What's the value of energy storage? It's complicated
Experts agree storage costs are falling, but few are sure of how to value storage
Of the many questions about energy storage, none goes as unanswered as pinpointing the technology's price tag.
But with armies of researchers working on the technology, it's unanimous among those in the sector that, whatever the price is, it's coming down fast and will continue to do so.
One noteworthy approximation of a precise price came during a press conference with industry executives that kicked off last week’s Energy Storage North America conference in San Diego, California.
When GE started working in energy storage, a system cost “about $2,000 per kWh," recalled Pratima Rangarajan, General Electric's (GE) storage product and engineering general manager.
The cost has since dropped about two-thirds, Rangarajan added. “We expect costs to drop another 50% in the next four to five years.”
Jennifer Didlo, president of AES Energy Storage Southland, did not disagree, but cautioned against simplyfing the costs of battery storage.
“I won’t disagree with the price point or the reductions,” Didlo said. But “it is more complicated than just the cost.”
To fully understand the value of storage, it's necessary to know “the service the storage provides to the system,” she explained. “Is it a 15 minute duration or a four hour duration? And what are the charging-discharging requirements?”
John Schaaf, vice president at Johnson Controls Stationary Energy Storage, agreed. Johnson Controls is just beginning to add storage to its sector-leading building energy management offerings.
“We think costs are dropping as much as 30% to 40%," Schaaf said. "But it is on an application-by-application basis.”
It's also about the total system cost and that introduces a range of considerations, Rangarajan added. “It is not about the levelized cost of energy or any single data point.”
The cost of batteries is dropping, but the cost of the infrastructure, the inverter, container and interconnection hardware is not keeping pace, Didlo said. “When we talk about the future cost curve and betting on what will happen, those balance of system costs may become a bigger part of it.”
The Southern California Edison (SCE) landmark 2014 Local Capacity Requirement (LCR) procurement received over 700 bids to meet its four hour duration peak demand need. While selecting the winners of more than 250 MW of storage contracts and more than 1,800 of natural gas contracts, the utility made an observation that complicates the cost of storage question, said Stu Hemphill, senior vice president.
“People bid the forward curve," Hemphill said. "To win, they see where technology is going and place their bid there.”
And, Hemphill added, storage is not a single technology.
"Some of our LCR storage contracts were with ICE Energy. That is not a battery technology and its economics are completely different. Energy storage is the Swiss Army knife of the energy world. It can serve a variety of purposes. The questions are what is the need? And how can storage help me meet that need?”
A comprehensive evaluation
With technology improving, policy driving growth, and storage rapidly going mainstream, researchers at Rocky Mountain Institute (RMI) decided it was time to find a way out of the cost confusion, said Garrett Fitzgerald, a senior associate and co-author of RMI’s “The Economics of Battery Energy Storage: How multi-use, customer-sited batteries deliver the most services and value to customers and the grid.”
The focus of RMI's paper, which debuted at ESNA 2015, differs from that of the executives at the press conference. But the basic question is still how to value the ability of storage to meet energy system needs. And RMI finds, as Didlo noted during the press conference, that value "depends on where you are providing energy or some other grid service.”
To better understand how to more accurately value storage assets, Fitzgerald said RMI addressed four key questions:
- What services do batteries offer the electricity grid?
- Where can they deliver those services?
- How much total value do batteries create when all their potential services are put to work?
- What are the barriers to the use of the multiple "stacked" uses of batteries?
From a study of the literature, the researchers found some 37 different services that storage can provide, but narrowed their study to 13 fundamental services. The three stakeholder groups the benefits of those services go to are: customers, utilities, and independent system operators/regional transmission organizations (ISO/RTOs).
They looked at cost as a measure of value, found it “all over the map” and concluded it is “not very useful,” Fitzgerald said. “To get at the value of storage, you have to look at what it is doing and where it is providing that service.”
The researchers allocated the services among three grid levels: centralized, transmission-connected storage; distribution-connected storage; and behind-the-meter connected storage.
RMI quickly saw the grid’s central level doesn’t provide customer-facing services that reduce electricity bills and that more services come into play toward the distribution edge. “But that doesn’t answer the question of what the net economic value of storage services is,” Fitzgerald said.
RMI began to understand that the maximum value of a block of storage comes when it can provide more of its full “stack” of potential services.
“Customer-sited, behind-the-meter energy storage can technically provide the largest number of services to the electricity grid,” the paper reports.
Even if it is not “the least-cost option,” it is "optimally located to provide perhaps the most important energy storage service of all: backup power," the paper added. Based on this insight, the researchers urge stakeholders to “look as far downstream in the electricity system as possible when examining the economics of energy storage.”
Because most customer-sited storage is deployed to reduce demand charges, serve as backup or maximize solar owners’ use of self-generation, batteries go “unused or underutilized for well over half of the system’s lifetime.”
As a result, determining the net value of storage is “greatly complicated,” the paper reports. It “varies dramatically both across and within all electric power markets due to hundreds of variables and associated feedback loops.”
It's clear that with today’s cost structures, “batteries deployed for only a single primary service generally do not provide a net economic benefit (i.e., the present value of lifetime revenue does not exceed the present value of lifetime costs), except in certain markets under certain use cases.”
But if those primary services require less than half a battery’s life, stacking other uses on them “shifts the economics in favor of storage.”
To drive this shift, regulators, utilities, researchers, battery developers, and distributed energy resource developers must be engaged to bring down regulatory barriers. Until this happens, distributed storage will remain uneconomic.
But can storage beat the price of natural gas?
At grid scale, storage economics are similarly making marginal progress, Didlo said, when she and the other executives at the ESNA conference addressed a different measure of storage’s value: its readiness to replace fossil fuels.
In its recent LCR buy, SCE chose several versions of energy storage, including battery storage, over natural gas generation, proving its competitiveness, Didlo said. “The change will not come tomorrow but AES firmly believes battery energy storage can replace natural gas in the resource mix.”
The SCE procurement highlighted an important advantage for storage, Schaaf added. “The variety of technologies offers a mix of revenue streams. Multiple revenue streams change the equation in the favor of energy storage.”
In the solicitation, SCE got competitive offers from both storage and natural gas generation and the utility remains “highly dependent” on natural gas, SCE's Hemphill said. But replacing it with storage “is where we are headed. The question is how quickly we can get there.”
The California Independent System Operator’s Duck Curve shows “a really high ramping need of 20,000 MW to 25,000 MW over three hours,” he noted. “The only thing we now have with that ramping capability is natural gas. With the Duck Curve, natural gas is the duct tape that holds everything together.”
But he can foresee a future where energy storage takes over that responsibility, Hemphill added. “And if California is going to move toward greenhouse gas reduction, we will have to depend on resources other than fossil fuels.”
Hemphill believes that the wedge could be the shift of transportation to electrification. “And that will potentially provide another source of storage for the utility and the California ISO to rely on.”
A natural gas turbine provides value when it's on, but it also generates greenhouse gas emissions, Didlo said. Whereas a " battery system is always on and is emissions-free, though if the need is for a battery for eight hour, it is not competitive today with natural gas.”
For meeting peak demand needs, however, natural gas turbines can be competitive today, GE's Rangarajan said. “The average utilization of peakers in the U.S. is just north of 4%.”
That is “the low hanging fruit,” she said. “When the question is about replacing all the peakers, the answer goes into the gray area. But battery storage is competitive now.”