Attaining Real Grid Parity with Renewables + Storage

Removing both the Fossil Subsidy from Renewables and the CO2 Subsidy from Fossil

We can all agree that including bulk energy storage with renewable solar and wind energy generation would certainly put a dent in the intermittency problem. It is also a near-given that with energy storage we can drastically reduce and perhaps eliminate our reliance on brown power; a very worthy goal. So let’s do it! Throw some of that advertised-as-market-effective energy storage on that grid-parity solar or wind plant and, viola: New energy economy wins!

Uhhh…hello? Tap, tap…Is this thing on?

Okay. I know what you’re going to say: “Young dreamer, be patient. We’re not there economically, but give us a couple of years and you’ll see.”

Really? A couple of years? I don’t want to be “that guy” but have you recently compared the cost of today’s energy mix versus the ideal renewable energy/storage mix? And, more importantly, do you know how we human beings make decisions? Think short-sighted, selfish, and avoidance of change.

Let me propose a chart showing where we are in our current energy mix and where we may want to go for a CO2-free electricity mix. It is by no means scientific but the values you see are pulled from both EIA data and a cost analysis from Lazard. C&I is not considered and the ratios of one energy source to another are pure supposition. For instance, the ideal ratio of renewables to storage in the future is unknown, but we do know that seasonality and intermittency require a tremendous amount of renewable capacity (relative to fossil) to fill our electricity needs throughout any given year.

This chart shows what a HUGE role energy storage plays in a green-energy future and how storage + renewables can replace the current fossil role. It also portrays the outsized investment needed in renewables and storage to displace fossil. General pricing is for reference. All pricing is 2015 except for the “ideal” $100kWh storage capital cost resulting in the $.013kWh stored electric adder, and a “potential” $1.25/w renewable plant capital cost.

Our focus in this story is on the Transition and how we get from today’s generation mix to tomorrow’s.

But First: Why storage with renewable generation?

There are several time frames to the answer. In our current centralized energy generation structure, the one monetary reason to include storage in a renewable generation facility is to add stability at the point of disruption when intermittency is the cause. (It could also put the onus on the disruptor). This is wise where transmission is tight and intermittency causes frequency problems. Storage could also shift load on a constrained transmission line to alleviate the need for system upgrades.

As we displace fossil with intermittent renewable generation, two things start to happen: 1.) we simultaneously increase transmission constraints because we’re replacing a dispatch-able energy source with one that is not, and 2.) peak intermittent generation will periodically exceed demand. This is when the utility of storage shifts from simply fixing transmission problems to making intermittent generation a fully dispatch-able electricity source.

Once intermittent generation + storage displace fossil’s capacity to fill the intermittency gaps, proper storage capacity becomes critical. Sizing storage to the intermittent generator and its particular generation profile can help avoid both curtailment and supply shortage. Looking further still, we may approach a time when fossil and nuclear are eliminated as sources of electricity generation. This will be interesting as finding a perfect balance between supply and demand is difficult. To avoid shortages we will oversize generation and storage thus introducing inefficiency and cost. Straight kWh PPAs will be replaced by capacity contracts.

For engineering purposes, storage in all of these eras can be concentrated at transmission nodes and at the end of distribution lines just as well as at the point of generation, and perhaps with greater control and cheaper charging energy. Yet it is difficult to change our ways, and making intermittent generation look like fossil in dispatch-ability and (total) kWh cost would be comforting. Tying storage to renewable generation at the point of generation goes a long way towards that goal and dilutes the risk found in concentrating critical assets.

Cost/Benefit Optics

Perhaps the best way to start our conversation is with a brief outline of electricity generation and storage costs & benefits viewed from five different angles: 1.) the cost of a unit of electricity, 2.) the cost of traditional energy storage [fossil], 3.) electron storage, 4.) the cost of fossil generation with electron storage, and 5.) the cost of renewable generation with storage. This is intended to show that while we tend to simplify cost to a unit of electricity, valuing storage is slightly more complicated.

#1: Wholesale Cost of Electricity

When a utility off-taker evaluates a renewable energy PPA contract, the $/MWh delivered price is measured against a standard established by mandate, previous contracts, or against an industry standard. The calculus is simplified by ignoring the environmental cost of emissions on the “brown” side and intermittency on the “green” side. It seems to allow an apple to apple cost comparison of MWhs delivered from two disparate sources. This is how we’re able to say that renewable energy is at or near par with fossil energy. It’s rather like comparing a Corvette to a Volt…they both look and act like cars but under the hood they’re nothing alike. As long as the renewable contribution to the energy mix remains small (minimal disruption from intermittency) and we keep our heads in the sand over climate change (don’t include the cost of CO2), the system works great.

