Rise of Energy Storage System accelerates Energy disruption

While going through a news article at Rocky Mountain Institute, USA, we realised that energy storage capacity was added at excellent pace in USA in 2015. According to Greentech Media, US added 221MWh of energy storage in 2015. Although 85% of this capacity addition was front of the meter, the behind the meter segment is also growing thanks to falling price of batteries.

Why do we need energy storage?

Coal, gas and diesel energy is dirty but their storage is easy and makes sense because of high energy density of fossil fuels. If we think of Volkswagen Small Car carrying 50 litres of diesel actually carries 639kWh of energy. This car really takes you 900km without a stop. On other hand, 85kWh of Lithium ion Battery weighs 544kg (Model S from Tesla) and takes up only 426km. This clearly shows the Energy density of diesel is 13.6 times higher.

We have progressed by leaps and bound only after finding high density fossil fuels. To progress further, we need clean fuel that is as dense as diesel so that we can use in transport.  We have wind and solar energy that is clean and equally cheap today but this energy is not good for the grid as it is intermittent. Let's look at Germany, the biggest renewable energy market, it produces 2MW of wind power or 44GW of wind power at any point of time within 24 hours of the day. Solar looks little better but it is also produces (nil) 0GW in the night to 38GW during the 1-3pm of the day. This type of electricity generation disturbs the grid and may cause a grid failure.

A chart from German Grid operator

This chart clearly shows the rise in grid interventions on account of higher wind power. It also affects the gas and coal stations drastically. The coal and gas plant operators have seen their credit rating going down by at least 2 notches.

Do we need Renewable Energy that is intermittent and grid disturbing?

According to International Energy Agency, we have to limit all our emission at 4,000Gt (giga tons=1bn ton). Until 2015, we (the world) have already emitted 3,000Gt of emissions, thus we have only 1000Gt of emissions left to save mankind from 2 degree Celsius temperature rise. We have seen a small decline in 2014 of 1.0% and 2.5% in 2015 but we are still adding 38Gt every year. Hence we have only 25 years to save mankind from the environmental assault as these emissions are going to hound us for next 1,000 years.

Chart on global emissions: IEA

We need good environment for our kids and parents to survive and we have only 25 years to limit the emissions. We need 100% clean energy to survive because natural disasters like volcanoes, wild fires and farm fires will continue to add natural emissions, just like animals emitting methane in dairy farms. Unfortunately, we have no choice but to have 100% clean energy coming out of wind, solar or tidal. These sources of energy are mandatory but they destabilise the grid.

Let us take a look at the functioning of the grid before we find a solution for higher renewable energy and grid stabilisation.

How does Electricity Grid work?

Somehow, electricity market has been functioning for 100+ years without any sizeable storage except peaking hydro power plants. It works like a water pipeline network, where water springs give limited water to the fixed number of taps. The grid operator manages the turning more taps (loads) or reducing the number of springs (power stations). This was working fine as long as water from Springs was predictable until 2005 or so. Since then emergence of wind and now solar has destabilised the same network. Wind and Solar plants are like unpredictable springs, which gives massive amount of water, all of sudden, or no water at times, this could be regulated by opening or closing more taps. But grid can not close down or open many taps, so pressure on pipeline increases and pipelines burst. The same phenomenon in case of electricity grids is known as Grid Failure.

In 2003, USA and Canada faced a major grid failure where 80+ million people were out of power for 48 hours, India had a massive Northern grid-failure in 2012 when all of North Indian population of 350 million was in complete dark for more than 2 days. These failures were without disruptive power from solar and wind. If the grids had some storage capacity, the grid failure could have been avoided just like water pipeline network works with storage at building level, municipal level and state level. In Germany the grid interventions have risen significantly as more than 60,550% during the past decade as shown in chart above.

How do they manage the Electricity Grid?

The grid managers manage electricity grid through coordinating loads and supplies as they have to maintain frequency at designated level e.g. 50Hz in India or 60Hz in USA. Whenever load increases above supply frequency falls, quality of power deteriorate and affects the electrical equipments. So the grid managers cut loads through load shedding or increase supply by firing natural gas stations of hydro power stations.

