Significant cost declines, market design reform, and state mandates have all driven energy storage to the forefront of consideration as a valuable and cost-effective grid asset. While energy storage use to date has largely focused on use cases like reducing system peak and pairing with solar to increase solar consumption, its potential to provide a range of grid system benefits has led many in the industry to view energy storage as the next big technological advancement for grid management.
Despite the promising technology, there is still work to be done before energy storage can reach its full potential. The industry is experimenting with different storage use cases to unlock new revenue streams (including for enhanced grid reliability and resiliency) and maximize the potential of their storage systems. However, with each use case comes specific constraints and implications for operation, design, degradation, and lifetime, which all influence the upfront and long-term costs of the system.
In this podcast, our energy experts discuss the energy storage landscape, emerging applications and design, and what needs to happen in order to unlock the full potential of energy storage.
Full transcript below:
Kyle: Hello and welcome to "The Spark Podcast." We're discussing the work that ignites real and lasting change with the industry experts at ICF. I'm Kyle Saukas, and today we'll be talking about the immense opportunities that energy storage presents in the market. Energy storage has been one of the hot new things in the energy industry for a few years now. But do we know what to do with it once we've got our hands on it? Like a dog chasing cars who wouldn't know what to do if they caught one. Have we got a firm grasp on how we use energy storage to our best advantage, and what might be some of the costs? With me today to answer these questions and more are ICF's Todd Tolliver, our resident storage tech expert.
Todd: Hi, Kyle, glad to be here.
Kyle: Pat Milligan, who's modeled energy storage participation in several US markets.
Pat: Hi, everyone. Thanks, Kyle.
Kyle: Mike Alter, a specialist in utility strategy for DER.
Mike: Hi there. Looking forward to the discussion.
Kyle: Great. So to start things off, our focus today is on the optimal use of storage. Todd, can you take a second and tell us why this topic is important in today's energy conversation?
Todd: Kyle, happy to take this question to start off the discussion. Storage is the next big player technology-wise for the grid. It can be a useful tool to help manage fluctuations and challenges that the grid faces today, particularly when you're adding intermittent resources like renewables, wind and solar, to the grid. Right now, this is uncharted territory, in general, in terms of understanding the flexibility and the way it can manage those grid issues and all the different applications and use cases that it can support. With all this incredible promise our storage does have, there's also a significant amount of complexity that needs to be understood and worked out. Understanding the technology in detail and its operational capabilities to really turn storage into that critical new opportunity for the grid.
Kyle: Right. Thanks, Todd. What kinds of storage applications are being built and contemplated right now, and how might that characterize some of the prevailing trends in the market?
Pat: So the biggest driver is state targets and those are usually going to be affected through utilities. And then it's kind of up to the utility to figure out what exactly they want to do with that. So probably the biggest application so far has been peaking needs and transmission congestion relief within highly congested areas where you can't necessarily build a new gas plant or because the state doesn't want new gas plants. That's kind of the best option on offer. And then, aside from those, you have parent applications with solar. On the grid-scale, those are really the two biggest plays. There's some small action by, you know, almost wildcatters, I would classify right now. People building small stuff as pure investment for a merchant market, but that's, I would say, in third place right now.
Todd: Yeah. I would agree with that, Pat. We're seeing a lot of solar developers looking to acquire capacity as they chase interconnection cues specifically to be able to add storage into those systems as they bid into RFPs that are looking for the capabilities that storage can provide in modifying those profiles. Additionally, folks are looking for opportunities beyond conventional off-take agreements like PPAs for looking at the merchant opportunities that those storage systems can provide. You mentioned solar-plus-storage. Probably the most common application we're seeing put on the grid right now, whether it's front of the meter or behind the meter, mostly time-shifting that energy. Again, modifying that profile either through simply shifting it to load match maybe some type of energy arbitrage driven by programs or mandates in various markets like the feeder program in New York or SMART program in Massachusetts and others. A lot of times, these off-take agreements are pretty simple. They're either a fixed dollar per megawatt hour or some type of dollar per kilowatt per month payment. Leveraging the ITC to try to manage the capital equipment costs for these DC-coupled storage systems. And then again, taking advantage of the high DC-to-AC ratios that we see in solar systems typically to grab that excess energy and shift it to a later time in the day are on the applications we're seeing now.