#2: Cost of Storage Inherent in Fossil Fuels

In traditional fossil generation, the cost of energy storage is bundled with the cost of electricity generation in the form of fuel. The initial cost of capturing and storing the energy was picked up by Mother Nature long ago. That is why it is economically cheap to us now (though not ecologically cheap). Our cost lies in extracting, transporting and storing the fuel; the energy lost through converting to electrons; inefficiencies in delivering steady electricity regardless of demand; and the release of emissions. One additional factor: fossil fuel costs are subject to market forces and highly variable.

#3: Electron Storage Costs

Unlike fossil fuels and their inherent stored energy, storing electrons involves converting them into other forms of energy like kinetic, chemical, pressure or heat. Essentially we’re doing what Mother Nature did for fossil only with an upfront financial cost and much faster conversion. This electron to battery transition is never 100% efficient, and in many cases the storage capacity of the battery degrades over time. However, storing and recovering electrons from battery storage is more effective than simply recovering the energy equivalent electrons from fossil fuels (60-90% roundtrip efficiency for battery and 25-45% extraction alone efficiency for fossil). The downside of battery storage being that the energy density of the various technologies is far inferior to the energy density of fossil fuels (~8,300Wh/kg coal vs ~240Wh/kg li-ion) resulting in big cost disparities.

#4: Cost of Storing Electrons from Fossil Generation

Storing electrons derived from fossil generation adds to the cost of electrons ultimately delivered from fossil fuel, though it adds little to the price volatility. The extra storage step can make economic sense when fuel costs are high; it lowers the cost of delivering steady electricity by reducing fuel burn on spinning reserve. But it only makes economic sense if the added capital / O&M costs and the inefficiencies of electricity storage are lower than the fossil savings.

#5: Storing Renewable Energy

In storing renewable electricity generation (wind & solar), the cost of energy storage is entirely separate from the cost of electricity generation because the fuel is un-storable (solar thermal being a quirky exception). The cost of both generating and storing electricity are tied up primarily in capital equipment so variable costs are relatively benign. As mentioned in #3, degradation of both the generation output (solar) and the storage equipment capacity, as well as in / out storage inefficiencies, add to the long-term cost.

The Ignored Costs: Intermittency and Emissions (and subsidies)

You may have noticed—and perhaps disagree with—the notion that the playing field for fossil and renewable generation is level. For years we have all been decrying the systemic advantages of fossil generation (namely subsidies and free emissions) over renewables while conveniently ignoring the cost of intermittency and the use of transmission or distribution grids paid for primarily by fossil generation. (Not to mention our own subsidies).

Well, for convenience I like to call it even. But, if you’re a glutton for esoteric calculation, you can crudely measure the cost of intermittency by subtracting actual renewable output from a 100% renewable capacity (as if renewable assets produced to capacity day and night uninterrupted) to determine how much fossil generation is needed to fill in the gaps over a 8,760 hour period (1 year). The cost of that generation (including its carbon output cost) is the rough cost of our intermittency.

Limiting the cost of emissions to CO and CO2 only, you can crudely measure the cost of carbon output. It is wildly complicated but can be guesstimated by totaling the cost to human health, damage to environment, infrastructure, crops, etc. attributable to global warming, and dividing it by the tons of CO2 spewed into the atmosphere over the span of the industrial era to arrive at a cost per ton of CO2. The EPA estimates the cost to be around $36/ton of CO2 in 2015. For reference, by including the 2015 environmental cost of burning coal, the cost of coal would rise from $46/ton to $120/ton and electricity cost from coal, not counting the cost to physically burn the coal and generate electrons, would rise from $.0173/kWh to $.0452/kWh. Again, these are back-of-napkin calculations derived from EPA, EIA and other readily-available on-line sources. (Calculations Below)

So is it a wash? Does intermittency cost offset carbon output cost? That kind of depends on your philosophy, where your renewable-resources are located and what your fossil plants are burning. But the question goes beyond the immediate economics because for a truly green renewable energy economy, we need to eliminate the fossil fuel used to offset intermittency, and that can only be accomplished with storage (or fission).

