Teri Viswanath: Welcome to Power Plays, a CoBank Knowledge Exchange podcast series. An audio program where we connect you with top energy and environmental innovators who share their insights, experience, and market observations. Welcome to today's program, the Next Big Thing, Grid Connected Batteries. I'm Teri Viswanath, the economist covering power, energy, and water for CoBank. I'm joined by my co-host Tamra Reynolds, CoBank's Regional Vice President of Electric Distribution. Hey, Tamra.
Tamra Reynolds: Hey, Teri. You know, I'm really excited to talk about batteries. From a financing perspective, we're seeing a ton of interest from our coop customers in battery storage, and I don't think it stops there. I think it's really across the entire energy industry really taking a closer look at battery storage as a whole, whether they're monitoring the falling costs and technology changes, or whether they're looking at financing hurdles and revenue streams to make these projects work. I think there's all of these different factors on the table when they start to evaluate what this looks like for them.
Teri: You're absolutely right. When we were brainstorming ideas on how to showcase our first podcast series on batteries, I know we want to first probe the potential revenue streams that made storage a smart investment for our rural cooperatives.
Tamra: Yes, and for this program, you had a chance to catch up with Gary Dorris, the CEO of Ascend Analytics. Dr. Dorris is a well-known economist in the industry as you know, and he and his team have extensive experience in evaluating US storage projects. Ascend has developed operating software used to optimize battery charge and discharge strategy. We thought he'd be the right person to probe on this idea of value stacking.
Tamra: Absolutely. I'm a big fan of Gary's and in my interview with him, I've asked him why the US energy market is suddenly booming. This year, 2021, is going to be a record year for installations. I specifically wanted to ask him to discuss those four critical factors that is, siting, sizing, stacking, and bid strategy. The Ascend team refers to this as the 4S factors critical to battery profitability. Here's my conversation with Gary.
Gary Dorris: I tell you, there are a confluence of factors that are leading towards storage development. Foremostly, I'd say renewable storage, unlike traditional, say, pumped hydro storage, battery storage in particular, is extremely flexible and can start up and shut down with no costs and do it instantaneously. You can't get a combustion turbine to do that and that creates a unique physical dynamic for integrating renewable resources.
I think we've seen storage initially take a role serving ancillary services. They can provide ancillary services, 10-minute spending reserves without doing anything, in terms of consuming no energy. In terms of regulation, they move extremely efficient compared to thermal plants and exactly hit the mark. As we move up to longer duration, we're finding storage the next thing will be incremental energy. Something probably five minutes in duration, whereas, regulation would be a signal that would be maybe a minute or two in a given direction, but balancing out to zero over the course of an hour and typically moves not much longer than a couple of minutes.
Incremental energy would typically be 5 to 15, 20 minutes in a given direction to balance out the system and that's needed to integrate renewables. Right now, storage is very economic in terms of integrating renewables in the market price signals, and many of the ISOs at the five-minute level are screaming storage makes sense. Certainly in the West, where we have high renewable penetration rates, in California, SPP and ERCOT, we find the economics of storage are very sound. Certainly in ERCOT and SPP, it's a two-hour and less storage makes sense. In California, it's been four-hour storage.
Teri: I think at one point, when we thought about renewables, weren't we just thinking that a gas plant would suffice in terms of being the automatic backup to renewables? There's been a shift in sentiment has there, in terms of battery storage? At one point we thought that natural gas plants might be able to serve that bridge, necessary partner to renewables, and all of a sudden it looks like there's maybe a better solution.
Gary: I would agree that natural gas was considered the transition fuel to renewables and the transition capacity moreover. Now, we're seeing the economics of storage decline precipitously, 10+% a year for 5 years in a row. Suddenly storage is economic and it's green. It's consistent with where we're headed in terms of energy supply and it's, I think rightly perceived to be an investment that's not likely to be a stranded investment. Unlike investments in the new natural gas, which I think the common sentiment is, they would be likely stranded at a certain point as we have 100% renewables.
Teri: How important do you think is FERC 841 in terms of your work as an economist, being able to find value, and make these projects pencil? Has that been really important also as part of the development?
