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Evaluating the Economics for Energy Storage in the Midcontinent: A Battery Benefit-Cost Analysis

EXECUTIVE SUMMARY

The range of benefits energy storage can provide to the electricity system are widely known among those in industry and well documented in the literature. Among these are storage’s abilities to help integrate wind and solar energy, improve grid reliability, and increase the economic efficiency of the electricity system. Despite the benefits, there has not yet been widespread deployment of energy storage. This is due to two main factors. First, there currently are not markets set up to allow storage owners to earn revenue for many of the services they provide.[1] Second, storage technologies have historically been more expensive than alternative resources that can provide comparable services. However, both of these barriers have been easing recently.

Given the changing dynamics and a growing interest in battery storage technology, we took a look at the economic opportunity for a grid-connected battery in the Midcontinent Independent System Operator (MISO) electricity market. Currently, a battery can earn revenue from the market in three ways:

1.    It can store low-cost power and sell it at a later time for a higher price, a strategy known as price-arbitraging. This service is useful on systems with high wind penetrations to help manage wind generation overnight when demand is low.

2.    It can provide frequency regulation, a reliability service where the resource receives payments to keep capacity available to balance the random fluctuations in supply and demand characteristic of the electricity system. This service is useful on systems of high wind and/or solar penetration, since the variability contributes to a larger uncertainty in frequency fluctuations.

3.    It can participate in the capacity market, where the resource receives an annual payment in exchange for an agreement that it will be available during peak demand hours in the summer. This service is currently in high demand on systems seeing retirements of large baseload coal and nuclear plants.

Grid-scale battery storage has been deployed in a number of applications outside of the wholesale markets. This includes enhancing reliability for sensitive customers such as hospitals and universities, and reducing demand charges for commercial and industrial customers. Furthermore, a regulated utility may be able to internalize additional non-monetizable benefits and convince its regulators to approve a storage investment with a guaranteed rate of return for reasons like lowering renewable integration costs, improving reliability, or deferring transmission/distribution/substation investments. [2] However, in this analysis we focus on the market-based applications for storage that can be explicitly monetized by an investor.

An additional revenue opportunity that may be available in the future is to provide ramping support during periods when there are large shifts in demand such as in the morning or evening, or during large shifts in supply from wind and solar generation variability. MISO recently implemented a ramping product in the spring of 2016, however prices for this service have been negligible to date.

Using recent prices from the MISO energy, regulation, and capacity markets, we find that a battery will earn the most money by providing frequency regulation. Specifically, we estimate that a 2 megawatt, 4 megawatt-hour battery providing frequency regulation for ten years will earn a total present-value revenue equivalent to $377/kWh, compared to only $60/kW from price arbitrage in the energy market. The battery could earn an additional estimated $64/kWh in present value revenue from the capacity auction if it were located in Illinois, which has a higher demand for capacity than Minnesota. If the battery were able to simultaneously participate in the frequency regulation and capacity markets its present value of revenue would total $441/kWh. [3] Comparing to costs, a prominent lithium-ion battery supplier announced last summer their batteries would soon be priced at $250/kWh.[4] However, a product quote from their website at the time of writing estimates a 2 MW / 4 MWh battery currently would cost $606/kWh, excluding installation. This means a battery resource is currently not economic from MISO revenues alone, although it would be at projected battery costs.

In part due to a lack of experience operating battery resources in MISO, the revenue estimates rest on a number of assumptions regarding MISO’s market rules and dispatch procedures. Energy arbitrage revenue estimates assume the battery is able to switch between generator and load classifications throughout the day, similar to how pumped hydro storage is accommodated in MISO. Frequency regulation revenue estimates assume a battery-specific regulation dispatch signal is used that is sensitive to battery constraints. This regulation signal involves operating the resource at a mean output of zero over a relatively short time frame (usually an hour or less) to consistently maintain a sufficient state of charge. Finally, in order to simultaneously earn capacity and regulation revenue, the battery is assumed to be able to provide frequency regulation most of the year, and then switch to an energy resource when needed as a last resort during grid emergencies. This is similar to how MISO awards capacity credit to Load Modifying Resources for making capacity available during NERC Energy Emergency Alert (EEA) events.

Viewing these assumptions as examples of potential market participation strategies for battery storage provides insights into how electricity markets are evolving as conventional baseload resources retire and are replaced by emerging technologies including storage. Overall, it is concluded that grid-connected storage will be economic from MISO market revenues alone if cost declines projected by suppliers in the near future come to fruition.

 

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[1] A number of studies have pointed this out. See Denholm, et al. 2012 and Chang, et al. 2014.

[2] See Akhil, et al. 2013 for a comprehensive overview of the benefits storage can provide to utilities, consumers, and system operators.

[3] Capacity market prices in Illinois have historically been much higher than other parts of MISO. It is unlikely the battery would see this level of capacity revenue if it were located in other areas of the footprint.

[4] Savenije 2015