The Value Proposition

Cost is only one half of the equation in calculating the economics of combining renewable generation and storage. The other half is the value afforded by both. There has to be a favorable value proposition.

Today’s Value Optics—of Energy Storage

Purveyors of energy storage point to the value stack of storage: capital project deferment, grid support, load shifting, bulk storage, spinning reserve offset, black start support, etc. These are all valid value streams that strengthen the economics of storage, and when taken as a whole it is hard to argue against storage with even moderate fossil fuel costs. The hard part of the sell is figuring the value (or even the necessity) of each layer in the value stack to today’s off-taker. That insight is rather opaque to the outsider and, in many cases, to the off-taker as well.

Today’s Value Optics—of Renewable Generation

Renewable generation facilities provide rather simple value to the off-taker: penalty avoidance of an RPS and the highly esoteric value of a “green” kWh. And because utility tariffs are public information, it is easy to ballpark the value of a simple kWh, green or otherwise. There’s the intermittency problem, but we can thank most utility off-takers and their regulators for valuing renewable generation by a simple $/MWh valuation and ignoring the intermittency cost. At least for now. The underlying secret is that intermittent generation does not provide the same utility as fossil generation; it is in essence subsidized by fossil.

Disruption on the Near Horizon

So we essentially have two different metrics for valuing the generation of renewable energy and for valuing the storage of energy, renewable or not: the known value of a kWh and the lesser-known—or fuzzy—value of storing the same kWh. These disparate valuations along with our great success in growing renewable energy’s share of the electric generation pie wreak havoc on the economics of renewable energy with storage.

Why? Because for decades we have grown the renewable energy industry from a mere blip on the radar to a nearly disruptive force by successfully (and unwittingly) equating the cost and utility of a green kWh with the cost and utility of a brown kWh. It has worked so well in fact that in many locales we can claim grid parity.

Add storage to this successful equation and it blows up. We know we need it to evolve our generation mix but find it nearly impossible to justify financially. So we make wonky mandates to include storage or we simply ignore it thinking time will fix the issue.

Now increase renewable’s share of the generation pie only slightly and we suddenly become disruptive, forcing both inclusion of storage into the equation and a seismic shift in how we value all of our electricity generation. Herein lies the dilemma and a return to that arc on our chart:

Progress

The transition to a predominately green generation mix has already started and we see it in the growing inclusion of renewable energy into our national electric generation mix. We say “inclusion of renewable” rather than “displacement of fossil by renewable” because this new, mostly intermittent, green generation is reducing our CO2 output by a fraction but only slowing the growth of fossil capacity, not reducing it. Again, because of intermittency, fossil (combined with the other non-intermittent sources) still needs the capacity to supply 100% of our peak energy needs at any given time should the sun not shine and the wind not blow.

Moving forward, disruptions will start to appear as more intermittent generation is added. First, we’ll see negative spot energy pricing. California and Washington already experience this during the spring snowmelt when reservoirs must release water, spring winds blow and cool sunshine conditions create an over-abundance of green energy. The result is curtailment orders where someone, usually the ratepayer, pays the price. (We won’t even mention Hawaii’s problems).

Next, the central pillar of renewable energy PPAs—firm pricing—will start to soften. We may start to see renewable energy PPAs resemble fossil capacity contracts with a fixed capacity price and a market-based delivered energy price. Complexity and risk rise when this happens and when risk rises financing costs tend to follow suit. One positive consequence could be stimulation of distributed generation (C&I) where the off-taker wants firm pricing and risks are more easily spread.

If we keep up with the current model we will eventually hit a wall where no more renewable generation can be absorbed by the existing system. We will have reached an unwelcome and precarious equilibrium.

Breaking through the Wall

Solving the physical problem is easy: add storage and the future opens wide to 100% green generation. Solving the financial aspect isn’t so easy because intermittent generation has always been subsidized by cheap fossil. If it had to provide the same utility as fossil energy, namely dispatch-ability, solar and wind would be wildly more expensive—almost four times the latest wind PPA prices at today’s storage costs. And yet to get to a place where renewables displace fossil, then solar and wind must provide the same utility.

The key is in realizing the true cost of emissions from fossil generation. If we go back to what the EPA calculates as the cost of CO2 emissions to society ($36/ton of CO2) and spread that cost over the electricity generated under that same ton of CO2 we arrive at $.0279/kWh of social cost from coal. That is 161% of the price of the coal burned to generate the kWh. (Again, see calculations below). Talk about a subsidy.

