Wednesday, January 25, 2012

The Good News Energy Storage Story

This week was a great week for energy storage.  Despite the bankruptcy of Beacon Power and the delisting of Ener1, which received inordinate attention from those looking for bad news stories in renewable energy, a game-changing regulatory decision in Washington and a record breaking storm on the East Coast signal a coming of age for energy storage technology.  It is important that the energy storage industry tell its good news stories and break the doom-and-gloom Solyndra Syndrome that has come to dominate the media and the political chattering class.

Last week, the Federal Energy Regulatory Commission (FERC) released its long anticipated Final Order No. 755 on frequency regulation compensation.  FERC determined that the current frequency regulation compensation practices of regional transmission organizations (RTOs) and independent system operators (ISOs), which do not account for the inherently greater amount of frequency regulation service provided by faster-ramping resources, are unjust, unreasonable and unduly discriminatory.  This decision, which rights a longstanding regulatory wrong, opens a profitable new market for energy storage technology.

Operators of wholesale electricity systems, such as RTOs and ISOs, must buy a certain amount of power each day in order to maintain the frequency of the electricity being wheeled over their systems.  Regulating frequency by adding electricity to transmission systems at specific times and at specific places is a complicated affair.  As a general rule, the faster and more accurately that current can be added, the more effectively it can rectify frequency problems on the grid.  Frequency problems undermine the stability of the grid and can in the extreme lead to system failures, such as blackouts.

RTOs and ISOs are obligated by federal law to purchase electricity fairly and without discrimination among vendors.  Prior to Order No. 755, most RTOs and ISOs interpreted this to mean that they had to pay the same amount of money per kilowatt for electricity used for frequency regulation purposes regardless of how quickly or accurately the vendor of that electricity was able to add it to the grid.  This practice effectively shut energy storage technologies, such as power-oriented advanced batteries, out of the frequency regulation market.  Although batteries can add electricity to the grid quickly and accurately, the per kilowatt cost of the electricity they sell is generally higher than the power produced by natural gas peaker generators, even though that power takes longer to be ramped up and placed on the grid.  Because energy storage providers could not be compensated for the quality of the power they provide relative to the power provided by natural gas generators, energy storage was effectively shut out of the frequency regulation market.

FERC Order No. 755 changes this.  Pursuant to the Order, RTOs and ISOs not only can consider the quality of frequency regulation service in setting the prices they pay for it, they must.  This change will put electricity vendors who use energy storage systems into the frequency regulation business, and into the money.

Many commentators have bemoaned the purportedly small size of the frequency regulation market.  In 2009, GTM Research estimated the size of that market at 7,137 MW in the United States and 37,828 MW worldwide.  Considering that the effective size of the frequency regulation market for energy storage providers has previously been -0- MW (except for some government-funded demonstration projects), the small market criticism rings hollow. 

Moreover, the need for frequency regulation service will rise as variable, renewable energy is added to the grid.  Each 100 MW of wind energy requires about 3-5 MW of additional frequency regulation.  Today thirty-two states and the District of Columbia have renewable portfolio standards.  Those standards will require the addition of huge amounts of renewable energy over the coming decade. The frequency regulation market will grow along with it. 

In addition to government mandates, normal market forces will encourage the addition of level-cost renewable energy to the grid and expand the size of the frequency regulation market.  The big (by volume) energy story of the next decade is likely to be the increasing use of natural gas for base load electricity generation.  This is good news for wind and solar energy.  While natural gas may have certain advantages as a fuel, its historic price has unquestionably been highly volatile.  There is little reason to expect that natural gas prices will be less volatile in the future and much to reason to fear the impact of that volatility on electricity prices as natural gas becomes a more significant portion of the base load fuel mix.  Utilities will hedge against that volatility by entering into long term supply contracts with renewable energy generators, whose fuel cost is always fixed (at $-0-).  The frequency regulation market will be a direct and substantial beneficiary.

The second good news story for the energy storage industry this week was, paradoxically, a very bad news story for many electricity consumers on the East Coast.  An early October Nor’easter last weekend knocked out power to about 3.8 million consumers.  Many of those consumers went without power for days.  And just about all of them are angry and looking for solutions.

Distributed energy storage (DES) is unquestionably one of the solutions.  DES describes the practice of placing energy storage devices, usually a battery, in the distribution portion of the grid out near the ultimate electricity consumer.  One of the many benefits of DES systems is that they can provide backup power for consumers.  When there is a fault in a transmission or distribution line, whether caused by a storm or some other disruption, a DES system can ensure that consumers will, for some predictable time, continue to have access to electric power.

Of course, DES systems are not a magic bullet solution to the problem of system reliability.  A 25 kWh battery buried in a neighborhood or installed in a basement will not provide unlimited power over a several day long outage to multiple households.  But the significance of this limitation is often exaggerated.  The greatest source of power outages in the United States is transient faults on distribution feeders and about 70 percent of those outages are restored within three hours.  And even in the case of longer, multi-day outages, DES systems can give consumers the option of conserving power and prolonging their access to it by directing it only to critical functions.  At worst, consumers would have time to plan for outages that are unavoidable.  After this past week, a good portion of the 3.8 million consumers affected by the East Coast storm will appreciate the value of this benefit and would probably demand it, if given the chance.

NAATBatt is trying to engage the electric utility industry in an effort to talk to consumers about DES.  This will be a difficult discussion for many utilities, as it focuses, in effect, on system failures, which no one wants to talk about.  But DES is an important technology that offers immediate, tangible benefits to electricity consumers and substantial additional benefits to the grid, a discussion of which is beyond the scope of this column.  Electricity consumers have a right to know about DES and to ask for it from their electric service providers.  This is another good news story for the energy storage industry and we must be proactive in telling it.

The commentators are, however, right about one thing:  When the DES market develops, it will make the frequency regulation market look small.

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