Mike: Yeah. And I'll build on what Kyle just mentioned. There have been a number of interesting trends on the behind-the-meter side as well as Todd was alluding to. One of them being increased applications for reliability and the management person, medium and large consumers be it in the commercial, industrial sector. And then, there's also some growing traction on switching residential customers to time-backed rates. California has a mandatory transition underway to shift all those residential customers to time-use rates. As Todd was mentioning, in New York, as part of that feeder proceeding, there will be a tariff for all DER market customers and potentially to all customers eventually at some point down the road. So those are a couple of key drivers that we're seeing. Also, just a note that another interesting development in this front, getting back to the solar-plus-storage discussion, is someone won a capacity award from ISO New England for 20 megawatts starting in 2022. I think this is really the first case of an aggregated resource, well, we'll call it a virtual resource winning a capacity contract in the wholesale market. And they're going to be aggregating this capacity from solar and storage devices across nearly 5,000 homes. Similarly, ISO has just submitted a proposal to FERC outlining some steps that they're going to take to implement a DER irrigation participation model as of 2021. So, I think as we continue to see trends along these lines, there will be a growing opportunity to see the aggregated resources inclusive of source to participate in and capture value from the wholesale market.
Kyle: Obviously, it sounds like there are many different applications and many people trying to experiment with different ways of using storage to earn revenue or provide reliability to the grid. And what we're trying to do today is drive down further into how does somebody make a decision around how they want to use their storage asset. There's a term, "use case," that I've heard quite often that comes up in these discussions, so, Todd, I'm kind of looking to you. Can you give a definition of what "use case" is and why that matters?
Todd: Kyle, yeah, happy to. So, use case really comes down to the application that the storage system is being utilized for, often called, again, as you said, use case. Why this is important and why it matters is that depending on that application and use case, it puts different constraints and requirements on how that battery is operated. And ultimately, what the design requirements are to meet that application and its requirements. What the degradation characteristics of that system will be because of those operational requirements. And then, ultimately, what its operational costs will be over the term of its life. So, there's actually a lot of detail that goes into understanding the implications of that use case. We have all those things that are impacted by the use case and application and storage system, and then as you start stacking those applications together, it creates additional complexity around the operation requirements and the costs associated with those that have to be focused on when thinking about how to utilize a storage system.
Kyle: Thanks for that. So, there's obviously a lot of different drivers behind employment and there's a lot of detail and analysis that needs to go into understanding use case. You know, in terms of the consideration for how this device is used, you guys talked about multiple revenue streams, multiple use cases. How do storage developers, utilities, others, you know, consider and develop and design the use case for these storage assets?
Pat: Well, I mean, how is it designed, I guess, is different in each case. I'll answer the first part of your question maybe which is so that this multiple uses of, you know, there's 130 different uses for storage, whatever the number is. Nowadays, it is the holy grail. But the actual stacking and doing six or eight different things at once has been slow to develop so far. Part of that, I think, relates to financing and what the utilities are willing to give you a long-term contract for. Usually, there's a well-defined need, peaking capacity in a certain region or relieving a reliability constraint on a certain line. And so, that kind of forms the core of the business case for the battery. And then, you know, to the extent they're stacking, it's working around that. So we help, you know, developers bid into RFPs where you just assume that you're taken over by the utility for a certain time, and then you try and figure out what you can do around that to make some revenues and to push the cost of your bid down. The merchant markets are probably the easiest way to combine use cases or at least revenue streams, I should say. One use case could be do merchant market, which could involve different revenue streams because the engines co-optimize. So you'll say, "I'm going to bid in for all these different ancillary services, I'll put in energy bids, and let the engines solve it out." Or, you know, if you're even one level more sophisticated, you're sort of doing a day-ahead, real-time optimization. A lot of traders really like these things to shift around energy and to basically day trade with it. But this sort of holy grail, where you're doing all these different things and providing a lot of different grid services all at once and somehow getting paid for all of them really hasn't been fleshed out yet.
