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Large-Scale Electricity StorageBusiness Models:Global Best Practices

08-01 14:14 Caijing

What should China learn from high-tech energy storage policy and business models elsewhere?

by SzilviaDoczi

For nearly 100 years, electricity systems weredesigned with a lifespan of 40 to 50 years, with standardflexibilityrequirements. But as energy changes, our systems must follow. With the rise ofrenewables and distributed, scattered electricity generation, flexibility isincreasingly important.Without more flexible systems, the new green world ofrenewable energy will see more blackouts, which bring our digital world to ascreeching halt. Flexibility means providing alternatives at times when electricityconsumption shifts (in the evenings) or when renewable electricity generation fluctuates(when the sun doesn't shine or the wind doesn't blow). Such flexibility can beprovided by access to generation resources in different locations or time zonesthrough either long-distance high-voltage grids (also known asinterconnections) or local storage of electricity.

Electricity storage has become an important policy concernfor governments in places where interconnection is not feasible. For example,on an island like the United Kingdom, interconnection proves costly, so localstorage is usually a better alternative. In California, interconnections areexpensive due to the vast distances to other states and other resources. Thesetwo regions provide today's best practice examples for high-tech storagedeployment.

In China, the government has acted swiftly toreorganize the traditional electricity system to meet future challenges: large-scalerenewables like wind and solarare being introduced, and unbundling reform —separating ownership of the generation of electricity from ownership of itstransmission and distribution — is underway to avoid conflicts of interestacross energy-sector players. The United Kingdom saw similar reforms in the1990s, as well as the European Union in the 2000s. The next step for China willbe to prepare its system for higher penetration of renewables, includingincentivizing more interconnections and more storage.

Electricity storage business models

While the use of large-scale energy storage iswidespread globally, it has so far been limited to low-tech pumped hydroelectricstorage, which stores electricity in the form of potential energy by exploitingthe elevation of two connected reservoirs.98% of today’s installed electricalstorage is based on a technology that has been available for more than 100years. Thefirst hydro storage site opened in 1909 in Schaffhausen, Switzerland. Hydrostorage is a simple concept with high development costs (normally billions ofdollars) and large environmental impacts. Consider that 97% of today’sinstalled electrical storage is based on a technology that has been availablefor more than 100 years. Other storage technologies including compressed airstorage, power to gas and batteries make up the remaining 3% of globalinstalled storage capacity.

InternationalEnergy Agency’s World Investment Report of 2016 reports that “over 80% of theUSD 10 billion of grid-based power storage investment went to pumped hydrostorage. Grid-scale battery investment has grown very rapidly and was ten timeshigher in 2015 than in 2010.” “Investment in electricity storage worldwide in2015 totalled over USD 10 billion, compared with an average of USD 8.5 billion(in 2015 prices) over 2010-14. In 2015, 4 GW of electricity storage werecommissioned globally, boosting installed capacity to over 150 GW.”

Figure 1 shows thelevel of development of different storage technologies (x-axis) compared withtheir costs and risk profiles (y-axis).For more information about energystorage technologies, see Arup’s guide to electricity storage technologies (http://www.arup.com/publications/5_minute_guide_to_electricity_storage).

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Figure 1 Storage technology development, costs and risks

While other technologies have developed over time,advancesin battery storage remain the most promising in terms of cost and riskimprovements.The idea of battery storage has been around since the late 18thcentury, when the first batteries were invented by Alessandro Volta. The firstcommercial use of battery storage was in 1880s to manage overnight electricityloads in the New York City area, but widespread commercial use was uncommonuntil the advent of consumer electronics in the 1970s. However, in spite of theubiquity of advanced battery technology in our everyday lives, these same technologiesare not being applied in our modern electricity systems.

While the technology is available, the uncertainty ofrevenue streams for large-scale battery storage systems has slowed theirapplication. In most countries, including China,battery storage investorscannot yet capture the full value of storage in their revenue streams due totheelectricity market structure, policy and regulations.A commercially feasiblebusiness model requires that the revenue stream captured by storage over timebe greater than the costs over time.

