One of the first things that any student of electricity economics learns is that electricity is not storable in meaningful quantities. This characteristic, in the context of peak electrical demands much higher than average demands, has meant that large amounts of capacity in generation, transmission and distribution are infrequently used.
This appears to be changing. There have been rapid developments in battery storage that might mean that batteries that are able to store reasonably large amounts of electricity become ubiquitous. This raises many interesting and important issues for producers and consumers.
One significant regulatory issue is whether regulated electricity network service providers should own and operate batteries connected to the shared grid or behind the customers’ meters, and if not how the benefits that batteries offer to the shared grid, are to be realised.
The Public Interest Advocacy Centre, supported by the Brotherhood of Saint Laurence, the Australian Conservation Foundation and Energy Consumers Australia has commissioned this report to explore this question.
Australia’s economic regulators and market operators are currently actively considering the issues that are the subject of this report. In the context of extraordinarily rapid technology and business development, this report seeks to provide broad coverage of the relevant issues and to recommend arrangements that are in consumers’ interest. We expect that the issues of this report will continue to be studied and debated in much further detail and so this report purports to be no more than an early contribution to the discussion, focused particularly on consumers’ interests.
Batteries in context
Electrical storage can be classified as mechanical, electrochemical (battery), electric, thermal and chemical. There is rapid technology development in each of these areas, but mechanical, and particularly pumped hydro1 storage accounts for 98% of all electrical storage internationally.
Batteries account for around 600 MW of grid-scale storage globally. This is a tiny proportion of global electrical demand (0.01%) but it is growing rapidly. Lithium-ion batteries in particular have favourable cost, size and operational characteristics which has meant that they have dominated the growth of grid-scale storage.
Battery economics
Batteries can provide valuable services in storing electricity when it is inexpensive and reproducing it when it is more valuable. Batteries can also substitute for transmission network augmentations, and can provide other services that are valuable in the operation of a power system. Participants – end users, retailers and energy market participants and regulated network service providers – will value different aspects of batteries, for example the peak capacity, the volume they can store, their discharge and recharge rates and their optimum operating cycles.
Battery economics is conceptually straight-forward but complex in practice because it depends on many uncertain factors. There is an abundance of market growth projections by analysts, investment banks and market operators. The dominant consensus is that the market for battery storage behind-the-meter and on the shared grid will grow rapidly.
Framing the debate
The electricity industry in Australia, like that in much of the developed world, has separated the networks from the production of electricity. This separation was decided in full recognition that networks can substitute or complement generation. This reflects a belief that the benefits from wholesale and retail competition exceed the disbenefits of integration that might otherwise be achieved through joint ownership and control.
Pumped hydro storage is invariably treated as a form of generation and so firms that own and operate networks are prevented from owning and operating pumped hydro.
A key question is, therefore, whether network service providers should be prevented from owning and operating batteries in their regulated business, for the same reason.
We identify arguments for and against this proposition. Electricity prices are unlikely to ever be sufficiently reflective of their true locational and temporal value to provide an appropriate market signal of where it would be efficient to locate storage. This suggests that ownership and operation of storage by network service providers may be helpful. In addition, there are some characteristics of battery storage (flexibility, transportability, scalability, low environmental impact at point of use) that might mean batteries are likely to be even more valuable to network service providers than pumped hydro. Again this suggests that if network service providers are prevented from owning batteries, and as a consequence they are not developed, consumers would be worse off.
However, there are also compelling arguments for preventing network service providers from owning batteries in their regulated businesses. These arguments include that battery development, at scale, can have a significant impact on wholesale markets. In addition, the track record in Australia of the effectiveness of regulation in protecting consumers from the abuse of monopoly power is not encouraging.
Experience elsewhere
Other countries are also considering how to regulate network service provider involvement in batteries.
In California, the State Government has set mandatory storage development targets and requires that not more than half of the target can be included in the regulated asset base. The target does not specify storage technology but does specify the amount to be connected to transmission and distribution networks and the amount to be connected “behind-the-meter”.
In Britain, we are not yet aware of regulatory or policy development. However several battery development projects have been funded through the “low carbon networks fund”, and this has included work on regulatory models. In Scotland, one of the distributors has secured the development of a grid-scale battery and purchases the services of the battery through a “congestion management contract”.
In New York State, a far reaching reform of the electricity sector is underway to separate the planning and operation of electricity distribution networks. The arrangements for battery storage are not the primary driver of this reform, but rather are seen as part of the context of demand-side developments (including distributed renewable generation, smart metering, demand-side response) that, in their view, justify the fundamental changes.
Options
We identify seven possible options for network service provider involvement in batteries, summarized in Figure E1. They cover the spectrum from NSPs having a full monopoly over the development of grid-connected batteries to Option 7 where NSPs are prevented from including grid-connected batteries in their regulated asset bases.
Recommendations
NSPs should be allowed to develop unregulated businesses for provision of grid- connected and behind-the-meter storage. But in preparation for this it would be valuable to carefully examine the arrangements for ring-fencing of regulated activities from unregulated activities and, where applicable, the arrangements for ring-fencing networks from retail activities. It would also be valuable to examine the nature of the relation that network service providers have with end users to ensure that by virtue of this relationship they are not able to obtain an unfair competitive advantage in the development of grid-connected and behind-the-meter batteries.
We suggest that Options 1,2 and 3 be rejected and Options 4 (and a variant thereof), 5 and 6 should be subject to further detailed examination. We think Option 7 is the most comprehensive and thoughtful approach to the issue. However serious consideration of this option in regulatory fora is not plausible in the absence of political commitment to the profound reorientation of the industry that this option entails.
We also suggest that NSPs be barred from the ownership of batteries that are located behind the customer’s meter. Most importantly, in the context of very rapid technology development, we suggest that regulatory arrangements for NSP involvement in batteries must be adaptable to change and this should be an important of the consideration of all options.
Next steps
This report has sought to cover extensive ground in an area of very rapid technology and commercial development. While the rate of growth of the battery market is uncertain it would be valuable to the industry and consumers that clear regulatory arrangements for network service provider involvement are developed before the industry develops. Much more work will need to be done to decide these arrangements..