Gary: FERC 841 is instrumental for storage to play in a level playing field with traditional thermal generation. Like any power supply system and the economic construct with certain rules in place and an economic structure for the market to clear, that framework was derived from thermal generation where thermal plants were the marginal unit. Storage wasn't even considered at that time that markets were formed. Storage is here and it can play an important role and 841 was established to level the playing field between all resources. It gives storage an opportunity to compete economically. I think the introduction of five-minute price signals, which is concurrent from high renewable penetration rates, has also been a part of the predecessor to 841 but very beneficial for storage.
As we proceed forward with 841, what we're going to have is co-optimization between energy and ancillary at the five-minute level, and that's where storage can really excel and provide real value. In integrating renewables and dealing with the inherent variability of the system, efficiently tackling those five-minute price spikes, balancing out the system, and serving ancillaries.
Teri: If you had some general advice you would talk about with regard to our electric cooperatives who are exploring storage development, what might that be?
Gary: To realize storage in an economic framework, not just to put it in because it's a nice clean resource but to derive value for ratepayers, I think we need to look at this at the sub-hourly level. It's not a matter of taking energy from the belly of the duck and putting it at the head of the duck. That's going to leave about 70% of the value of storage off the table. Significant value of storage in the sub-hourly.
For coops, many of them are in a somewhat unique position of also being charged a monthly demand fee. If that's the case, there's also some peak shaving opportunities as well. In order for storage to realize its full economic potential, definitely recommend understanding the sub-hourly market dynamics and how storage can serve as a physical hedge to insulate coop members against those real-time price spikes that effectively all load is served against.
Teri: Can you explain when you think about use cases in this space, what are the major use cases? Is there a pecking order with regard to how we think about use cases and whether storage makes sense from an economic and a technology standpoint?
Gary: For the use case for storage to realize the most economic value, does depend a little bit on where you are. Each market has different needs and presuming those needs are reflected in the market prices and conditions. I think the maturity of a market with respect to renewable penetration rates, tends to reflect the relative value of storage. I'd also say there's value in storage for coops in a really unique dimension, even if it's very low in penetration rates in the market in peak shaving, just avoiding those demand charges.
Teri: Those are two top ones that come to mind, right? Which is renewable integration. If you're in a market that is flooded by renewables, that all of a sudden the economics makes sense because we have the means to be able to take advantage of a market that is being saturated by renewables. Then this other form, which is peak shaving, that commonly comes up. I think those are commonly what we look at peak shaving, trying to not pay the top dollar for the energy and being able to smooth the costs of your resource.
At one point, I remember we had this conversation that you had said, "If we take a look at the market, the part of the market that you see the leanest or the thinnest, happens to be this ancillary service area." Can you expand on that discussion that we had?
Gary: Sure, Teri. If you look in ancillary service market, it is relatively thin. I think if you look at regulation, the most profitable area for battery storage to operate, is 300 megawatts in most ISOs. Some are at 100, like New York and New England. Saturation of this market kept pretty quickly. I'd say, in most cases throughout the country, battery storage has effectively saturated at least the regulation market. That means the opportunity to earn larger terms and compete with thermal at their prices, that's been cannibalized by the storage assets. If not now, it will happen soon enough, but there's still some opportunity there. The newer frontiers for storage recognizes declining cost is to compete on incremental energy.
That's where that five-minute pricing was really important. If we look at renewable penetration rates in California or SPP, they've all roughly gone from, 5 years ago at 10%, to today a little over 22%. The variability in price has gone from roughly in the day-ahead market, $10 a megawatt-hour to about $40 a megawatt hour. ERCOT, of course, having more variability than that, maybe double. The real-time market has gone from, 5 years ago at maybe $20 a megawatt-hour, to something on the order of $60 or $70 a megawatt-hour. Again, ERCOT, being probably double that.
The increase of renewable penetration rates, when I look at all three of these ISOs, directly impacts the variability and price, and it's that price movement up and down in the real-time market where storage is able to extract its value.
Teri: Maybe related to this expansive role that battery storage could play, I think it might be that next big technology advancement for grid management.
