The barrage of news about the progress and promise of electricity storage in the last year just got another jolt from two disparate sources: the U.S. Department of Energy (DOE) and Tesla Motors. On April 21, DOE released the first installment of the Quadrennial Energy Review (QER) focusing on improving the nation’s energy infrastructure and notably referring to “energy transmission, storage, and distribution,” emphasis added. On April 30, Tesla’s CEO Elon Musk announced two new business lines: the PowerWall, a re-chargeable lithium ion battery for homes (in either a 10 kWh or 7 kWh size), and the PowerPack, a 100 kWh battery for grid applications. These are only two items in a dizzying array of projections, market developments, reports, and statistics emerging in the last year, highlighting that storage is arguably THE big story in the electricity industry. The U.S. Energy Information Administration recently indicated that non-hydro storage capacity in the United States has doubled in the last five years, to 350 MW. A report from Greentech Media and the Electricity Storage Association estimated that the U.S. energy storage market grew 40 percent in 2014 over the previous year, adding 62 MW of storage–and they predict an additional 220 MW will come online in 2015. The growth in the storage market is not limited to the United States: IHS CERA projects that 40 GW of storage will be connected to the grid globally by 2022.
Electricity storage benefits
Unlike discussions surrounding net metering and rooftop solar PV, storage appears less controversial. It’s easy to see why—storage provides many benefits across the entire grid. In research we’ve conducted at Brookings, a cross-section of stakeholders describe storage as “emissions-free capacity,” a source of “time value,” and “a great way to make intermittent resources more valuable.” Indeed, storage can help the entire electricity system operate more efficiently and offers something for everybody: 1. At the wholesale level it can provide ancillary services such as frequency regulation; 2. In generation, it can help integrate variable renewable supply; 3. In transmission, it can provide congestion relief; 4. In distribution, it can provide volt/VAR and peak capacity support; 5. On the customer side, it can provide back-up power and store excess onsite energy generation. With the advent of more widespread deployment of rooftop solar PV, there has been particular excitement on the customer side of the meter for combining residential solar PV with storage. SolarCity and Telsa are partnering to offer a rooftop solar PV and battery package, and Sungevity and Sonnenbatterie have agreed to offer a solar-plus-battery integrated system. Wall Street also recognizes the solar-plus-storage potential. In May 2014, Barclays stated “we believe a confluence of declining cost trends in distributed solar PV and residential scale power storage is likely to disrupt the status quo.” And UBS in August 2014 said that “Solar systems and batteries will be disruptive technologies for the electricity system.”
A burgeoning storage market
But the enthusiasm for storage also extends to the front of the meter. In a recent Utility Dive survey, utility executives were asked to choose the top three technologies they should invest in, and the majority chose storage. The reasons are clear: Storage could help utilities firm-up renewable generation, integrate customer-sited distributed generation, and manage peak load, among other benefits. Indeed, as Katherine Hamilton, policy director at the Electricity Storage Association recently pointed out at a panel that I moderated on storage at Johns Hopkins University, of total storage capacity deployed in the United States in 2014, 90 percent was in front of the meter, and 10 percent was behind the meter (most of the latter was in the commercial sector). What’s driving the burgeoning storage market are the inter-related factors of policy and cost declines in storage systems, especially batteries. First, we are seeing more supportive policy and regulations at the state and federal level. As Hamilton explained, there are several main policy drivers for storage: the increasing deployment of variable renewable energy generation, the need to address resilience, grid edge innovation, and the EPA’s Clean Power Plan (CPP). Regarding the CPP, over the next 15 years, in addition to reducing fossil fuel generation, we are going to need 40 GW of peak capacity, and storage can play a role in meeting those peaks. Examples of leading policy efforts include California’s mandate under A.B. 2514 for the three investor-owned utilities in the state to procure 1.3 GW of storage capacity by 2020, and Hawaii, New York, and New Jersey are also actively promoting storage. The Federal Energy Regulatory Commission (FERC)’s Order 755 calls on the ISOs/RTOs to allow storage to participate in ancillary service markets, specifically to provide frequency regulation.Costs are also declining. One study estimated that the cost of lithium ion battery packs for electric vehicles declined 8 percent annually between 2007 and 2014. EPRI forecasts that lithium ion battery packs will be one-quarter of their 2010 price by 2022. These trends in policy and technology are impacting the market and two big announcements in November 2014 are illustrative. Southern California Edison (SCE) released the results of a procurement—designed to develop a portfolio of resources to replace the retirement of the San Onofre nuclear station and several large natural gas generation units—in which it awarded contracts for 260 MW of storage. Oncor, the largest transmission and distribution company in Texas, announced plans to invest over $5 billion in storage.