Thus when more solar and wind power is added, the grid becomes destabilised and grid interventions become norm of the day. Higher is the proportion of the solar and wind energy; higher is the level of intervention in the grid. This also affects efficiency of the coal and gas plants and fossil fuel electricity price increases significantly.

 What is a solution to the problem?

Just like water supply system has storage tanks installed at state, municipal and building level, we need to have energy storage systems installed at all these levels. The utility level storage is known as front of meter storage and household or building level storage is known as behind the meter storage. Since large wind and solar farms are generating electricity, they will need energy storage systems at the source itself. USA has added maximum capacity in this segment as 85% of capacity addition in 2015 was at utility grade (front of the meter).

Since it is a well-known secret, we need to install storage at solar and wind farms so that the power from these massive disruptive energy sources.These storage stations would be storing electricity during peak generation and transmit it without congesting existing transmission lines. On other hand, the distribution companies should also install storages near their loads, this could save massive payments made to peak-generating stations during peak hours. The investments actually pays off within 6-9 years depending on the peak energy tariff based on peak fuels like natural gas.

Does it work for the distribution and transmission companies?

For transmission companies: The regulators are planning to install massive transmission corridors but it will be used at full capacity only for 2-4 hours. Hence it is going to be under-utilised and would be costly for the consumers as they are going to pay for the transmission charges. The storage systems of USD10m could save on capital cost of USD100m transmission lines upgrades. On other hand, it also utilises existing transmission lines fully, means higher return on equity for transmission revenue for such companies.

For distribution companies: These companies have to minimise the cost of power purchase and wheeling charges. They can delay capital expenditure by installing storage systems, which will also help in reducing wheeling charges (fixed charges for consumers). As explained earlier, consumers as well as distribution companies will also save on peak tariff charges.

Why storage installations happen at accelerated growth?

As seen in USA where front of the meter capacity addition is happening at accelerated pace, it is also taking place in all Islands, South Korea and Japan where power is generated from Liquefied Natural Gas (LNG) or diesel. Since these localities and nations have commitment towards clean energy, they have installed it.

Economies of scale: As few nations and islands have installed Energy Storage Systems (ESS), the protocols and standards are already in place. Thanks to large scale battery manufacturing, the battery as well as system (balance of battery system) costs have crashed from USD2000/kWh in 2012 to just USD800/kWh for front of the meter. With new liquid metal batteries, this cost is going to be just USD300/kWh for the utility grade ESS by 2018.

The crash in ESS cost is going to make it viable not only for solar and wind generators (IPPs) but also for distribution companies. Where distribution companies don't have resources (like Indian discoms), the energy traders can install the storage for the distribution companies (discoms). The revenue model could be favourable to traders with Return on Equity of 16-18% with our assumptions. 

How does ESS economics work in favour of grid managers/ consumers with diesel generator sets?

Our own analysis, shows that grid level ESS with Lithium ion batteries  (LIB) is not really costly compared to diesel generators. Thanks to cheaper diesel today, diesel has just 25% advantage over ESS with LIB for 0.5MW/1 MWh as shown in the chart below.

How does solar plus storage help ESS at Distributed Energy Resources (DER)?

The household systems will not need really big systems like PCS and PMS. It could be managed with chargers and inverters. The expansion of solar plus storage could be accelerated only when tariff actually falls below USD0.15/kWh and not before that.

On other hand, we see massive demand from defence installations as well as continuous process manufacturing companies like machining and pharmaceuticals. It should also be used by utilities like water, telecom and transport as grid power disrupts their services and they can operate during Superstorm Sandy. If NY and nearby area has solar plus storage, life could have been much easier for the poor people stuck in tall buildings including patients.

How does ESS shape an opportunity for investors?

Today, the companies operating in ESS space can make money by installing systems for the clients like defence and healthcare. They can also tap sizeable continuous process industries. The biggest opportunity is going to be in build own operate and transfer (BOOT) segment for such players among utilities of water, telecom and transport.

(The article is written by Mr Prasad Dahapute of Varhad Capital, Pune, India)