But how does that number hold up against the cost to store and deliver a kWh of renewable electricity? That’s a little complicated due to the different battery technologies. Plus we’re talking about levelized cost of a stored kWh versus simple fuel costs; the cost of the battery and its upkeep versus the cost of energy stored as fuel.

The magic number for storage is rumored to be $100/kWh so let’s use that as a base. If we focus on high-cycle, bulk energy technology like flow batteries and compressed air where we can conservatively estimate a useful life of 7,500 full dod cycles over 20 years then we get down to a price of $.013/kWh. Of course real vs magic costs will dampen our excitement, but ponder this… If we consider the true cost of coal, then in theory we only need to beat the social cost of coal to make storage work in its place.

With the social cost of coal being ~$.0279/kWh, we could increase the acceptable levelized cost of storage from $100/ kWh to $210/kWh (at 7,500 cycles). That’s a long way from the current $800/kWh for flow batteries, but then flow batteries have yet to realize any cost benefits from scale. We could use Li-ion that is fast approaching the $210/kWh mark, but it suffers from limited cycles, limited dod, high operational costs and degradation issues that push its break-even with the social cost of coal to well under $100/kWh.

There you have it: all we have to do is account for the social cost of fossil generation, get bulk storage costs down, and our problems are solved.

Accounting for the Social Cost?

Who pays for the social cost of climate change attributed to burning fossil fuels? As it stands, the cost falls on the individual or community unlucky enough to be in the way of a storm or rising oceans or epidemic or some other catastrophe tied to global warming or air particulates or heavy metal discharges and so forth. We tend to think of it as localized and a case of bad luck. Yet as the cumulative effects of CO2 emissions add up, it will eventually effect a wider swath of society and cost more to clean up. The EPA makes two ominous points:

·The models used to develop SC-CO2 estimates do not currently include all of the important physical, ecological, and economic impacts of climate change recognized in the climate change literature because of a lack of precise information on the nature of damages and because the science incorporated into these models naturally lags behind the most recent research.

(Meaning the $36/ton cost only includes what is easy to tally and is underestimating the true cost.)

·The SC-CO2 should increase over time because future emissions are expected to produce larger incremental damages as physical and economic systems become more stressed in response to greater levels of climatic change.

(Meaning our underestimated $36/ton cost is going to grow substantially.)

We already spread some cost of climate change in our country through our taxes in the form of disaster relief aid, the Army Corps of Engineers, higher health costs and other avenues. It isn’t exactly equitable and it is terribly inefficient because it isn’t solving the underlying and growing problem, but it relieves some of the immediate pain.

So the earlier statement “all we have to do is account for the social cost of fossil generation…” is not quite right. We do account for it, but after the damage is done.

The Fix to the Financial Conundrum of Energy Storage

This isn’t easy to hear because it is so obvious and yet so difficult to achieve:

We need to change our collective thinking.

Duh. Right? But hear me out. I’m not talking about changing our thinking about climate change or personal belief systems or politics (especially politics); everyone has a contentious opinion on these things. Money is the focus because most people place personal wealth before any of the above. The change in our thinking is about shifting the social cost of CO2 from the back of the parade to the front, from cleanup to prevention, and from armageddon to opportunity, negative to positive, without altering our personal wealth to a great degree.

This would be a fairly straight forward exercise if it were simply us, the USA. If our actions alone led to direct visible results, we could set up a national carbon market to reward CO2 emitters for reducing emissions and pay for it through the long-term reduction in disaster costs. The EPA estimates an equal reduction in the social cost of CO2 as CO2 levels decrease. Unfortunately excess CO2 is a global issue where our actions alone will likely not result in visible results for decades.

Now a national carbon market would be a good way to level the fossil/renewable + storage space. A general carbon tax would be even better, but neither is likely to happen for reasons of ideology, uncertainty and cost. Instead, we turn our focus to the opportunity at hand and the existing tools at our disposal including federal and local government and private enterprise. Here are a few ideas to get the ball rolling:

• ·        Leverage the Federal Treasury

The current federal tax credit for storage charged with renewable energy isn’t terribly successful in part because it dilutes the effect of the solar and wind tax credits. (Lower output due to storage inefficiencies). The result is we aren’t seeing economies of scale being created. To boost storage adoption, we should do two things:

a.      Remove the “charge with renewable energy” caveat of the tax credit for a period of time to boost adoption until storage pricing comes down.

b.     Increase the tax credit for CO2 emitters who displace emissions with storage. Pay for it through two channels:

                                                              i.     A national “local content” rule that would boost federal tax revenues. Before you scream protectionism, consider the success foreign corporations and local governments are having by working through current local content rules in places like Ontario, Canada.

