The big question for energy storage — valuation

By Charles Carmichael

Energy storage is big news these days, both inside and outside the energy industry, with reports and articles all forecasting how fast battery prices may fall and how big the market will get as they do.

But for Matt Roberts, executive director of the Energy Storage Association (ESA), the real story is that “energy storage is being deployed now: it’s not just five or ten years down the road.“

The question for Roberts is how it will be used and valued as energy system transformation unfolds here in the United States and around the world.

Speaking during an Oct. 8 webinar sponsored by Solar Electric Power Association (SEPA), Roberts sketched out a picture of the energy storage market as large, diverse and absolutely poised for growth.

“There are large multi-megawatt and multi-megawatt-hour installations out there today providing service, “ he said. “In all parts of the grid, in front of and behind the meter, our members are finding value propositions and use-case scenarios for energy storage.”

Worldwide, the large-scale energy storage market stood at 565 projects, totaling 3.53 gigawatts (GW) at the end of 2014. It is expected to almost double to 6.37 GW and more than 800 projects in 2020.

Figure 1: Energy storage projects across the U.S. 

Source: Energy Storage Association

In the United States, growth in storage projects will nearly quadruple from about 220 megawatts (MW) going into operation this year to an estimated 850 MW coming online in 2019.

Many in the energy storage business have been hoping that slowly falling battery prices will eventually snowball, similar to what happened to photovoltaic (PV) solar module prices six or seven years ago. For much of the decade from 2000 to 2010, PV modules hovered around $5 per watt before a booming global market sent prices tumbling to today’s sub-$1 range.

Demand in the automotive industry has helped accelerate a recent drop in the price of lithium ion batteries, while the variable nature of solar has expanded the overall market for storage. Roberts noted that balance of system costs – which make up 60 to 70 percent of an installed storage project – are declining because many of the inverters, switches, control systems and power electronics are also being used throughout the growing renewables industry.

Storage vs. gas peaker — no contest

Roberts also stressed that energy storage is many different things – flywheels, compressed air, thermal and a range of batteries – with many different applications on the grid.

For example, independent system operators — ISOs, which manage regional grids — are looking for bulk energy services such as supply capacity, as well as ancillary services, including frequency regulation, spinning and non-spinning reserves, voltage support and black start capability. Meanwhile, utilities are more interested in transmission and distribution (T&D) upgrade deferrals and congestion relief.

How will more solar and storage affect wholesale power markets? Check out the SEPA-Black & Veatch report here.

On the customer side of the meter, end users are seeking ways to improve power reliability and quality — which, in turn, can help prevent power or voltage fluctuations. With the right price signals, customers could also use storage to lower demand charges and reduce electric bills by shifting consumption away from peak-demand, high-cost hours.

Roberts captured the essence of energy storage as a capacity and flexibility resource in one arresting chart that compared a 50-MW gas peaker plant with a storage battery of equal size. The peaker typically has to keep running at a low level — 10 MW — so it can be online within minutes. But having that level of standby power also means incurring standby costs and creating emissions. By contrast, the 50-MW battery comes online in seconds with zero emissions and very low standby costs.

Figure 2: Natural gas peaker plant vs. storage

Source: Energy Storage Association

In addition, the peaker has only a 40-MW flexibility range, whereas the battery has a total range of 100 MW. It can charge up its full 50 MW to take excess energy off the system or discharge the same amount during demand peaks.

While helping to meet the need for more capacity and flexible resources, energy storage can also reduce “uplift” costs, which are some of the hidden costs of inflexible generation, Roberts said. Uplift charges may be incurred to keep gas units idling between morning and evening peaks or to run expensive generation out of economic order to relieve congestion on transmission lines.

The cost is not incidental. For example, in 2014 PJM, the wholesale electricity market serving all or parts of 13 mid-Atlantic and Midwestern states, spent $965 million on uplift.

Leveling the playing field for storage

Turning to the policy arena, Roberts zeroed in on the key regulatory issue for storage: calculating its total value. Within the typical existing regulatory framework, a T&D company can capture the value storage provides to the grid but not the generation value. When moving electrons onto the grid, storage “looks like” generation.

On the other hand, an independent generator can sell a storage unit’s generation and ancillary services but cannot readily capture the T&D value the technology provides.

Even though the valuation conundrum remains a problem in most areas, important policy initiatives at the federal level have already leveled the playing field somewhat.

— Congress has made the investment tax credit (ITC) available for storage linked to renewable generation — an incentive that could sunset with the ITC itself at the end of 2016.

— The Federal Energy Regulatory Commission (FERC) has shaped ISO policy so that certain storage applications — such as frequency response and startup speed — can be monetized more readily in these large regional markets.

— Under the EPA’s Clean Power Plan, states can use energy storage as one of the building blocks to achieve emissions reductions: for example, storage can enhance deployment of renewables by easing their integration onto the grid.

Considerable innovation is also emerging on the state level in how storage can be used to meet a menu of needs and satisfy regional value propositions. In California and Arizona, storage is replacing capacity and supplying an increasing need for flexible ramping capacity to handle overgeneration.

Utilities are using a range of smart technologies to get more solar on the grid. Read the SEPA-NREL report on smart inverters here.

In the Northeast, the emphasis is on resiliency in the face of extreme weather events, such as Superstorm Sandy. In PJM’s service territory, it’s more about economics.

Individual states will largely determine how to deploy and value the simultaneous services that storage can provide, including difficult-to-value factors, such as speed of installation, and reduction of emissions and water use.

The way forward, Roberts concluded, is to ensure energy storage is able to compete freely and fairly with other resources providing the same services –- and to open markets to all ownership models.

Charles Carmichael is a contributing writer for SEPA.