The following is a contributed article by Ronald DiFelice, managing partner at Energy Intelligence Partners.
In many electric utility markets, policymakers are exploring the next generation of renewable energy policies that will deliver the most value given the new reality of low-cost solar PV, wind and energy storage. Policies that encourage energy storage to be paired with solar or wind generation can have an outsized impact because these grid assets can together deliver firm capacity into peak periods when customer costs are the highest. If implemented effectively, the results are lower costs for ratepayers, increased resiliency and reduced emissions.
A Clean Peak Standard (CPS) is a relatively new policy tool that can increase the share of renewable energy resources used to meet peak demand. Now is the ideal time to implement Clean Peak Standards in the U.S. because there is a significant amount of peaking capacity that is over 40 years old, as shown in Figure 1. Over the next 20 years, about 152 GW of peaking capacity is expected to retire. For example, in North and South Carolina, 1.61 GW of winter peaking capacity is scheduled to retire by 2028 according to Duke Energy Carolinas and Duke Energy Progress.
Arizona and California have proposed a CPS, and in 2018 Massachusetts became the first state to establish a CPS requiring the delivery of a minimum percentage of kilowatt-hour sales from clean peak resources during system peak demand periods. Building upon these efforts, Energy Intelligence Partners (EIP) has developed a new CPS concept that improves the traditional CPS. It leverages the improving economics of energy storage (ES) to address the limitations of renewables and will help create a truly reliable clean grid.
ES has the capability to address the main drawback of renewable energy — its intermittency — and turn renewable energy resources into truly dispatchable assets. EIP developed an ES-centric CPS for North Carolina’s regulated monopoly electricity market, but it can be a model for other states with similar energy markets.
The energy storage-centric CPS (CPS-ES) requires that renewable energy generation is paired with ES. A portion of power delivered during designated peak periods must be generated by renewable energy and delivered by some combination of the renewable energy generator and paired ES. This means that unlike other CPS programs, generators are not just incentivized to deliver during peak periods, they are required.
In North Carolina, the CPS-ES would apply to the three major electricity retailers and is proposed to be 5% of their system peak load by 2025 and 10% of their system peak load by 2028. This represents 22% of their estimated peaking capacity by 2028. A 10% CPS is achievable and will have the most benefits for the grid for a reasonable investment because peak loads are the most expensive to serve. For example, in Massachusetts, it was found that the top 10% of annual demand hours accounted for 40% of the electricity spend.
CPS-ES benefits are achieved through existing and fundamentally new ideas regarding the deployment of the cleanest, lowest-cost resources, including:
- Renewable energy assets paired with ES increase the value of both resources;
- The most expensive and least efficient resources in the generation stack can be systematically replaced by renewable energy plus ES and result in lower system costs today;
- As capital costs drop, these assets can replace more and more peaking and intermediate capacity, allowing natural gas and coal assets to operate more efficiently. Batteries have no efficiency curve, so ramping them up and down does not affect grid efficiency, unlike ramping fossil assets.
- While third-party developers can build renewable energy and ES at the lowest cost, there may be operational efficiencies to be gained long-term if utilities purchase the assets after 5 years;
- Opening the market to third-party competition ensures the lowest cost for ratepayers;
- An option for Investor Owned Utilities (IOUs) to purchase the assets at market value after 5 years — and earn their approved rate of return plus 10% — results in the optimal scenario.
Structurally, the CPS-ES addresses the typical complaints from IOUs in regulated markets about renewable energy (intermittency, higher cost) and third-party competition (loss of control). By incentivizing IOUs to purchase the assets after a 5-year period, the ratepayer benefits by combining the lowest cost deployment with the most efficient long-term utilization of the assets.
Some highlights of the CPS-ES include:
- Eligible CPS-ES resources are new and retrofit 4-hour ES facilities co-located and paired with solar or wind generators with a utility interconnect between 250 kW and 20 MW;
- The CPS-ES resource must deliver firm output continuously for 4 hours per day during weekdays, 50 weeks per year, for 15 years;
- The ES must be charged 100% by its paired and co-located renewable energy generator.
The proposed CPS-ES program for North Carolina would be implemented through four tranches of RFPs and a reverse-auction process, and CPS-ES resources would receive a maximum energy payment of $0.033/kWh and a maximum capacity payment of $10/kW-month (implied cost per kWh < $0.08/kWh). Based on our analysis, CPS‐ES resources are cost competitive at these values while offering developers attractive returns and compare very favorably to alternatives. For example, a recent study of peakers in the Carolinas showed new natural gas combustion turbine peakers cost > $0.12/kWh for utilization rates of 16.7% and below (equivalent to running a generating unit at full capacity 4 hours per day, 365 days per year).
In North Carolina, it is estimated that the 10% CPS-ES as proposed would drive the deployment of 2,795 MWs / 11,178 MWh of energy storage and 4,193 MWs of solar PV (DC) by 2028. This represents investments of $1.77 billion and $2.14 billion in ES and solar PV, respectively, for a total investment of $3.94 billion by 2028. In 2028, 7.3 million MWhs would be generated from the CPS-ES program with estimated median customer benefits of $447 million per year. The emissions benefit of the CPS-ES is the avoidance of over 1.8 million metric tons of CO2 per year.
Next steps required to make the CPS-ES a reality include educating legislators, the Utilities Commission, the Public Staff, and IOUs in North Carolina on how this plan delivers high value for all stakeholders and especially for ratepayers. Gathering input from these stakeholders is also important, and after making any necessary modifications to the CPS-ES, a new cost/benefit analysis might also be required to set program parameters. A similar process can be used by other states to tailor the CPS-ES to state-specific market conditions.
The time is right for the CPS-ES because energy storage plus solar or wind now represents the lowest-cost option for new firm peak capacity in many markets. The reduced emissions and increased resiliency that accompany any CPS-ES program can also help to achieve other common state policy goals. A White Paper entitled “An Energy Storage-Centric Clean Peak Standard” provides more detail on the CPS-ES and can be downloaded here.