Luckily, energy storage business models are rapidlychanging and the business model for battery storage is about to becomeincreasing profitable. A simplified business model comprises the combination ofvalue provided to the society, the revenues collected by the investor and thecosts paid by the investor.

For a business model to be feasible, revenues must behigher than costs. Energy storage can provide value to the society throughavoided transmission and distribution network costs, flexibility, ancillaryservices, additional capacity and shifted time of use (not restricted to peakhours) (Figure2). However,today the investors are only rewarded with revenues for some of these valuesprovided. With time, we expect the revenues to increase as regulatory andcommercial arrangements provide more revenue for the value of storage.

Meanwhile, costs have been declining and are expectedto decline further in the future. Both the increasing revenues and thedeclining costs make the battery storage investments more attractive toinvestors, providing a better business case.

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Figure 2

Cost trends

The business case for large-scale storage depends on furtherreducing costs and improving revenues.

In line with the technology learning curve, the costof battery storage has been declining globally in recent years, from over US$1,000per kWh to US$400 per kWh (Figure 2). General MotorsandTesla targets for 2021 and 2020, respectively,aim for US$120 per kWh and US$100per kWh.

Meanwhile, innovative countries (United Kingdom) andstates (California, USA)are creating markets and energy policies that supportthe revenue streams for investors to capture the value they provide forelectricity users.

 

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Figure3 Cost of battery storage over time

Due to declining costs and improving revenue streams,we are today at the tipping point of a surge of investment in electricitystorage.

Storage trends

Navigant forecasts that, under the rightcircumstances, network-scale energy storage deployment could increase to over30GW by 2025.Counties such as Mexico and China can greatly benefit from notonly the deployment but also the manufacturing of the new storage assets. Currently,Tesla is the only company set to deliver large amount of large-scaleelectricitystorage at an elevated speed, through its Gigafactory based in Nevada, USA.However competition is expected from countries where manufacturing costs aresignificantly lower.

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The United Kingdom’s path to success

The United Kingdom is on track to become a worldleader in energy storage, with powerful electricity markets that can attractand maintain high-tech storage investments.This current state of affairs is aresult of decades of energy strategy, started with Margaret Thatcher in 1980s.

UK highlights

√ Over the past three and a halfdecades, the UK has nourished a privately owned and unbundled energy industry,where the market delivers private funds and facilitates innovation through competitionwith minimum regulatory intervention. China is on a similar path throughitscurrent unbundling reform.

 Clear market signals throughtargeted ancillary services procurement and capacity markets havemobilizeda largenumber of private investors that helps reach larger volume therefore economiesof scale in battery storage.

 Robust markets deliver thecertainty of future revenue streamsrequired by investors.

Successful market structure

The ElectricityAct of 1989, which provided for the privatisation and liberalisation of theenergy markets in the UK, introduced significant changes to the formerlyvertically owned and operated system. Markets developed further following thepower exchange platform established for wholesale electricity trading with theUtility Act 2000, which is also when the first subsidy mechanism for renewablegeneration was introduced. In 2005,the British Electricity Trading andTransmission Arrangements(BETTA) were established, which increased competitionin the energy markets.

The liberalisation and privatisation of the electricitysector led to increased private investment and the development of a successfulmarket structure and competitive markets for electricity generation (wholesalemarkets) and supply (retail markets) in Britain. As a result of privatization,most of energy sector is privately owned today. The vertically integratedsystem was broken down into independent generation, system operation,distribution, transmission and retail activities.

The key players in the UK’s electricitysector are the following:

♦ The Department for Business,Energy & Industrial Strategy (DBEIS) drives Great Britain’s energy policyand was created by Prime Minister Theresa May in 2016.

♦ The Office of Gas andElectricity Markets (Ofgem) is the UK’s regulator, responsible for managing theelectricity and gas systems in the UK. Ofgem is an independent national regulatoryauthority that maintains its independence due to a well-structured publicgovernance system that makes Ofgem directly accountable to the Parliament andnot DBEIS. This regulatory independence provides investors and consumers withlong-term certainty and independence from sudden changes due to short-termpolitical cycles.