Gary: Yes, Teri. I think storage can play an important role in grid hardening and resiliency and avoid a transmission costs. That is another economic avenue for storage. It's still in the nascent stages at this point. We've looked at this economically on radial systems which a lot of coop members have, where these long distributed lines and storage can avoid some transmission upgrades necessary to keep voltage at sufficient levels, but its biggest value today, and I'd say in the next five years, is in serving the grid in key hotspot areas. That will defer investment in transmission and act as a more resilient resource to keep the system running even under duress.
Their economies of scale that are realized with storage are relatively small compared to thermal plants. It's appropriate to have many smaller plants distributed throughout, creating greater grid resiliency and they have large centralized stations that are inherently subject to a single contingency.
Tamra: Teri, Gary made a number of really important points in his discussion with you. The first one I'd point out is, really, the extreme flexibility that battery storage affords compared to other technology. It seems like just a few years ago that everyone was touting the flexibility of reciprocating engines like Nautilus, but even those take up to two minutes to reach full output.
The other thing, I think, that he pointed out that really resonated well with me and I think will resonate well with our customers, is the opportunity for coops particularly to combine battery storage with renewable generation as a way to insulate members against price spikes and demand charges.
Teri: I agree. It's interesting to note that 90% of storage development is occurring in about 9 states. California is home to about a third of the capacity but Texas is not far behind. An EIA report that was released last year tells us that the Lonestar state can boast of having the most co-located battery storage capacity.
Tamra: Teri, as the saying goes, everything's bigger in Texas. My team and I have the opportunity to work with Pedernales Electric Coop., which is the country's largest electric distribution coop located just outside Austin, Texas. I think that they're such an interesting coop to study because they continue to grow at a steady pace each year. Roughly 15,000 members a year, which is the size of an average electric coop. They serve two distinct membership footprints. One that's really rural and one that's suburban. Then lastly, they have a long-term contract with LCRA that has some unique flexibility built-in for managing their own generation storage assets.
I reached out to Christian Powell, who's director of regulatory affairs, to see if he'd be willing to talk a little bit about their recent battery project and to walk us through how his company got comfortable making that investment. Here's what Christian had to say.
Christian Powell: We ultimately settled on this battery project in Johnson City. Johnson City, Texas is where PEC is headquartered so that was a no-brainer for us. We also have quite a few other unique situations in the Johnson City area in our system and that we have a cooperative solar farm or array there in Johnson City as well. Also, another renewable intermittent source of energy supply that's there but ultimately, we ended on a battery that was roughly 2.25 megawatts. It's a two-hour battery. It makes it a 4.5 megawatt-hour battery.
The design that we ended up with includes three different containers. They're basically co-located at our Johnson City substation just on the adjacent property there. Inside those three containers, we ended up with 9 250-kVA battery inverter combination trains, split between those three containers. It includes 216 lithium battery modules. This battery installation actually has 100-millisecond trip time from full discharge to full charge and vice versa, coming and going, which is a big part of the true benefit of this type of resource.
Tamra: Christian, you talked a lot about the motivation behind looking at a battery storage project is really to drive down some of the cost that your members experience across the board. Are there any other motivating factors behind looking at deploying batteries and adopting those that you guys had to consider when you were looking at moving forward with this type of a project?
Christian: To even just get to a decision that you're going to move forward with a project, one of those being the cost, the cost of the membership. The other being the system impacts that would result as or would come about as a result of installation of those. The other thing is the payback periods on what those cost might be when you move into a project. All those things played into our decision-making process early on. We got to a place where it seemed to really make sense for us to do this project because the opportunity was almost too good to pass up.
With such an emerging technology as we talked about, and so much interest in it and so much gaining popularity there was in the market here in Texas, we really felt like we needed to start studying it either way because we do have a large system. We do have folks who are interested in whether it'd be what we call merchant generation where they would want to come and connect to our system, or our own members who might want to co-locate batteries for any number of installation purposes, whether it's backup generation or another source of revenue for them.
