Open markets, market neutrality, and regulation that supports the long-term business case for storage were key themes discussed at recent conferences I attended. The need for greater flexibility in the electricity network is increasing, and is set to change the interactions of market players and how the market operates across the entire energy value chain. As investigated in our recent report, Capturing value in managing flexibility, opportunities to control energy demand and supply volatility exist at several points:
At the point of demand, by minimizing the amount of renewables the consumer injects into the grid, leveraging tools such as behind-the-meter storage, demand response and smart charging.
At the point of distribution, by balancing demand through pooling and the use of batteries before it gets to the distribution grid; i.e., “islanding” (microgrids, community-scale storage, community blockchains, virtual power plant) to reduce dependence on the grid and minimize the need to go back and forth with renewables to the main grid.
At the point of transmission, by aggregating generation fleets or by pooling individual generation commitments instead of each wind or solar farm having an individual commitment to the grid, or by adding storage to smooth out supply.
At the point of supply (generation), using different storage solutions to help the grid (e.g., stand-alone batteries, batteries bundled with solar and wind, smart inverters to manage solar generation, vehicle-to-grid and emerging technologies such as hydrogen generated from renewables).
Among the novel approaches explored in Capturing value in managing flexibility, a few leading large wind generators are implementing digital wind hubs that support the aggregation of grid commitments and optimization of generation from multiple wind farms to improve production forecasting and better match supply to grid requirements. And, when storage is added to wind or solar, we see even more refinement and accuracy of the production forecast to “nowcasting.” For example, in one project integrating storage to wind and solar production in the forecasting analytics, we saw up to a 50 percent reduction in error of the short-term (six hours) production forecast. In the United States, much of the utility-scale solar is now being developed with storage and smart inverters, increasing the dispatchability of solar. In wind, batteries often share balance of plant and grid connections but are not yet fully integrated with the wind farm. However, this will change with the emergence of hybrid solutions integrating wind, solar and storage as a single plant. For example, Vestas’ Kennedy project in Australia is the world’s first utility-scale, on-grid wind, solar and battery energy storage project.
Whereas the business case for digital is clear—it is a requirement to participate in the grid services value pool and to optimize the generation portfolio, the business case for storage differs dramatically by market, depending on the market rules being developed. Improved forecasting is unlikely to be sufficient to justify a battery. Currently, the most lucrative value pool is frequency response, but this is a limited market. The long-term viability of batteries requires a regulatory framework that supports batteries participating in multiple value pools—a wider set of grid services including transmission and distribution capacity deferral. For example, California recently published rules to support “multiple-use” energy storage applications, allowing the same battery capacity to be bid for different services as long as they were not in the same timeframe. This is a critical first step in improving the economic viability of a battery investment.
In conclusion, there are business models emerging at all points to improve flexibility in the value chain. These different models and emerging players will be competing for the same value pools of arbitrage, grid services and small-scale back-up activities. One of the more significant challenges will be for regulators to refresh the market rules to support open markets and market neutrality and encourage the needed innovations in business models that will deliver flexibility at the lowest cost.