♦ National Grid undertakes therole of system operator for the National Electricity Transmission System in theUK. The system operator’s role is to constantly balance supply and demand inthe electricity system.

♦ Transmission and distributionelectricity networks in the UK include three transmission and eightdistribution network owners and operators. These are privately ownedgeographicmonopolies with regulated revenues. These traditional electricityplayers have been slower to support energy storage due to the uncertainty ofownership rules and definitions, new technology, and costs associated withstorage connections and operation.

♦ Retail market players are so-calledenergy suppliers who compete for commercial, retail and industrial customers.As a result of retail competition, prices are driven down and margins aresqueezed because consumers are free to switch to a cheaper or betterelectricity provider. Six main energy retail suppliers dominate the retailmarket,which includes more than 44 active suppliers and over 100 registeredsupplier entities. 

Clear market signals

In the market-drivenbusiness model, energy storage projects and businesses have clear market signalsthrough commercial revenues via the provision of a number of services. Energystorage companies can choose to participate in wholesale markets as anarbitrageur or in ancillary services markets run by the system operator andcapacity markets. In United Kingdom high-tech energy storage has been successfulin the capacity market and the ancillary services market.

Capacity market

The capacitymarket was introduced in 2014 as part of the Electricity Market Reformprogramme to ensure the future security of the UK’s electricity supply.The capacitymarket provides payment to existing and prospective generators and demand-sideproviders in return for a commitment to provide capacity during a system stressevent. These payments provide for investors a steady, predictable revenuestreamthat they can leverage to finance future investments. In return forcapacity payments, providers must make available their capacity at times ofsystem stress or face penalties. Potential providers secure the right toreceive capacity revenues by participating in a competitive auction processwhich will set the level of capacity payments.

2016 wasthe first year that more than 500MW of new-build battery storage was contractedin the capacity market — 6% of the total 52.4GWof contracted capacity for2020/21. This reflects the improving business case for battery storage as costsdecline and the technology matures. The clearing price was £22/kW/year, up from£18 a year ago.

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Figure 4  Source: National Grid

Ancillary Services Market

TheBritish enhanced frequency response tender is another example of a market-drivenbusiness model, specifically the participation of energy storage in theancillary services procurement market.

The enhancedfrequency response service seeks to mitigate the effects of declining systeminertia as nonsynchronous renewable generation (wind, solar, etc.) is added tothe Great Britain generation mix in place of synchronous conventionalgeneration. This impacts the ability of National Grid, the system operator, tomanage system frequency and increases the demand for traditional frequency-response-balancingservices currently being offered. As a result, National Grid sought to procurea new service with a response time of 1 second (or less) in order to improve managementof system frequency pre-fault, as well as assist with maintaining systemfrequency closer to 50Hz.

The tenderprocess created a high level of storage-investor interest, with 243 storageproject proposals. Proposals were selected by comparing the cost included in thebid price against the cost of an alternative option for National Grid, asopposed to the unit price offered through the tender. Of the 243 tenders, eightwere accepted, resulting in an average price of £9.44/MW per hour, andresulting in a price range of 7 to 12£/MW per hour of service provided. Thetotal procurement cost of this tender was £65.95million.Successful tenderersreceived a four-year contract for storage services.

The global futureof high-tech storage

Driven by a clear national strategy to become a globalleader in energy storage, the UK has developed and deployed market mechanismsthat now set the standard for best practice in market-driven high-tech storagedeployment.

As the race for this new global market continues,twoof National Grid’s energy futures scenarios project exponential growth instorage deployment in Britain, reaching or exceeding 10GW of storage capacityby 2040.

 

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Figure 5 Predicted future energy storage scenarios forthe UK

California Highlights

California has been one of the most progressive statesin the USA with ambitious clean energy targets. With the increasing use ofrenewables and highly access to interconnected generation resources elsewherethe state government decided to implement a fast track electricity storagestrategy.