Todd: Pat, no, I agree. I think that makes a lot of sense. And, you know, I think, everyone, as you mentioned, is really looking at storage to be this kind of holy grail that everyone is seeking out that can solve all the grid's problems and make everyone tons of money. But at the end of the day, when you look at all these things that have to converge which is understanding the revenue stream opportunities, getting your arms around the technical maturity of the technology, really understanding the capital and operating costs for these systems, it's critical that as you're working through all those problem sets that you set up your commercial agreements that protect you as you contemplate the different operating conditions that these systems can be put under to chase all these opportunities that are out there. Most folks when they consider the operating life of storage systems think about cycles and cycles per day as being the main driver but there are other sort of second-order operating characteristics that you have to think about, too. And those things have to be captured in things like the off-take agreement. They have to be captured in the capacity guarantees that you're getting from your equipment vendors. And they have to be contemplated across the project to make sure that you're going to get that operation over the term that you're looking for.
Pat: Really, that goes through...you know, if the use case changes over time whether that's planned or unplanned. You know, it'd be great if, you know, the battery is flexible as things arise in 5 or 10 years, the grid looks different, you can do different things. Maybe they can and maybe they can't, right? It depends upon the design. There's going to be some costs to adjust. It be great if you can reconfigure things on the fly, and some of that from what I understand is unknown but whether you can do things, how the technology is going to change if the same manufacturers are going to be there.
Todd: Right. No, that's absolutely true. And although as flexible as battery systems are today, they're not infinitely flexible, so. You have to put some bound on that problem somehow.
Mike: Yeah. And I think that is really an important point, Todd, but it's just the simple fact that energy storage can't operate indefinitely as a defined charge where it can output energy for a certain amount of time and then it is fully depleted and it needs to recharge. And when you have that situation with these energy limitations, especially as you start to think about targeting multiple value streams potentially with different operators sending you different signals for how to operate, there's a growing potential that you have conflicting signals and then this source might not be able to fully meet all of its obligations. And there's been a lot of work on this front in trying to think about frameworks to enable this home and value stacking, or what a lot of people refer to as dual participation. When a storage participates both in the wholesale market and in the provision of distribution services. So, California through their multiple-use applications initiative and New York as part of its energy storage order and ongoing work in the NISO to enable dual participation for energy storage and DER aggregations down the road. There's been emphasis on trying to think about what domain is a energy storage device connected to whether it's the customer level, distribution, transmission, of both power level that either serves that the storage device providing reliability or an unreliability of service. And by thinking about these kinds of aspects of the framework, you can start to think about how can energy source stack these multiple value streams in a way that maximizes value to access while minimizing the potential for negative impact to systems' safety and reliability. So, while there has been a lot of work done, I think that both Pat and Todd were alluding to before, there's still a long way to go in this regard.
Kyle: Stacking revenues, using storage assets for multiple uses to maximize the value for the owner and possibly also for the grid seems to be, you know, the goal, the holy grail that we seem to have been mentioning a couple of times. How is that decided? Like, what's stopping people who have storage assets now from achieving that? Obviously, there's some technical complexity, but what else might be out there that we need to consider?
