The Price of Regulation for Energy Storage

Ancillary Services and Energy Storage Markets

Ancillary services – Frequency Regulation, in particular – has been critical to achieving desired hurdle rates among front-of-the-meter storage projects in deregulated markets. However, given finite size and price sensitivities in these markets, what will be the impacts for developers?  We have extensive thoughts on the topic here at Enovation Partners, and, suffice to say, “the devil is in the details” when considering the answer. 

The structure and rules of many ancillary service markets are complex, leading to unforeseen outcomes and disruptions when a new technology bursts on to the scene. If ancillary services products are configured with storage in mind (e.g. discharge duration, compensation for speed), there is a great fit with current storage capabilities.

However, markets are small:

Hinderances to storage adoption

Further obstacles to storage adoption come from each market’s complex pricing mechanism. In many cases, there is no simple price-setting mechanism in terms of supply/demand, and in other cases there is very little competition or price transparency.

Examples:

PJM’s frequency regulation rules from 2012 encouraged a boom in storage, during which time owners and operators of storage benefitted from favorable market rules and compensation mechanisms (e.g. pay-for-performance).  Commitment to net neutral signals for storage and limits on sustained signal durations leading to batteries acting out of harmony with system needs, and – at least from the Market Monitor’s perspective – overcompensation for Frequency Regulation resources following the Reg D signal.
 

In 2017, PJM changed its rules around neutral signals, signal intensity, and settlement mechanisms in a manner that left storage owners with significantly less revenue and, for some, substantially accelerated battery degradation. These rule changes were struck down after in an April 2018 ruling leading to a correction in pricing and signal.  FERC has requested a technical conference for late 2018, and thus the wheel of time continues for PJM Reg D.
 

In New York, a potential state mandate of 1.5 GW of storage would create a market disconnect by injecting new, potentially uneconomic supply to meet a largely unchanging demand.

Frequency regulation market price declines by 90% following the installation of a 100 MW Tesla battery in South Australia - frequency regulation products were previously priced by units with highly volatile variable prices

Conclusion

We expect markets to struggle when there are swift changes to underlying technologies in a Regulation supply stack. Storage’s innate ability to provide ancillaries faster and cheaper than current price setting units will drive a step change in clearing prices as storage usurps gas-fired generation as the marginal unit. 

At Enovation, we expect price drops to reflect the delta in the units’ marginal prices to provide ancillaries.  As a result, market sensitivity to dramatic price changes in the near-future as storage projects could have dramatic implications for future development decisions by Independent Power Producers and investors. Prudent developers should have a clear idea of how additional market entry can impact pricing, and hedge by configuring systems to earn other revenue streams.

What does this mean for the economics of storage projects? How will overall storage penetration be affected? Are mandates achievable? Enovation Partners’ expertise and analytics capabilities guides our clients through issues like this everyday

Press Release: Lazard's LCOS 3.0 and LCOE 11.0 Report

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The Lazard annual report on the Levelized Cost of Storage LCOS 3.0 was released today with the Lazard Levelized Cost of Energy report LCOE 11.0

Go to LCOE 3.0 Report and Executive Summary

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LAZARD RELEASES ANNUAL LEVELIZED COST OF ENERGY AND LEVELIZED COST OF STORAGE ANALYSES

– LCOE 11.0 shows continued cost declines for utility-scale wind and solar energy –
– LCOS 3.0 shows declining but widely variable battery storage costs –

NEW YORK, November 2, 2017 – Lazard Ltd (NYSE: LAZ) has released its annual in-depth analyses comparing the costs of energy from various generation technologies and of energy storage technologies for different applications.

Lazard’s latest annual Levelized Cost of Energy Analysis (LCOE 11.0) shows a continued decline in the cost of generating electricity from alternative energy technologies, especially utility-scale solar and wind. Lazard’s latest annual Levelized Cost of Storage Analysis (LCOS 3.0), conducted with support from Enovation Partners, shows declining cost trends among commercially deployed technologies such as lithium-ion, but with wide variations depending on the type of application and battery technology.

“The growing cost-competitiveness of certain alternative energy technologies globally reflects a number of factors, including lower financing costs, declining capital expenditures per project, improving competencies and increased Industry competition,” said George Bilicic, Vice Chairman and Global Head of Lazard’s Power, Energy & Infrastructure Group.

“That said, developed economies will require diverse generation fleets to meet baseload generation needs for the foreseeable future.” “Energy industry participants remain confident in the future of renewables, with new alternative energy projects generating electricity at costs that are now at or below the marginal costs of some conventional generation,” said Jonathan Mir, Head of Lazard’s North American Power Group. “The next frontier is energy storage, where continued innovation and declining costs are expected to drive increased deployment of renewables, which in turn will create more demand for storage.”

The two studies offer a variety of insights, including the following selected highlights:

LCOE 11.0

• As LCOE values for alternative energy technologies continue to decline, in some scenarios the full lifecycle costs of building and operating renewables-based projects have dropped below the operating costs alone of conventional generation technologies such as coal or nuclear. This is expected to lead to ongoing and significant deployment of alternative energy capacity.
   
• Global costs of generating electricity from alternative energy technologies continue to decline. For example, the levelized cost of energy for both utility-scale solar photovoltaic (PV) and onshore wind technologies are down approximately 6% from last year.
   