  Energy storage targets are aneffective way to achieve initial energy storage penetration but those targetsare arbitrary and must be revisited over time.

  Energy storage target of 1.3GWby 2020 was set by the California Public Utilities Commission in 2010 with anadditional 0.5GW added in 2016,totalling 1.8GW by 2020.

  The storage target isimplemented and funded through distribution network revenues that translate torates, therefore it is passed through to end-users. Targeted project areprocured by distribution networks through a competitive process.

By the end of 2016 nearly half of the 1.8GW target hasbeen delivered by the utilities in California. As a result of the fast trackprogress today the 2 largest battery storage facilities in the world are bothin California and both have been commissioned in 2017. First the Tesla poweredSouthern California Edison storage facility of 20 MW output (80MWstorage)opened near Los Angeles in January 2017 followed by the AES powered Sothern Gasand Electric facility of 100 MW in San Diego.

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Californiamarket structure

The story of California electricity storage deploymentcouldn't be more different from that of the United Kingdom. Even if bothregions face limited interconnection availability the market structure and theway they incentivised energy storage is different.

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California regionalisation, source CAISO

As inthe case of the UK, interconnection and regionalization in California can alsoprovide some flexibility to the electric grid and provide solutions in additionto energy storage. There is an ongoing regionalization process in Californiathat will connect markets of the Western Interconnect in the coming years butflexibility is needed well before this regionalization process will becompleted.

Thefirst phase of the California CAISO extension is the Energy Imbalance Market(EIM). The EIM system automatically finds the lowest-cost energy to servereal-time consumer demand across a wide geographic area and covers real timebalancing energy[1].The EIM’s reach is limited and it has no impact on ancillary services, existingbi-lateral agreements, PPAs and day-ahead markets.

Californiahas independent state policy and regulator however electricity markets,transmission and dams are regulated on US federal level. The California PublicUtilities Commission - CPUC regulates investor-owned electric and natural gasutilities operating in California. Utilities operate distribution networks,retail activities and also own some generation. The lack of unbundling in California still poseschallenges and imposes conflicts of interests in the electricity markets.Conflict of interest exists in utilities where generation, distribution systemand the retail activity is co-owned. Another source of conflict of interest isthe existence of non-regulated publicly owned utilities as these utilities arenot regulated by the CPUC.

System operation is independent and isprovided by the California Independent System Operator known as CAISO. TheCAISO oversees the operation of California’s electric power system,transmission lines, and electricity market.

Investor owned utilities known as IOU’s arethe main players in the generation, distribution and retail sectors inCalifornia. Three major IOU’s are in charge of the distribution of electricenergy in California. San Diego Gas & Electric serves 3.6 million people inSan Diego and southern Orange counties[2].Southern California Edison serves 15 million people in 15 counties in Southernand Central California, including the Los Angeles County. Pacific Gas &Electric serves 5.4 million electric customer accounts in Central and NorthCalifornia, including cities like San Francisco, where it is headquartered.

PubliclyOwned Utilities are usually owned by a local government body and are limited toserving a specific service area. Publicly owned utilities operate their owngenerator assets or purchase power through agreements and contracts. Most ofthe Publicly Owned Utilities are small or mid-size, with the exception of thelarger Los Angeles Department of Water and Power and the Sacramento MunicipalUtility District.

PrivateGenerators are investor owned plants that provide energy through state’swholesale electricity market or through bilateral agreements. These privategenerators generate over 50% of the state’s electricity.

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California needs high-tech storage

In 2012 theCAISO reported that it will require significant amount of new flexibilityservices for system balancing in the high ramp up periods during the afternoonswhen the solar generation is lower.

Thisdynamic has been forecasted to cause the phenomenon called Duck curve below.The curve shows the net demand which is the total energy demand minus renewablegeneration during hours of a typical day. The multiple lines representforecasted years where the lower lines are further out in the future and meanhigher amount of solar generation. The ramp up required from non-solargeneration in the afternoons is forecasted to be steeper every year. In 2016the CAISO reported that it was already seeing levels originally forecasted foryear 2020. Other counties such as China will face similar challenges asrenewable penetration especially solar generation increases.