Pat: So, everyone talks about the need for updated market rules, policies, the whole pseudo-legal environment around how these things are operated. I would say that's one domain. The other domain is utilities optimizing these things for themselves. Just to throw out one example of that, you know, in our piece a lot of times, the utility will have a well-defined need. They say, "We need so much capacity," during certain hours here, you know, and they submit bids sometimes just from storage sometimes from a whole range of technologies. But storage can, just used as a peaking resource or just used for one particular thing at a time, any one particular thing, it tends to be a really expensive play. And it doesn't look good. It only looks good if you at least do a couple of different things with it. You know, except in a very specialized application. So, utilities and their RFPs, if they're not storage only, have to find a way to get the other values out of this stuff instead of just using it for one particular thing. And that's something that we've tried to help developers with. On the ISO side, or on the broader legal environment, you know, everybody's favorite, which are every market, is just basically an acknowledgment that the markets are behind in figuring out how these things are going to participate. Like, Mike said earlier, and actually not cause problems. You know, there's barriers to optimizing the resource but there's also protections that need to be put in place. For example, California right now has ongoing proceedings trying to define what the default bid it should be for a storage resource which is super ambiguous and vague. But the amount of batteries they're putting on the grid, all of a sudden, you'll have market power issues really quickly, and you could actually exacerbate volatility rather than mitigate it. And, you know, there's an aspect of control there also. If every battery owner is allowed on a five-minute real-time basis to try to do whatever they want, they decide when they turn on, they decide when they turn off, it can cause instability in the market. PJM went through some of that a couple of years ago where you have hundreds of megawatts of batteries deciding to turn on and off really quickly, and that creates swings on the whole rest of the grid. So, if the grid operators are not careful, rather than being reliability resources, they can actually, you know, exacerbate the system. So there's a lot of work to be done there both for better, you know, more optimized revenues and to make sure that their batteries are being used to best effect on the grid and actually, you know, really helping the grid.
Todd: Yeah. Absolutely. And I think as Pat was just alluding to, a lot of times, these utilities when they're going out with RFPs trying to procure resources via storage or some other portfolio, DER, there's an emphasis on one specified use case that they're trying to need the utilities for. And let's use one example, let's say there's a distribution substation that is going to be fully tapped out after a certain amount of time. And the utility's looking to either defer or entirely replace and avoid the need for that upgrade through the use of distributive assets. Now, likely, what's going to be the case is these needs are highly temporal in nature. And so by that, I mean, you can imagine that the peak loading condition on that substation is not every hour throughout the entire year, but rather when it's hottest out, when it's the time of day when the most people are using electricity. So that tends to be in the summer months during the afternoon into early evening hours. And as we've seen in some initial RFPs from utilities both in California and New York for these types of non-wires opportunities, they'll define a specific timeframe in which the assets may be called upon to provide the NWA service for this capacity deferral, we'll call it. So, if a utility comes out and says, "We only need these resources from 4 to 8 p.m. and we might be able to leverage them up to 20 times a year. And we'll provide you with X number of hours advanced notification for when we're going to call the NWA to perform," then that provides a little more certainty for developers as for when they can target some of these alternative revenue streams. Whether it's directly with a customer for demand-charge management or just bill reductions overall in the time-value rate or it could be directly participating in the wholesale market for other value strains. It's this kind of proactive provision of information to developers that will really allow them to confidently fit in lower costs of utilities because they'll be more confident that they'll be able to receive revenues from some alternative sources.
Kyle: So, Todd, I want to turn back to you. It sounds like the drivers and the details for understanding how a storage use case should be designed. It can be pretty complex. You know, there's a lot of different opportunity for storage but how they're set up seems to be kind of narrow in scope currently. If the market and regulatory environment is right, and everybody's on board to allow storage to do what it can potentially do, well, I have a clear enough picture to max it out, correct?
