Inside the Tesla big battery: How it made money and cut prices

The Australian Energy Market Operator has provided further detail on how the Tesla big battery in South Australia pitched in to help to cut prices in crucial electricity markets and deliver an incident-free summer for the National Electricity Market.

The report from AEMO, discussed in its special review of the last summer, and in its latest quarterly market report, delivers the most detailed description to date of how the world’s biggest lithium-ion battery has performed since its opening last December.

It also provides unique insight into the battery’s own performance, its ability to slash prices by breaking open the gas cartel that controlled prices in specialised markets such as grid services, and how it helped keep the lights on and reshape thinking about grid operations.

AEMO is clearly impressed, and is already looking forward to more batteries joining the grid before next summer. Another three batteries – one in South Australia, and two in Victoria – are scheduled to join by then.

“We were watching the Tesla battery with interest, particularly over the high demand periods, and we were quite pleased with what we saw,” says AEMO head of operations Damien Sanford.

He said he was impressed with its ability to “flex” and provide services when needed. “You know that the reserve is there, and that it can inject it very quickly.”

Some Tesla big battery services, such as its super fast response to system faults, are not being remunerated because the market does not value such speed and accuracy – and won’t until rules are changed.

But the battery’s other services, such as arbitrage, are making money.

This graph below shows in great clarity, for the first time, how the Tesla battery has managed to make money through arbitrage, charging when prices are low and selling when prices are high.

According to AEMO, Neoen’s Hornsdale Power Reserve, as the battery is officially known, was dispatched as a load in the SA market for 38 per cent of the December 2017 to March 2018 quarter, for a total of 11GWh .

It was dispatched as a generator (discharging) for 32 per cent of the quarter, discharging a total of 8.9GWh – mostly in the late afternoon, to correspond with higher energy prices.

The graph above shows the average daily dispatch, showing that the load, or charging, is clearly aggregated around cheaper prices in the morning, and the discharging, or generation, is clearly gathered around the afternoon and evening peaks.

As you can see in the graph below, the comparison of the average charge and discharge price reveals an average price arbitrage of $90.56/MWh.

AEMO says this spread was “in a large part due to three days of price volatility in South Australia” – January 18 and 19, and February 7 – during which time the price settled above $5,000/MWh for nine trading intervals.

Most attention up until now has been on the battery’s impact on so-called ancillary markets, which provide essential grid services such as frequency control, and are known in the industry as FCAS.

Earlier this month, we brought you a story about the stunning impacts of the battery in assessments done by McKinsey & Co analyst Godart van Gendt.

The AEMO reports confirm that assessment, even if some of the numbers are slightly different, and help to put paid to Coalition jibes that Tesla’s big battery is too small to do anything of any substance in Australia’s grid.

Conservatives have sought to demonise the Tesla big battery. Senior ministers such as Treasurer Scott Morrison said it was about as useless as the “Big Banana” and Resources minister Matt Canavan has described it as “Kim Kardashian” of the energy industry.

But as AEMO’s Quarterly Energy Dynamics report notes, the introduction of the battery and demand-side response has worked to drive down frequency control ancillary services markets by 57 per cent below than the final quarter of 2017.

“In Q1 2018, FCAS costs were $25 million, representing a $32.7 million (57%) decrease on Q4 2017 levels,” the report says, referring to the table on the left (above).

“AEMO’s FCAS requirements were steady compared to Q4 2017, so decreases in FCAS prices were the main driver of lower costs.”

And driving those lower FCAS prices, the report explains, was the additional supply from two new participants: Hornsdale Power Reserve and demand response from EnerNOC.

“These participants provided FCAS supply from a large-scale battery and aggregated demand response, representing an Australian first for these technologies,” the report says.

“Noticeably, during the first quarter of 2018, these new technologies captured a larger share of FCAS markets … displacing higher-priced supply from existing technologies (largely coal), as shown in figure 17.

“In addition, increased competition through two new FCAS providers has coincided with a reduction in the price of offers from some existing providers.”

As AEMO explains it, the HPR managed to provide regulation and contingency FCAS for 71 per cent and 99 per cent of the time, respectively.

It also provided regulation FCAS to South Australia during the activation of a special constraints that require a minimum of 35MW to be made available on January 14 and March 8.

Regulation FCAS prices in SA during periods of constraint have typically exceeded $9,000/MWh – due to the limited number of suppliers of these services, as we have documented on numerous occasions.

But, with the big battery in the mix and breaking the gas market cartel, average Raise and Lower Regulation prices were just $248/MWh during the January 14 event.

In that instance, AEMO estimates that the big battery reduced the cost of regulation services by about $3.5 million during the five-hour period in which the constraint bound.

The Tesla big battery is also being financially supported through a contract from the state government to provide grid security services in case of an emergency. Those services are yet to be invoked.

The battery is also being used by AEMO as a front-line defence against any catastrophic outcome should the interconnector that links South Australia with Victoria suddenly fail.

Batteries are likely to need revenue from several different serves – including the ability to create micro-grids – to deliver a return on investment.

Mostly they will require the development of new rules within the markets that recognise and value their superior speed, accuracy and flexibility.

In a statement accompanying the two new reports, AEMO chief Audrey Zibelman said the data illustrated the important role considered planning and collaboration across governments and industry played in delivering a secure, reliable and cost-efficient grid.

“While the hotter than usual 2017-18 summer posed significant challenges from increased demand and risks of failure of generation and transmission assets, the power system held up well,” she said.

“We recognise that there are still concerns about pricing but our analysis on the energy markets shows a downward trend on wholesale electricity prices and FCAS costs on average,” she said.

“We are pleased to have created a framework for the use of new technologies that ensures power system security and simultaneously encourages competition.

“In this instance, the entrance of two new FCAS providers introduced competition and put downward pressure on ancillary services prices, which ultimately benefits the consumer,” she said.