Energy Storage Catalysts and Barriers
Because energy storage can help the power industry with many problems ranging from intermittency issues hamstringing renewables to energy crises threatening entire population centers, it is being acclaimed by many as the linchpin of tomorrow’s clean energy future. According to a recent report from Energy Storage Association and GTM Research, United States energy storage deployment is projected to increase by 1200 percent from 2017 to 2023.
Since our ancestors set aside their first log for the next day’s fire, humans have relied on the fundamental principles of energy storage to survive. The United Nations warns that energy management today continues to play a foundational role in our ability to exist on Earth.
Fortunately, the market demand for storage solutions has driven prices down and pushed innovation further. In December, Xcel Energy reported it received “unprecedented” low prices in response to a solicitation. Xcel received a median bid for wind plus storage at $21 per megawatt-hour and solar plus storage at $36 per megawatt-hour. In contrast, Lazard's Levelized Cost of Energy estimates solar plus storage to be $82 per megawatt-hour.
Another groundbreaking win for the industry came on Feb. 15 when the Federal Energy Regulatory Commission voted unanimously “to remove barriers to the participation of electric storage resources in the capacity, energy and ancillary services.” The ruling requires that regional grid operators revise tariffs to properly value energy storage through a participation model that recognizes its operational and physical benefits.
In an interview, Randy Armstrong, senior hardware project manager at Stem, Inc., addressed the catalysts, barriers, and unit economics of today’s energy storage. He said what his views are of the factors propelling the industry forward as well as the obstacles holding it back.
Whether it is freezing water at night and melting it during the day to cool a building or designing wind turbines with pumped hydropower, there are various ways to store energy. However, Armstrong said he has seen “lithium-ion dominate the market as it continues to ride the electric vehicle wave.”
According to the United States Department of Energy, lithium-ion storage projects have seen a dramatic shift in their installation rate over the past five to ten years.
Building intuition for how electric vehicle demand changed the unit economics of batteries, Armstrong said “the automobile industry has created the economies of scale to create the necessary pressures to make lithium-ion batteries denser and less expensive.” For example, Tesla just inked a deal for another Gigafactory and Volkswagen forecasts there will be 40 of these massive battery-production sites by 2025.
The benefactors of this growth period are commercial and industrial customers looking to leverage behind-the-meter storage to counter high-demand electricity prices. Armstrong said, “The markets these types of customers reside in are often large urban population centers sensitive to space constraints, so cheaper batteries with smaller footprints become very attractive.”
Beyond demand pricing, the value proposition of storage can include frequency regulation, backup power, demand charges, energy arbitrage, transmission and distribution deferral, and several other streams of value or revenue, depending on the market. For example, it can also include time-of-use bill management.
How effective a developer is in monetizing these streams for the customer directly depends on the capacity and duration of a battery and the intelligence of the software platform governing it. Artificial intelligence will be the determinant of energy storage service value and performance, not hard-programmed dispatch software.
Armstrong said he recommends designing a system by “not finding a solution and then finding a problem, but instead finding the problem and then developing the solution.” For example, “a typical lithium-ion battery has a two-to-four-hour duration, which lines up very well with the problems people are trying to solve in high-demand-charge markets as well as the incentives in those regions.”
However, other problems would lead to different solutions. The high-power requirements for frequency regulation point to flywheels as a potential choice. Longer durations necessary for energy arbitrage encourage leaning toward flow batteries or pumped hydropower. Not only do the technical specifications determine the storage system’s ability to maximize return on investment, but they also determine how the battery is managed.
The progress made on the intelligence of the software side of storage has “substantially improved a system’s ability to optimize for several value streams due to more sophisticated algorithms and better understanding of how to value stack,” Armstrong said. Whether it is using historical analysis or day-ahead pricing, tailoring a charge/discharge behavior to a particular market or strategy will continue to make batteries more efficient.
However, the progress discussed above has fallen short in unlocking certain markets within the United States due to limited energy policies that would enable its services. According to the United States Department of Energy, storage projects are being heavily concentrated in particular regions and are nonexistent in others.
High near-term soft costs, permitting and interconnection delays, and lack of properly aligned incentives have blocked adoption. They have also belied the readiness of storage to compete and partner with clean power projects. As the learning curve progresses, storage markets are primed for an explosion given that regulatory approval adheres to fair, cost-effective measures.
Often in the role of gatekeeper, regulators are a natural bottleneck in the process and are viewed as responsible for slowing its momentum. Armstrong said, “It’s not that regulators are trying to slow the process down; they genuinely care about ratepayers and it is their responsibility to protect them.”
Armstrong said he expects “storage to mimic solar, where you will see soft costs such as interconnection, maintenance and permitting come down while familiarity with the technology increases simultaneously.” As the performance data of current installed projects continues to build, comfort will lower these barriers and market participants will position themselves accordingly.
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