Todd: Well, almost. You know, the more definition around the regulations and markets will pull that curtain back a bit and let the light in quite a bit. However, there's still more detail around understanding the operational costs associated with being able to participate in those ways. And you know, we've talked a bit about that already, but haven't gotten too specific so now we can dig in a little bit. So, you know, as we mentioned earlier, as you use these batteries, it wears them down. And it wears them down much faster than most other resources that we see on the grid today. Solar panels might change at 0.5% per year. Battery systems will degrade closer to something like 2% to 3% per year. So, they degrade quite fast. And there's a cost associated with that and it's directly going to be a function of how that system's operated, how many applications you're trying to support, and how many times a day essentially you cycle energy through that battery. And the cycling of that energy is really what's wearing that down. So if you consider storage as a long-term resource, meaning greater than 10 years, something that, you know, might be on the order of 20 or 30, you're going to have to add batteries or additional capacities to that resource over time. And that costs money, of course. So because of that, you're going to need to augment that capacity over time to allow that resource to last the entire term of that project. And that does have a cost associated with it. What does that actually cost in terms of degradation? Well, some numbers...the numbers can range anywhere from something on the order of $8 to $12 a megawatt hour when levelized over the term of the project. Those numbers aren't well understood today because battery prices and subsequent costs are coming down constantly and there are a lot of market factors that move those values around. And that's part of what makes it hard to pull that curtain all the way open and shed light completely on all the things that we need to understand. But with that kept in mind again, as you think through those operational costs which really are driven mainly by having to potentially augment that battery capacity over time, it can push you away from either doing multiple use cases or keep you from implementing certain applications that would excessively wear the battery and make it difficult to make your cost versus revenue equation balance out.
Kyle: So I want to touch on one point here. You keep referencing batteries. Obviously, they're the most popular use of energy storage right now. But can you kind of touch on why that is, and how might different storage technologies affect the use case decision even between different types of batteries and battery and nonbattery?
Todd: Kyle, that's a great question. Because for energy storage, there are a lot of different technologies that could be implemented, and they all have their unique characteristics in terms of their operational capabilities, their capital costs, as well as their operating costs. And that include whether or not you need to add additional energy capacity over the term. And you'll hear people talk about pumped hydro and compressed air and there's even technologies out there around called ice storage or cryogenic storage, and I also noticed thermal storage, that all have their different characteristics and in some cases, you can get very long lifetimes or very low degradation rates out of those systems, but they have other limitations like very low power capacity so they can't support every use case. Or would be challenged to meeting something like a frequency regulation application. In other cases, they're very limited in terms of their ability to meet certain energy densities. So if you're trying to put an energy storage system in your home, you want something with relatively high energy density and that's where things like batteries come in and are very popular for that approach. The reason that the industry focuses so much on batteries, I think, really comes down to two things. The biggest piece of it being there's a significant amount of synergy with the electric vehicle industry that's driven that technology that has a similar form factor and is helping to really drive those costs down. So it's brought battery technology, and in particular, lithium ion technology, to the forefront today. And it tends to bring that convergence of application, cost, and timing altogether. So that's one reason.
And the second reason that batteries are still popular, such a popular technology for storage today really has to do with their flexibility. Of all the storage technologies out there, really by, in general, changing the settings or the control settings in the system, they can operate very differently in terms of duration and power output. And not all technologies can meet that capability and that's what makes them so interesting for use case stacking and attacking multiple revenue streams.
Kyle: We've talked about the revenue, regulatory and technical considerations for how you decide how to use a energy storage asset. But what else could enter the equation that we might not have touched on?
Pat: One other major area of development that needs to be taking place, too, is, and there's some movement here, it just gets talked about less, I think, is on the scheduling and especially in the emerging markets. You know, there's a day-ahead market in which all services are co-optimized, but few operators really expect to get all the value that they want out of the day-ahead market. One of the strongest things about batteries is the ability to instantly react. And so they've been...a lot of the independent owners of batteries anticipate doing a lot of real-time trading and co-optimizing between the day-ahead and real-time markets. And all that requires a certain amount of forecasting and trying to do really mathematically complex projections of what the real-time is going to look like. And then, you know, add in the fact that you have a state of charge to manage, and you might have other obligations with contracts. Mike mentioned the reliability services and the possibility of dual signals earlier. And those puzzles can get really complicated.
