Value of energy storage lies in increased renewables and capacity deferrals

A new study has concluded that the economic value of energy storage increases as variable renewable energy generation increases its share of electricity supplied, however, the degree to which such variable renewable energy sources can be deployed hinges upon the future availability and cost of energy storage technologies.

The new study recently published in the journal Applied Energy was authored by researchers from the Massachusetts Institute of Technology (MIT) and Princeton University’s Andlinger Center for Energy and the Environment (ACEE), supported by General Electric (GE).

The research analysed battery storage technology in an effort to determine the key drivers impacting its economic value, how that value changes with increasing deployment over time, and the implications for energy storage’s long-term cost-effectiveness.

“Battery storage helps make better use of electricity system assets, including wind and solar farms, natural gas power plants, and transmission lines, and can defer or eliminate unnecessary investment in these capital-intensive assets,” said Dharik Mallapragada, research scientist at the MIT Energy Initiative (MITEI) and the paper’s lead author.

“Our paper demonstrates that this ‘capacity deferral,’ or substitution of batteries for generation or transmission capacity, is the primary source of storage value.”

There are other sources of value for energy storage identified by the report, including its ability to provide operating reserves to electricity system operators, avoiding fuel cost and wear & tear incurred by cycling on and off gas-fired power plants, as well as shifting energy from low price periods to high value periods.

However, the paper conclusively showed that these sources are of secondary importance compared to the value energy storage creates by helping to avoid capital-intensive capacity investments.

The study, which was based on a capacity expansion model intended to find the least expensive ways of integrating battery storage in a hypothetical low-carbon power system, came to four key conclusions. First, and as already mentioned, the economic value of storage rises as variable renewable energy generation provides an increasing share of the electricity supply.

Secondly, the economic value of energy storage beings to decline as storage penetration increases due to competition between various energy storage resources for the same set of grid services.

Thirdly, as energy storage penetration begins to increase, the majority of its economic value is seen to be tied to its ability to displace the need for investing in both renewable and natural gas-based energy generation and capacity transmission.

Finally, the study concluded that without further energy storage cost reductions, a relatively small magnitude of short-duration energy storage is cost-effective only in grids with variable renewable energy sources providing 50-60% of electricity supply.

“As more and more storage is deployed, the value of additional storage steadily falls,” said Jesse Jenkins, former MITEI researcher. “That creates a race between the declining cost of batteries and their declining value, and our paper demonstrates that the cost of batteries must continue to fall if storage is to play a major role in electricity systems.”

“The picture is more favourable to storage adoption if future cost projections ($150 per kilowatt-hour for 4-hour storage) are realized,” added Mallapragada.

The authors highlighted how their results show the need for reforming electricity market structures or contracting practices so as to enable energy storage developers to monetise the potential value of substituting generation and transmission capacity – what the researchers describe as “a central component of their economic viability.”

“In practice, there are few direct markets to monetise the capacity substitution value that is provided by storage,” says Mallapragada. “Depending on their administrative design and market rules, capacity markets may or may not adequately compensate storage for providing energy during peak load periods.” Mallapragada also highlighted the way in which developers and integrated utilities in regulated markets are able to capture capacity substitution value by integrating energy storage with the development of wind and solar.

The research also shows, however, that in some cases the continued cost declines for wind and solar could in fact negatively impact storage value, which would in turn create pressure to drive down storage costs so as to remain cost-effective.

“It is a common perception that battery storage and wind and solar power are complementary,” said Nestor Sepulveda, a postdoctoral associate at MIT, who was a MITEI researcher and nuclear science and engineering student at the time of the study. “Our results show that is true, and that all else equal, more solar and wind means greater storage value.

“That said, as wind and solar get cheaper over time, that can reduce the value storage derives from lowering renewable energy curtailment and avoiding wind and solar capacity investments. Given the long-term cost declines projected for wind and solar, I think this is an important consideration for storage technology developers.”

The research also shows just how complex is the relationship between wind and solar costs and energy storage value.

“Since storage derives much of its value from capacity deferral, going into this research, my expectation was that the cheaper wind and solar gets, the lower the value of energy storage will become, but our paper shows that is not always the case,” said Mallapragada. “There are some scenarios where other factors that contribute to storage value, such as increases in transmission capacity deferral, outweigh the reduction in wind and solar deferral value, resulting in higher overall storage value.”

Of course, battery energy storage is increasingly finding itself in a battle with natural gas-fired power plants to provide the necessary and reliable capacity for peak demand periods. However, the researchers found that replacing natural gas with battery storage is not as simple as it could be.

Specifically, the researchers discovered that adding one megawatt of storage power capacity displaces less than one megawatt of natural gas generation due to the fact that storage must not only provide 1 megawatt of power output, but must also be capable of sustaining production for as many hours in a row as the gas capacity operates. As such, energy storage must provide many hours of energy storage capacity – measured as megawatt-hours – as well as power output.

Further, the research showed that this capacity substitution ratio actually declines as storage seeks to displace more gas capacity.

“The first gas plant knocked offline by storage may only run for a couple of hours, one or two times per year,” explained Jenkins. “But the tenth or twentieth gas plant might run 12 or 16 hours at a stretch, and that requires deploying a large energy storage capacity for batteries to reliably replace gas capacity.”

Energy storage duration is dramatically important to replacing natural gas capacity, and the research finds that longer storage durations of eight hours generally have greater marginal gas displacement as compared to storage with two hours of duration. However, the additional system value from longer duration capacity storage does not outweigh the additional cost of the storage capacity.

“From the perspective of power system decarbonization, this suggests the need to develop cheaper energy storage technologies that can be cost-effectively deployed for much longer durations, in order to displace dispatchable fossil fuel generation,” said Mallapragada.