We really felt like there was a unique opportunity here for us to study and learn from our own installation early on. That coupled with, there was an opportunity for us to secure a grant from the Texas Commission on Environmental Quality which was basically an emissions reductions type of a grant as a battery, and particularly a battery, as I mentioned earlier, that was co-located in our system with a solar installation, there are some other unique opportunities there where we can essentially make that solar go farther. Sun only shines certain times of the day. Even then, there are issues with the production value of the solar if it's cloudy.
Sometimes it doesn't always match up with when you really need the power as far as timing goes. Sun starts to go down as people come home and turn on all the light switches and appliances on and whatnot. This being co-located there was another no-brainer in the sense of applying for this grant from the Texas Commission on Environmental Quality, and that grant actually was going to pay for basically up to half of the project. One of the major concerns that we had was the warranty period and as we were going through the review of proposals, we wanted to make sure that no matter what the revenue and/or the operational plan that we had, that we could definitely have the battery pay for itself within the warranty period. With the TCEQ grant, with the multiple revenue streams that are coming out in the ERCOT market for batteries, we were able to significantly reduce the payback period.
Teri: In terms of making this project pencil, impact the economics a little bit, because I think that's really important. You had mentioned a couple of key points. One is that it had to be, the payback had to make sense within the warranty period that had to occur when you undertook the financial modeling for this. It was also in a backdrop of ERCOT having these outrageous price spikes which is certainly going to be a motivating, would seem to be a motivating feature, but when you're looking for the line share of the value to sort of say, how do we get to yes on this project from a financing perspective, where did you find the most value?
Christian: One of the big parts of the decision and what really drives the revenue for the batteries is that, they are so versatile. There are so many different revenue streams that can be had with the battery and so many different things that you can do with them. From the standpoint of how we would operate it, there are ancillary services in ERCOT which are one of the true- I think what all the ERCOT market is learning are that some of the true fundamental values of batteries is, we mentioned earlier, we talked about the instantaneous deployment of them. When there are issues in the ERCOT grid, very few resources can respond the way a battery can.
The other thing is, with those price spikes, batteries are proving to be a big benefit in what I would call the cost avoidance market. When you see those price spikes, that's usually what determines how much transmission costs you pay for the rest of the year or for the coming year. Being able to use batteries to reduce your load impacts in those peaks, because you have that battery power there to help supply and therefore not have to take it from the rest of the grid, also helps reduce that cost for the entire next calendar year. Another emerging place that batteries are starting to get a lot of consideration is in the capital expenditure deferral.
Teri: The first and foremost happens to be that ancillary market, right? That ancillary market is just a natural setup for battery technology. Then this peak shaving, which seems to be, especially in the area of the world you're in, peak shaving is really important and especially because of that saturation of other renewable assets. Then I think maybe last, if I've heard you correctly, it could be looking at capital deferral in terms of maybe generation but also maybe transmission. Is that maybe part of it as well? Is that a possibility?
Christian: Well, and I think for us being a very large distribution system, I think more so importantly for us is understanding if we can defer distribution system costs. That's obviously a big part of our cost allocation and cost structure at PEC, and anytime that we can reduce the cost of distribution, it could directly helps our membership and helps to keep our costs down.
Teri: If I can sum up Christian's comment on how his organization got comfortable with this investment, there were a few drivers that were really important to Pedernales. For starters, keeping costs down by insulating their members from those ERCOT price spikes, but also the decision was about making the most of their existing solar generation investment, and perhaps offsetting some of the upfront costs in market participation.
Tamra: Teri, I think that's true but from speaking with Christian, PEC is really leveraging this investment as a low cost way to better understand how this kind of technology can be deployed with a longer term goal of managing their system costs.
Teri: It was interesting how both Gary and Christian stressed the inherent flexibility of battery storage, that flexibility of being able to start up and shut down with no costs and to do this instantaneously. As Gary mentioned, you can't get a combustion turbine to do that, and that creates a unique physical dynamic for integrating renewable resources.
Tamra: That's true. I hope all of you have enjoyed our first but certainly not last podcast on battery storage. Join us on Power Plays next month, where we will further that discussion, exploring how developers are racing to build the biggest batteries in Texas.
Teri: Thanks again for joining us.
