Stacking energy storage values — capturing many value streams — can lead to profitable projects, even at current storage costs, according to a new report from economists at The Brattle Group.
The report, “Stacked Benefits: Comprehensively Valuing Battery Storage in California,” focuses on California, but its conclusions apply generally to the entire U.S., said Ryan Hledik, principal with Brattle.
Brattle conducted models and simulations using a 1-MW battery — which provides four hours of storage — and estimated the comprehensive savings associated with “stacking” battery storage uses, or operating batteries to capture the benefits from a number of value streams. Energy storage advocates say stacking is critical to take advantage of battery benefits.
The economists identified costs for utilities and others to acquire certain services, including energy, capacity and frequency regulation, and concluded that using batteries for these services could save $280/kW annually. That amount could be captured through utility bill reductions, by avoiding retail rates, or through a third party (an aggregator, for example) selling demand response into the market, said Hledik.
“We calculated the total system-level value that could be captured and divided it up among parties, depending on the situation,” said Roger Lueken, associate with The Brattle Group.
Most of the existing energy storage research focuses only on isolated applications of batteries, according to the report, which was prepared for EOS Energy Storage with funding from the California Energy Commission.
While the economists identified the potential for savings, they also named the challenges to realizing the savings and making the most of energy storage.
One challenge is technical, said Hledik. More sophisticated software systems are needed to capture energy storage’s multiple benefits.
Regulatory barriers to stacking energy storage
Another challenge is regulatory, he said. In some states, utilities can only own storage to provide distribution services. [Editor’s note: For example, in restructured states, where utilities cannot own generation, regulatory confusion exists over whether energy storage should be defined as generation or something else.]
“There are some concerns about regulated monopolies operating in competitive markets,” said Hledik. In these cases, a utility that owns storage can’t make a profit by selling excess battery capacity into the wholesale capacity market or using it in energy markets, he said.
In California, however, utilities have begun developing distribution resource plans and identifying areas on the distribution system that are likely to need capacity upgrades in the near future, said Lueken.
“A third-party storage developer could come in and work with a utility to address distribution concerns and could use the battery to sell into the wholesale market,” he said. In that case, the third party would own the battery.
Credit: The Brattle Group
The Brattle economists developed two retail rate designs that could help address some of the barriers and create more opportunities for battery storage.
The first design is called a three-part rate that consists of a monthly customer charge, a cents-per-kWh charge and a demand charge based on customers’ maximum demand during system-peak hours.
“With the demand component, behind-the-meter battery storage could be operated to reduce peak demand and avoid the demand charges,” said Hledik. Battery owners would store energy to use during peak hours, thereby avoiding demand charges, he explained.
While three-part rates are often already offered to commercial and industrial customers, residential customers would also qualify for these rates, he added.
“A lot of utilities are starting to explore this for residential customers,” he said. The demand portion of the rates would send a strong price signal offering a larger bill savings for the use of energy storage than what’s offered under other residential rates, he noted.
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The second rate is a smart home or smart business rate. A rate would be based on an hourly basis—or sub-hourly—depending on the market. Both energy and capacity costs would vary. The rate would address price volatility, on an hour-to-hour basis, plus the need for new capacity, said Hledik.
“You could take capacity costs and allocate those across hours of the year, depending on whether there’s a need for new capacity,” he explained. Because battery storage can respond quickly to changes in price, energy storage could make money in this type of market. Owners would charge batteries when prices are low and use battery storage when prices are high.
“The customer’s incentive is to consume energy from the battery during high-priced hours rather than buying from the grid,” he said.
This rate would allow for some “stacking,” he said. “In any given hour, a portion of the price you’d face would be energy costs and a portion would be capacity costs.” Battery owners would dispatch their batteries to provide both energy and capacity.
Role of third-party aggregators
Another opportunity would be for third-party aggregators to control batteries owned by residents and businesses and reap cost savings for them, said Lueken.
“Demand response aggregators work with industrial customers to manage their demand and avoid demand charges,” Hledik said. This would be a similar program for battery owners, under which the aggregator would sell demand reductions made possible by energy storage into the wholesale capacity market.
The study found that overall, at least in California, using stacked energy storage — at its current costs — proves economical because batteries can reap revenue from generation, capacity and ancillary services, said Hledik.
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