Pros and cons for battery storage

Background

With fuel sales out of fashion, battery storage has now become the Holy Grail for the Renewables sector. However, it has been the “’late comer” following behind solar, wind and hydro, when it should have been promoted in parallel to support all these technologies and provide a consistent power source.

Pros

• Previously, employing battery storage seemed implausible for businesses. Now, attitudes have been changed by innovative technological developments, increased funding, and the urgent need for readily available energy. Our former commentary on this topic (see Elexica article dated 27 April 2016 by R Daukes) explains the financial burden of adding storage to a renewable energy project and the diverse market responses. One optimistic response is that battery storage creates progressive benefits, such as balancing out the electricity grid demand.

  The National Grid began maximising this advantage earlier this year, through the process of tendering for 200MW of power to allow balancing through their Control Room. Battery storage suppliers that are able to fill this capacity stand a stronger chance of developing their businesses more widely, which explains why the responses generated over six times the initial amount of 200MW.

  Potential suppliers will benefit from increased revenue because of their ability to charge storage assets at subsidised rates, by charging batteries when power prices are lower, and discharging their batteries during more costly periods. Companies can also get paid to discharge their assets to perform grid balancing services when there is not enough power to meet demand. Therefore, this is a key tender which needs to be followed closely by those in the battery storage sector to see which technology succeeds.

  The current frontrunner is Renewable Energy Systems (RES), who have signed a four year contract with the National Grid, stating that using battery storage will enable them to deliver 20MW of frequency response to the UK’s network. A Carbon Trust report published in March 2016 revealed that energy storage could potentially save as much as £50 per year from the average energy bill, with an overall system wide savings of as much as £2.4bn a year by 2030.

• Furthermore, the National Grid has stated that it requires 30%-50% of its balancing from non-traditional sources by 2020, signalling growing opportunity for suppliers.

• Both as a pro and con, the capacity market must remain technology neutral. That allows flexibility, new entrants and new innovations. However, it means that the default position is the cheapest power source, which constrains strategy and policy.

• Householders can contribute in a number of ways to the power conundrum in the UK by providing their own battery storage, the so-called “storage behind the meter”, or even by withdrawing from the Grid altogether. This continuing trend has been likened to an Airbnb style storage for householders.

Cons

• A major disadvantage is the capacity market mechanism itself, which is currently being appealed at the European Court of Justice based on the alleged unfair treatment of demand response. In the fourth quarter of 2015, two different investigations were launched in France to evaluate if the country’s capacity mechanism and tender for an innovative power plant were consistent with EU State Laws.

  The main issue is that specific companies will be favoured above their competitors, which creates barriers to entry for new players. The Electricity Market Reform in the UK has likewise incorporated this into its policy programme, by employing a capacity market mechanism to ensure power during pressurised times in the system.

  The mechanism means that the winning bidders in auctions will obtain frequent capacity sums in return for being notified four hours in advance to responsibly deliver allocated capacity supplies. However, despite its benefits, the capacity market mechanism distorts competition, and separates markets dealing with energy within the EU. This creates unbalanced competition within the EU energy market, and may result in unproductive investments.

  Consequently, numerous threats and problems arise within the system, for example, the restriction of new companies entering the market, as evident in France. In addition, auctions often appear to privilege specific technologies over others, and fail to consider the value of other approaches.

• The arbitrage available to power suppliers, such as cheap power at night and expensive power during peak periods in the day, will eventually level-off, and then completely disappear once the market has soaked up the additional storage capacity. This poses a disincentive to investors, and the timescale by which that will disappear is uncertain.

• For independent generators the picture is not so rosy because the contracts for demand response providers with the National Grid are often only one or two years of generation, with no access to the longer term contracts available to power stations. A report earlier this year by the Institute for Public Policy Research has called for changes to remedy this disparity which makes it for difficult to compete with traditional generation, but those changes could be years away.

  The report points out that to access the longer contracts operators must prove that they are spending above a certain threshold on building or upgrading their plant. For the 15-year contract, that level of expenditure was set at £255/kw capacity in the latest (2015) auction; for the three-year contract the threshold was £130/kw (National Grid 2015b). And any capacity spending less than these amounts would only have access to one-year contracts.

• There seems to be a consensus that commercial and industrial uptake of battery storage will be within the next 2-4 years, so it is still “on the cusp” of achieving wide success. Grid-scale deployment of battery storage is held back by uncertainty, high costs and other interrelated regulatory and commercial barriers. However, observers agree that storage will become more economically viable as fossil-fuel-based alternatives become less competitive due to policies to reduce greenhouse gas emissions and long-term rising fossil fuel prices, according to a briefing published by Parliament last year.

  Capital costs of storage technologies could also decrease. Deutsche Bank also believes that 20-30% yearly cost reduction is likely for lithium-ion batteries, which could bring them at commercial/utility scale to the point of mass adoption potential before 2020. A consultation by Ofgem and the Department of Energy and Climate Change on regulatory barriers to storage deployment, including the ability of distribution companies to own and operate storage, is currently ongoing and will issue a definitive list of reforms in the spring of 2017.