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Very few technologies are capable of delivering the required quick start-up of powergeneration aligned with the steep demand increase in the chart above seen for2020. One of the technologies that can start up and deliver power output in fewseconds is the battery storage. In line with this California focussed itsenergy storage efforts on battery storage technologies and other innovativemodern storage technologies.

Policy Driven Business Model

Due tolimited electricity markets the regulator the California Public UtilityCommission decided to increase system flexibility swiftly through targetedstorage procurement lead by the IOUs.

Perhaps themost significant and best example of how California is targeting to deployenergy storage is the legislation included In Bill AB2514. In 2010 Californiamade a strategic decision and passed Bill AB2514, which required the CPUC todetermine appropriate procurement targets. AB2514 does not specify a particularstorage technology but rather defines energy storage as available technologythat is capable of absorbing energy, storing it for a period of time, andthereafter dispatching the energy.

In October2013, as a result of AB2514, the CPUC adopted an energy storage procurementframework and established an energy target of 1,325 MW for the three investorowned utilities in California: PG&E, Edison, and SDG&E by 2020, withinstallations required no later than the end of 2020.  The CPUC target[3] already specifiedtechnologies and defined eligibility of emerging storage technologies that havenot yet achieved widespread commercial application but have already beendemonstrated (therefore are post R&D phase). Battery storage or ice towater storage are 2 examples of such emerging technologies. The target wasbased on a study prepared based on future scenarios by the California SystemOperator. Later legislation AB 2868 increased this target with an additional500 MW by 2020.      

Thebusiness model in line with the CPUC targets is driven by IOUs. The storageprojects are procured through the IOU’s in a competitive process and deliveredby developers or contractors. Ultimately the projects are funded through theIOU’s rates and therefore are passed through to consumers through the rates tothe end-user’s energy bills.

Theadvantage of this business model is that it delivers energy storage targets ina timely manner and it provides certain investment funds for projects thatwould not be commercially feasible due to high technology risk, high connectionor operational risk.

Thedisadvantage of this model is that it doesn’t incentivize companies to be costefficient and innovative following the procurement process because the projectis funded through distribution network rates under low scrutiny.

Additionallyefficiency is lost becausedevelopers/investors face high transaction costsforbidding into the procurement process where there is a high risk of losteffort. Developers and contractors are dependent on the procurement process ofIOUs and the risk of failure is high, if they lose in the procurement there isno fall-back option but the project design costs have already been incurred.Thus developers will price the risk of failure into their return expectations.

This iscompared to other markets such as the UK electricity markets where regular biddingrounds and tenders provide numerous opportunities and fall-back options for storagedevelopers/ investors.

Conclusions

Having researched the global policy landscape forhigh-tech energy storage United Kingdom and California are the most successfulstarters in the global race for high-tech electricity storage best practicestoday. The different energy sector structures in these two regions defined verydifferent policy and therefore business models for storage. UK's private andunbundled electricity markets provide the right competitive vehicle for storagedeployment. While California achieved the largest high-tech battery storagedeployment in the world through a policy approach as electricity market remainless functional.

 UKstorage investments are mainly market driven so investment opportunities willbe in electricity market participation

 Californiastorage investments are mainly policy driven and therefore investmentopportunities will be in strong engagement with policy, regulatory decisionmakers and utilities controlling the funds

 Thebest combination of both worlds is to start with policy funded demonstrationprojects while building robust revenue streams in electricity markets

  In many other jurisdictions regulators are yet to decide how todrive storage investments

 

Szilvia Doczi is an energy economist at Arup, based inLos Angeles, California. Shepreviously held the position of senior manager at Ofgem, a British energyregulator

[1]https://www.caiso.com/informed/Pages/EIMOverview/Default.aspx

[2] http://www.sdge.com/aboutus

[3]http://docs.cpuc.ca.gov/PublishedDocs/Efile/G000/M065/K706/65706057.PDF

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