries continue their relentless cost declines, it’s hard to completely imagine exactly what the future might hold but energy storage is guaranteed to disrupt power markets – meaning this sector warrants close attention from savvy investors.

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Content Discussion

Matt Chester's picture
Matt Chester on October 4, 2018

Great article-- I continue to remain concerned about the sources of necessary minerals for large scale batteries and what upstream supply effects need to be watched to make sure they are sourced ethically and don't cause more damage than good, but continue to see the immense potential for all the reasons you list out here. In particular, while storage on a large scale is often attached to solar, your points about hybrid storage and use with gas plants is not included in the discussion often enough. 

Bob Meinetz's picture
Bob Meinetz on October 9, 2018

“New U.S. energy storage projects make solar power competitive against existing coal and new natural gas generation, and could soon displace these power market incumbents.”

100% unsubstantiated hype. You provide evidence of not a single storage / solar solution which has replaced a natural gas peaker plant - and until electricity customers are willing to let their lights go out, their computers turn off, their cellphones, their tablets, their washing machines shut down when your grid batteries run out of energy, your childish, unthinking fantasy can’t compete with anything, can it?

Please - learn some basics of how the grid works. You’re embarrassing yourself.

Energy Innovation's picture
Energy Innovation on October 4, 2018

Here you go Bob, seems like you missed these well-reported stories about energy storage replacing natural gas: 
https://spectrum.ieee.org/energywise/energy/renewables/energy-storage-projects-to-replace-three-natural-gas-power-plants-in-california
or 
https://www.utilitydive.com/news/nearly-13-of-planned-gas-peakers-at-risk-from-energy-storage-gtm-finds/519577/

Wayne Lusvardi's picture
Wayne Lusvardi on October 7, 2018

At what price point?  Nonsense. 

Bob Meinetz's picture
Bob Meinetz on October 9, 2018

Here you go, Energy. Seems you missed this well-reported followup, describing the cognitive dissonance experienced by those who thought it might be possible to replace dispatchable energy with "storage":

PG&E's landmark energy storage projects snagged by pushback

Why would PG&E want to build something that doesn't work? Because they're guaranteed an 11% return on their investment. That's right - California's utilities are paid to build stuff, whether it's needed or not.

One might expect California's current crop of PUC commissioners, and the Governor who appointed them, to have a good grasp on the dynamics of grid electricity. In fact, they understand CAISO's grid at the level of, oh, energy-aware eighth graders. Here's what the people who run the grid say:

"The state’s grid operator identified the units [Metcalf, Feather River, Yuba City gas plants] as needed for local grid reliability."

Bottom line: batteries, which renewables activists innocently hoped might be able to overcome the fatal deficiency of variability, aren't a suitable replacement for any dispatchable source of grid energy. And never will be (they're great for powering the flashlights of solar advocates after the sun goes down).

Joe Deely's picture
Joe Deely on October 8, 2018

We will see the first case of solar/storage helping to eliminate coal in Nevada over the next few years. 

Nevada(NV Energy) currently imports coal electricity from the Navajo(255MW share) in AZ and also has a coal plant in Northern Nevada that is shared with Idaho - Valmy (522MW)

The contract with Navajo expires at end of 2019. Valmy will close its two units between 2022 and 2025. All of this coal based generation will be replaced by solar/storage. 

This article describes some of the upcoming projects.

Six New Power Purchase Agreements:

  • Battle Mountain Solar Project – 101-megawatt solar photovoltaic project located near Battle Mountain, Nevada. Includes 25 megawatts of battery energy storage for a four-hour period. It is being developed by Cypress Creek Renewables, which is a privately held solar developer with more than 2.2 gigawatts of solar energy projects developed to date across 12 states. Unlike most combined solar and battery energy storage systems that lose efficiency through multiple conversions between direct current and alternating current energy, Cypress Creek’s Battle Mountain Solar project only needs one conversion by coupling their direct-current battery system to their solar field. At 25 megawatts, this resource will be the nation’s largest DC-coupled combined solar and battery storage system. 
  • Dodge Flat Solar Energy Center – 200-megawatt solar photovoltaic project located east of Reno, Nevada. It is being developed by NextEra Energy Resources, LLC. The Dodge Flat Energy Center will integrate 50 megawatts of battery energy storage for four hours. NextEra Energy Resources, LLC is the world’s largest operator of renewable energy from the wind and sun and one of the largest wholesale generators of electric power in the U.S., with more than 19,000 megawatts of net generating capacity, primarily in 32 states and Canada as of year-end 2017. 
  • Fish Springs Ranch Solar Energy Center – 100-megawatt solar photovoltaic project located north of Reno, Nevada. It is being developed by NextEra Energy Resources, LLC. The Fish Springs Ranch Solar Energy Center will integrate 25 megawatts of battery energy storage for four hours. NextEra Energy Resources, LLC is the world’s largest operator of renewable energy from the wind and sun and one of the largest wholesale generators of electric power in the U.S., with more than 19,000 megawatts of net generating capacity, primarily in 32 states and Canada as of year-end 2017.
  • Eagle Shadow Mountain Solar Farm – 300-megawatt solar photovoltaic project located north of Las Vegas on land owned by the Moapa Band of Paiutes. It is being developed by 8minutenergy Renewables, which is the largest independent solar and storage developer in the United States. To date, 8minutenergy Renewables has 7.5 gigawatts of solar photovoltaic and one gigawatt of storage under development in North America. 
  • Copper Mountain Solar 5 – 250-megawatt solar photovoltaic project in Eldorado Valley, just south of Boulder City, Nevada. It is being developed by Sempra Renewables, a subsidiary of Sempra Energy, which is a leading U.S. developer of renewable energy. Together with its partners, the company owns and operates nearly 2,600 megawatts of renewable generating capacity serving 11 states.
  • Techren Solar V – 50-megawatt solar photovoltaic project in Eldorado Valley, just south of Boulder City, Nevada. It is being developed by Techren Solar LLC and will be adjacent to Techren Solar I, II, III and IV, which currently are in the construction stage. With the addition of Techren Solar V, the total Techren project size will be 400 megawatts.

Going forward Nevada will have no coal based electricity. More importantly, NG based electricity will also continue to decline as more solar/storage comes online.