New GPI Report: Evaluating the Economics for Energy Storage in the Midcontinent

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*This blog is an excerpt adapted from the executive summary of the report, “Evaluating the Economics for Energy Storage in the Midcontinent,” that can be found in full here.*

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 the abilities of storage 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:

  1. 1. There currently aren’t markets set up to allow storage owners to earn revenue for many of the services they provide.
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  3. 2. Storage technologies have historically been more expensive than alternative resources that can provide comparable services.

However, both of these barriers have eased 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. We evaluated the revenue opportunity for a battery in three market areas:

  1. 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.
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  3. 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.
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  5. 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. However, in this analysis we focus on the market-based applications for storage that can be explicitly monetized by an investor.

By deploying an optimal dispatch model and 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, bringing present value revenues to $441/kWh. Comparing to costs, a prominent lithium-ion battery supplier announced last summer their batteries would soon be priced at $250/kWh. However, a product quote from their website at the time of writing estimates a 2 MW / 4 MWh battery costs $606/kWh, excluding installation.

Overall, we conclude that grid-connected storage will be economic from MISO market revenues alone if cost declines projected in the near future by producers come to fruition.

 

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