Mike: Yeah. I think that's a great point, Pat. And building on that when we talked about this a little bit earlier, too. But if you start thinking about more distributed storage assets and they're connected on a distribution system or behind the customer's meter and they have direct access to the wholesale market, then you have to start thinking about some of the issues involved with, what we'll call testing where storage is participating in the wholesale market but not actively considering real-time distribution system conditions. And that has the potential to adversely impact the distribution system and California and New York, again, have taken some of the leading efforts here to sort of proactively define operational coordination processes between the ISO, the utility, and the DER owner or aggregator to make sure that distribution system conditions are taken into account so that way, if one of these distributor's storage assets is responding to a wholesale signal, it's not going to compromise the safety and reliability of the distribution system. And that same set of processes will play out, too, for those resources that we're talking about in terms of dual participation if there are conflicting signals between the ISO versus the utility. How can those parties work together to ensure that the ISO schedule is updated or the rates to make sure that it can still meet those reliability services, it's all-involving brainwork and something that needs to continue, but definitely some key early steps taken by California and New York to through those kinds of issues.
Kyle: Looking ahead to the next five years, what predictions for change can you guys make for me today?
Todd: Kyle, I wouldn't mind taking that one first. I think there's some low-hanging fruit there in terms of costs are going to continue to come down and we're going to see higher and higher penetration drive that. Various types in terms of storage. Again, the EV market is going to help drive that so that we'll see more and more batteries themselves coming online. Relative to that or related to that, I also expect the penetration of new technology or other technologies coming into play and that's both on battery types themselves. And I think we'll see also some of those other technologies you mentioned earlier like pumped hydro and compressed air and maybe more exotic things starting to come in, in specific applications. Talking a little bit more about the applications, stand-alone storage, I think, is going to have a bigger role in the future as utilities and other entities get more comfortable with the technology and understand how to leverage it as a resource and then also assign value to it, so that developers and investors can figure out really how to get that revenue from those opportunities. And then, you know, to take that application and use case point farther, grid services are going to be an important part of that, and I think seeing those things that really benefit the grid whether it's at the transmission or distribution level are really going to help pull storage along and really create the diversity that everyone's been talking about.
Mike: That's great and I'll add two things that I see developing over the next five years potentially. I think the first is around the possibility of using storage as a transmission asset. The FERC has previously ruled that energy storage was eligible to serve as a, what we'll call a single-use transmission asset or just targeting one use case. But they also issued a policy statement exploring the possibility that storage can have multiple applications and try to be a regulated asset on top of also participating in the wholesale market for other revenue streams. However, they did call out three possible issues along with this kind of participation model. One being around the potential that there's a double recovery of costs by the storage asset. It can also potentially suppress competitive prices in the wholesale market by virtue of getting all these different revenue sources. And then also if the ISO is actively operating the storage device, would that jeopardize its independence? And interestingly, the California ISO started a Storage as a Transmission Asset initiative in 2018 to explore the potential for these storage assets to serve these multi-use applications. And they inevitably suspended the initiative because stakeholders, through that process, identified a number of significant barriers including whether or not the prices could actually forecast with enough confidence when the storage assets would actually be needed by the price over reliability needs, and how that actually forecast what kinds of revenue that these assets could make while participating directly in the wholesale market. So, it hit a bit of a bump in the road right now. It will be interesting to see if there is any further progress on this moving forward. I think a second key development that might happen over the next five years is just greater convergence across the industry around how to conduct spend-to-cost analyses for storage as Pat and Todd were alluding to earlier. The value of any given storage project is going to be highly dependent on the specific project, varying due to factors like the use case or use cases, what technology is being used, where on the system is it located. If it is participating in the market, what kind of rules are there governing the compensation? So there's been a lot of discussion around this to date and some differences of opinion. But I think moving forward, there will be some convergence, and we'll start to see some more alignment across the industry about how to actually conduct these analyses.
Kyle: Awesome. Thanks, guys, Todd, Pat, and Mike. Appreciate you guys coming in for this episode of "The Spark" and providing your insights. For all of our listeners, don't forget to subscribe to "The Spark," and let us know what you think needs to happen to fully take advantage of energy storage units' opportunity for the energy industry. How do you see this technology bringing more value to the grid? And other questions like that can be addressed to us on Twitter and LinkedIn, just tag @ICF within your comments. And we'll catch you next time. Thank you.