• Despite the modestly slowing rate of cost declines for utility-scale alternative energy generation, the gap between the costs of certain alternative energy technologies (e.g., utility-scale solar and onshore wind) and conventional generation technologies continues to widen as the cost profiles of such conventional generation remain flat (e.g., coal) and, in certain instances, increase (e.g., nuclear). Specifically, the estimated levelized cost of energy for nuclear generation increased ~35% versus prior estimates, reflecting increased capital costs at various nuclear facilities currently in development.
   
• Although alternative energy is increasingly cost-competitive and storage technology holds great promise, alternative energy systems alone will not be capable of meeting the baseload generation needs of a developed economy for the foreseeable future. Therefore, the optimal solution for many regions of the world is to use complementary conventional and alternative energy resources in a diversified generation fleet.

LCOS 3.0

• Among commercially deployed technologies, lithium-ion continues to provide the most economical solution across use cases analyzed in the LCOS, although competing flow battery technologies claim to offer lower costs for certain applications.
   
• Although energy storage technology has created a platform for discussions related to certain transformational scenarios, such as consumers and businesses “going off the grid”, it is not currently cost competitive in most applications. However, under some scenarios, certain applications of energy storage technologies are attractive; these uses relate primarily to strengthening the power grid and accessing cost savings and other sources of value for commercial and industrial energy users through reducing utility bills and/or participating in demand response programs.
   
• Industry participants expect costs to decrease significantly over the next five years, driven by scale and related cost savings, improved standardization and technological improvements, supported in turn by increased demand as a result of regulatory/pricing innovation, increased renewables penetration and the needs of an aging and changing power grid in the context of a modern society. The majority of future cost declines are expected to occur as a result of manufacturing and engineering improvements in batteries. Cost declines projected by Industry participants vary widely among energy storage technologies, but lithium-ion capital costs are expected to decline as much as 36% over the next five years.
   
• As the energy storage market continues to evolve, several potential sources of revenue streams available to energy storage systems have emerged. However, the ultimate mix of available revenue streams for a particular energy storage system varies significantly across geographies.
   
• LCOE 11.0 and LCOS 3.0 reflect Lazard’s commitment to the sectors in which it participates. The two studies are posted at www.lazard.com/perspective.

Lazard’s Global Power, Energy & Infrastructure Group serves private and public sector clients with advisory services regarding M&A, financing and other strategic matters. The group is active in all areas of 3 the traditional and alternative energy industries, including regulated utilities, independent power producers, alternative energy and infrastructure.

About Lazard
Lazard, one of the world's preeminent financial advisory and asset management firms, operates from 43 cities across 27 countries in North America, Europe, Asia, Australia, Central and South America. With origins dating to 1848, the firm provides advice on mergers and acquisitions, strategic matters, restructuring and capital structure, capital raising and corporate finance, as well as asset management services to corporations, partnerships, institutions, governments and individuals.

For more information on Lazard, please visit www.lazard.com. Follow us at @Lazard.

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Link to source: Lazard Press Release for LCOS 3.0

Video (0:48): LCOS

Levelized Cost of Storage energy analysis

Industry leading analytical comparison of energy storage costs

Learn the latest in the Levelized Cost of Storage methodology and analytics

LCOS Stacked Use Cases

One of the many ingenious features of the Lazard’s Levelized Cost of Storage (LCOS) analysis is the ability to stack use cases.

Stacked use cases capture multiple sources of value from a single installation. The total of all the potential value streams available for a given system defines the maximum, economically viable cost of the system; therefore, stacking value streams and use cases offer the greatest opportunity to maximize return.

Use cases focus on the user’s needs rather than the storage system, so by stacking all of the use cases into one stacked use case, a single system can be installed to perform all of the necessary actions. Having a single storage system that can cover all of the requirements in each unique circumstance is both easier to manage and install and also more cost efficient in the long run.

Example of a stacked use case: commercial and industrial 

Stacked use case: commercial and industrial → The graphic visually shows the example of the stacked use case along with economies of scale, compared to cumulative system cost.

You get the same value of each use case and of the system as a whole for a portion of the cost (seen in picture).

More about LCOS

Energy Glossary

by Grace Kelly

Presentation ESA: Observations on Storage Costs

The Lazard Levelized Cost of Storage (LCOS) Survey is the most comprehensive survey of project costs in the industry, with over 120 companies participating last year.

As expected, the LCOS shows that costs are coming down across most technologies and use cases, with expectations for sustained cost reductions in the next few years. This is showcased through the continued cost reductions of lithium ion batteries, the introduction of promising new technologies such as flow batteries into commercial production, or the revitalization of existing technologies like lead through the adoption of carbon nanoparticles to enhance capability.

Cost reduction trends vary across technologies, highlighting a partial lack of standardization in costing and configurations. As we are still in the early commercial stage of technical development, these trends are expected to continue through improved material sourcing and manufacturing improvements. “Soft Costs” – deployment and operating expenses are expected to be significant areas of cost improvement going forward.

These falling costs hold the promise of opening up extensive new markets in the coming years – especially for the combined use cases that can greatly enhance the value of deployed storage assets.

Based on Enovation Partner’s current research into the C&I market, these cost reductions of storage assets are a key determinate for adoption. Based on a survey of 500 energy management decision makers, 20% of or respondents seriously considered adopting energy storage systems on site, but did not implement a deployment—with 80% citing economics being the dominant motivation for decisions.

For more information contact: Daniel Gabaldon

Playing in the Storage Game

Helping companies develop energy storage strategies requires an educational model. At the same time, you need to act quickly and take risks, which one can do most easily at this stage of the game.

by Robert Zabors

Read the full article