Electricity storage challenges
Nevertheless, there are important challenges. First, costs remain high. Lazard’s most recent levelized cost of electricity analysis indicates that battery storage costs are still well above other technologies. But cost issues go beyond the battery itself. As Craig Irwin, clean tech analyst at ROTH Capital Partners emphasized at the Johns Hopkins panel, it is critical to reduce costs in supporting infrastructure such as cooling systems—especially for larger MW-scale deployment—and inverters. He added that other improvements are needed in developing a systematic approach to site specification and buyer education beyond the technologies proposed by specific vendors. Moreover, one of the key lessons of the last 20 years is “that you have to own your supply chain.” In this regard, Tesla’s partnership with Panasonic in the $2 billion development of its Gigafactory designed to produce enough lithium ion batteries for 500,000 cars annually, could move the needle in reducing battery costs. Irwin suggested that today the 85 kWh battery in Tesla’s Model S costs about 25 cents per watt hour, compared to other batteries in the 45 to 50 cents per watt range. With Tesla’s goal of knocking costs down to 10 cents per watt hour, this should help drive down lithium ion battery costs worldwide, but it will also affect the competitiveness of other battery chemistries. In addition, there are a number of other unanswered questions about Tesla’s business model, especially regarding cost at the residential level. Second, supportive policy and regulatory frameworks need to be in place to help create markets. The example of PJM is illustrative. Of the 62 MW deployed in the United States last year, two-thirds was deployed in PJM’s territory. Indeed, at utility scale, the biggest market is PJM, largely responding to FERC Order 755. The result, according to Scott Baker, senior business solutions analyst at PJM, is that there are currently 100 MW of storage in the PJM market with another 500 MW in the interconnection queue indicating that “clearly this market is not slowing down.” But, overall, the wholesale ancillary services market is small, with Baker describing it as a “starting point to prove the capability of storage and allow the wholesale market to evolve.” However, one of the challenges for owners of storage participating in a competitive wholesale market is the unevenness of the revenue stream. For this reason, SCE’s recent procurement of 260 MW of storage capacity changes the landscape. For example, Colleen Lueken, director of market analytics at AES Energy Storage noted that the company not only operates as a merchant in PJM, but also now has a competitively procured power purchase agreement (PPA) to provide storage as capacity and as a flexible resource: AES was selected by SCE to provide 100 MW of in-front-of-the-meter battery storage in the West Los Angeles Basin. This is a far more certain revenue stream than bidding ancillary services into PJM. Third, figuring out the right policy and regulatory framework requires more progress in sorting out how to monetize the value of storage in different applications. The basic challenge is that the flexibility of storage—in terms of services it can provide—makes it difficult to fit into existing regulatory rules. As Lueken of AES noted, “to access the full value of energy storage you need to break up the resource from a revenue perspective and be able to provide benefits for different applications.” Arnie Quinn, acting director of energy policy and innovation at FERC echoed this sentiment indicating that “We need to move away from the question of where storage fits, to whether it’s the right solution.” There is progress in this area: Quinn believes that “wholesale markets are moving toward attribute based compensation where we define the attribute of the service we want, and then compensate it.”
What comes next for electricity storage?
In sum, there is great potential for storage both in front of the meter and on the customer side of the meter. Costs need to come down, but the longer-term trajectory indicates that this will happen, and policies and regulations to incentivize storage need to continue to be implemented to spur the creation of markets. The DOE’s QER is a step in the right direction, calling for the establishment “a framework and strategy for storage and flexibility.” In the near-term, it is likely that most of the market development and storage capacity deployed will be at the grid-scale in competitive markets such as PJM, but the SCE procurement certainly highlights the impact of supporting policy and regulation in spurring competitively procured PPA-type arrangements. In addition, California’s investor owned utilities have initiated the first round of storage auctions in response to the state’s mandate, with final project selection and submission to the California Public Utilities Commission for approval this coming fall. In the longer-term, solar-plus-storage could become increasingly economic on the customer side. Indeed, as Hamilton of the Electricity Storage Association described, the three biggest storage markets in the residential sector are California, Arizona, and Hawaii and what they all have in common is lots of solar. But beyond selected markets, residential-scale storage systems such as Tesla’s PowerPack won’t likely lead to mass defection from the grid in the next five to 10 years. The important point, however, is that Tesla’s announcement—and all the other recent news—is exciting because it shows the progress and potential of a technology with multiple applications and benefits across the grid, providing something for everybody.
John P. Banks