How Renewable Generation Makes Energy Storage More Valuable?

Energy storage is promising from the technological standpoint, but is still limited from reaching a wider market due to its high upfront cost: the most affordable storage systems available at the moment allow energy to be stored and retrieved for around $0.10/kWh/cycle. Since this value is added to the cost of generating that energy, it is hard to come up with a successful business case for storage technology, unless energy generation has a very large cost difference between peak and off-peak hours.

The feasibility analysis for an investment in energy storage would have to consider three main factors, and lithium-ion batteries are no exception to this:

• Upfront cost per kWh of storage capacity – Lithium-ion batteries are currently offering prices as low as $200/kWh, down from $3000/kWh back in 1990.

• Service life – Lithium-ion batteries currently last for up to 2000 cycles, and if subject to a daily charge and discharge cycle, they can be expected to last around 5.5 years. By 2020, the service life is expected to reach 6000 cycles – over 16 years if cycled once per day!

• Energy price difference between peak and off-peak hours – If the price difference is higher than the round-trip cost of energy storage, there can be a business case for energy storage. The batteries in this example offer a cost of $0.10/kWh/cycle – if peak rates exceed off-peak rates by more than this value, energy storage can yield a profit. An important factor here is that utilities assess project viability in terms of production cost difference, while consumers base their calculations on retail price difference.

It is important to note, however, that simply yielding positive cash flow may not be enough to justify an investment in energy storage. The capital used for the project has a financial cost, and a minimum rate of return may be required in order for the project to be attractive. Energy storage may also have to compete against alternative investments; for example, if a utility company has the option of building a hydroelectric power plant to meet peak demand, an energy storage project would have to offer a higher financial return to be considered.

Variable Renewable Generation and Curtailment – An Opportunity for Storage

The rules of the game are starting to change with the widespread adoption of variable renewable sources such as wind and solar power. These sources may show peaks in generation in response to weather conditions – it can happen with wind farms on a windy day, for instance. In fact, the installed wind power capacity in the UK is so high that wind farms can’t sell their entire energy output, and in 2015 they were paid a total of £90 million for not exporting their surplus generation to the power grid during low-demand hours. In other words, a sizable portion of the potential energy output of UK wind farms is not being used.

There is a limit to how much a power grid can ramp down its production to absorb peaks in generation from VREs. For example, nuclear and coal power plants can’t adjust their production, and when the power grid has shut down all other sources other than these two, absorbing peaks in variable generation is not possible. Under operating conditions such as these, the energy from renewable sources can be considered to have an economic value of zero or even negative. If smart storage is used to absorb energy that would have otherwise been wasted due to curtailment, then the final cost of delivering that energy to the power grid is only the round-trip storage and retrieval cost – generation cost is essentially zero.

Illustrating the Concept Better with an Example

Assume an energy storage project has a rated output of 10 MW and a storage capacity of 40 MWh. It absorbs energy during low-demand hours and provides it during peak demand. The project has an installed cost of £8 million and uses lithium-ion batteries rated for 2000 cycles.

Scenario 1

In this case, the project is absorbing energy with a cost of 0.08 £/kWh and supplying it back when peak demand occurs at 0.16 £/kWh. The charge and discharge cycle is daily.

• Profit per year = 40,000 kWh x (£16/kWh/cycle – £0.08/kWh/cycle) x 365 cycles/year

• Profit per year = £ 1,168,000 / year

• Payback period = £8M / (£168/year) = 6.85 years

• Yearly ROI = £168M / £8M x 100% = 14.6%

Unfortunately, the batteries will reach the end of their service life in 5.5 years, so it is not possible to even recover the initial investment under these project conditions.

Scenario 2

Assume the project is absorbing the output of a wind farm that is being curtailed, so basically the cost of generation is zero. There is a better business case for energy storage under these conditions:

• Profit per year = 40,000 kWh x £16/kWh/cycle x 365 cycles/year

• Profit per year = £ 2,336,000 / year

• Payback period = £8M / (£2.336/year) = 3.42 years

• Yearly ROI = £336M / £8M x 100% = 29.2%

In this case, the project is able to offer a payback period shorter that the service life of batteries: they will still have over two years of service life left after the initial investment has been recovered.

Comparison

The following graph shows the cash flow projection for both scenarios in a timeframe of 5.5 years, the service life of the batteries in this example. The project is only financially viable in scenario 2.

Figure 01. Simplified cash flow projection of the energy storage project.

Keep in mind this is an oversimplification of reality – there are many other factors at play, such as:

• Electricity price inflation

• Potential for extra revenue from offering ancillary services to the power grid

• Financial cost, if the project is developed through a loan

• Diminishing returns – the increased adoption of distributed energy storage and demand-side management will gradually erode the economic value of bulk energy storage.

However, the graph illustrates how absorbing production from VRE sources that are being curtailed makes the project more attractive from the financial standpoint, compared to the scenario where it consumes off-peak energy from the grid to supply it when peak demand occurs.