                                                            ii.     Monetize the future savings from reduced CO2 emissions in the form of reduced disaster relief and environmental impact. In essence let the treasury borrow against future savings to pay for tax credits now.

• ·     State PUC buy-in

Keep existing utility rates but introduce an easy-to-swallow, fixed annual escalator over a number of years to more accurately reflect the true cost of fossil generation and subsequently the cost of renewables + storage…coincides with a mandated increase in RPS.

• ·        Challenge the Market

In 2008 Southern California Edison (SCE) issued a RFP for 250 MW of distributed rooftop solar and set the EPC price goal to an unreal $3.50/watt. At a time when rooftop solar was $6/watt at best, a 40% discount made a lot of people chuckle, but the RFP actually proved successful because of its size and the cache it would bring to whoever landed it. If the same SCE folks issued a single-site RFP for 500MWh of $200/kWh flow battery bulk storage for the Windhub transmission facility in Mojave, someone looking to get their company in front would take the bait and unwittingly set a standard. (BTW: Kudos to SCE for going above and beyond on their storage goals).

Completing the Arc

The ideas outlined above aren’t magic bullets but they do demonstrate thinking that could stimulate the controlled transformation of our energy environment. By acknowledging the perils of doing nothing to stem our CO2 emissions and by addressing the financial worries of people more concerned about daily living than the long term climate, we could see a transition similar to this graphic where renewable generation increases its contribution to the energy mix; fossil spinning reserve is displaced by storage; and combined generation + storage eats away at fossil’s dominance, all without breaking the bank.

As with so many things, the devil is in the details. Fossil prices tend to fall as demand falls thus placing downward pricing pressure on renewables. Nuclear may not provide future base load given public sentiment. Storage pricing may bottom out well above the social cost of CO2 emissions. And, of course, the fossil producers won’t roll over and tolerate the gradual snuffing of their industry. There’s going to be a fight.

There is good news. The ranks of climate change deniers are thinning, renewables are proving to be good job creators, and storage costs continue to fall. Big fossil companies are by no means ignorant of the coming changes and in many cases have eagerly entered the renewable generation market. So things are moving slowly forward, perhaps a little too slow to save the world as we know it, but all we may need is the implementation of good legislation to kick things into high gear much like solar circa 2006.

Conclusion

The US Renewable Energy Industry has done a superb job in leveraging the opportunities given to it by various legislative entities and foreign manufacturers. In fact we’ve done so well that we are at or near parity with fossil generation in many markets. Yet this success has backed us into a corner where we sell intermittent energy as if it provides the same utility as fossil. But it doesn’t. Fossil is subsidizing the intermittency of renewables and we in turn subsidize the social cost of CO2 emissions.

As we expand renewables further and attempt to reduce our dependency on fossil generation, the need grows to add storage to give intermittent resources the same utility as fossil. Yet adding storage thoroughly destroys the price parity we so proudly trumpet. We must either find a way to get renewables + storage back to parity with fossil or start to value the true cost of both fossil and renewables: emissions and intermittency respectively.

When we crunch a few simple numbers from a few reputable sources we find that the cost of storage could soon be on par with the social cost of CO2 emissions, especially if storage sees economies of scale similar to solar. This means that valuing the true cost of fossil generation by adding the social cost of CO2 brings us back to parity with renewables + storage, with storage representing the cost of intermittency.

At this point we need to consider who pays for the effects of climate change attributed to greenhouse gas emissions. In the USA some of the cost is picked up by society through taxes to pay for disaster relief and environmental controls. This is an important point to emphasize because it lends reason to slowly increase electricity rates to reflect the true cost of fossil generation or renewables with storage. It also provides a mechanism that only the federal government can pull: borrow against future savings from reduced climate change costs to pay for storage incentives now.

There is no shortage of good ideas around moving our generation mix away from fossil fuels. Perhaps the most important goals are to find a way to truly level the energy playing field; encourage people to pay the true cost of the energy they use; and set a successful example for others to emulate.

• Bryan Banke is a veteran of both the fossil and renewable energy industries. He firmly believes in a sustainable energy future and aspires to form a sustainable innovations group to tackle our complex energy opportunities.