THE BUSINESS of STANDALONE GRID-SCALE ENERGY STORAGE in Northern States STANDALONE GRID-SCALE ENERGY STORAGE

THE BUSINESS OF STANDALONE GRID-SCALE ENERGY STORAGE in Northern States STANDALONE GRID-SCALE ENERGY STORAGE

In 1800, Alessandro Volta invented the first In February 2018, FERC Order 841 directed operators of wholesale markets to design rules for energy battery, which came to be known as the storage to participate in the wholesale energy, voltaic pile. It was the first device to pro- capacity and ancillary markets. This ruling set the stage for grid-scale storage systems of at least vide a steady supply of energy. Batteries 100kW that are connected directly to electrical have come a long way since then. In the transmission systems. 1970s, lithium-ion batteries were commer- According to Wood Mackenzie Power & Renewables, at the end of 2018, 1,000 MW of battery-based cialized for the first time. Now they are a energy storage projects were operational in the crucial component in revolutionizing and United States across more than 20 states. This and other data show that battery energy storage is enabling continued renewable penetration still in its infancy; especially in northern states. For on the US electrical grid. example, the Energy Storage Association recently noted that only 16.2 MW of storage has been deployed in the state of Minnesota, and none is currently under contract or development. There are signs of traction, though.

THE BUSINESS OF STANDALONE GRID-SCALE ENERGY STORAGE IN NORTHERN STATES 2 At the beginning of this month, PacifiCorp, which operates in Utah, Wyoming, Oregon and Washington, released its draft integrated resource 600 MW plan (IRP) which included plans for nearly 600 MW of battery storage by 2025 of battery storage by 2025 and more than 2,800 MW of battery storage by 2038. These developments are exciting for the prospects of grid reliability with 2,800 MW of battery storage by 2038 increasing renewable penetration. What this paper will explore is the current feasibility of grid-scale planned by PacifiCorp in Oregon, standalone storage in the northern half of the US. Utah, Washington and Wyoming

STORAGE RESOURCES (P-45CNW) New Storage Capacity

3,000 2,500 2,000 1,500 1,000 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2027 2038 500 ■ ■ Cumulative MW 0 2019 IRP 2017 IRP (None)

THE BUSINESS OF STANDALONE GRID-SCALE ENERGY STORAGE IN NORTHERN STATES 3 Why does the grid need storage at all?

Battery technology and grid-scale applications Today, most grid-scale storage is paired with solar have been expensive and not widely used to date. farms. This partially shifts the farm’s generation There are many benefits that could be realized by from lower-priced hours to higher-priced on-peak increased battery penetration on the grid. One of hours. Since solar doesn’t naturally produce during the largest advantages is to support the increase these valuable hours and wind cannot be relied on in renewable penetration through improved grid to run at those times, batteries, paired with solar or reliability. This need arises from the seasonal, hourly, standalone applications, can deliver this clean power and second-to-second variability of generation by during peak hours. renewable sources.

THE BUSINESS OF STANDALONE GRID-SCALE ENERGY STORAGE IN NORTHERN STATES 4 What are the most common types of grid-scale storage?

Historically, pumped hydro and compressed air The newest player on the stage is chemical batteries were the only means for grid-scale storage. This and specificallylithium-ion batteries. Focusing on is a generous characterization of compressed air our area of interest in northern states, we see that since there is only one operational application of there is not a lot of storage currently in use. Most of compressed air across the country with the ability the current application is behind-the-meter storage to deliver 110 MWh of power. S&P Global Market as the first grid-scale storage plant in the MISO only Intelligence shows in its US power plant summary went operational in 2016. The tide does look to be that there are 22,339 MWh of summer peak pumped shifting with 2,686.5 MW and 4,031 MW planned in hydro storage capacity in operation across the the MISO and PJM queues respectively, all of which country, as well as 37,049 MWh planned for future could be online by the end of 2023. These numbers construction. Pumped storage is great because it can clearly show that the interest in grid-scale storage deliver energy to the grid almost immediately by systems is catching on in northern states. releasing water from an elevated reservoir, through a turbine and down to a lower reservoir. It loses some round-trip efficiency because of evaporation and turbine physics, but it is a very attractive way to store power where possible. 2,686.5 MW and Compressed air storage is less common. The only compressed air storage system in the US is 4,031 MW in Alabama. It is sited in a cavern where air is mechanically pumped into an excavated salt cavern planned in the MISO and PJM when power is cheap. Later the pressure is released, queues respectively spinning a turbine, and power is created during more valuable hours. Flywheels are also a small energy storage player, but most applications and testing have been in the transportation sector.

THE BUSINESS OF STANDALONE GRID-SCALE ENERGY STORAGE IN NORTHERN STATES 5 What are the most important factors that need to be considered when deciding to build a standalone storage system?

The most important parameters when considering how long the battery can continue to function what type of battery is best for a certain part of the before needing to be retired. grid and use case are: • Daily dispatch limits: The upper limit of how • Storage capacity: The maximum amount of much generation the transmission system can energy that can be injected into the grid at one accept from the battery. time. • Guaranteed storage availability: A contractual • Battery duration: The total amount of time that obligation by the battery developer and the battery can inject its maximum capacity into operator regarding how often the battery the grid. is operational and how often it is out of • Degrading: Battery capacity is reduced every commission for repairs, maintenance, etc. year due to repeated cycling. This can be • Location: It is most beneficial to locate mitigated by overbuilding the battery capacity standalone storage at a substation to reduce up front to guarantee a certain amount of interconnection length and other related costs. capacity at the end of the life. Another way to It is also best to keep batteries close to load so fix this is to augment the battery after it has they can be reactive to changes in demand and been operational for a certain number of years. not have energy losses over longer transmission This will take it offline during construction but distances. will bring capacity back up to a higher desired It is an iterative process to consider all these inputs level. and their combinations to fit what works best for • Round-trip efficiency: The percentage of energy the grid-scale storage goals being analyzed. lost through the charging and discharging process up until the point of interconnection. • Ramp rate: A measure of how quickly the battery can start injecting energy onto the grid. • Cycles per day and life: How many times the battery can charge and discharge in a day and

THE BUSINESS OF STANDALONE GRID-SCALE ENERGY STORAGE IN NORTHERN STATES 6 Now that we have covered the background and basics of standalone battery plants, what are the benefits of the system to the buyer?

Currently, no single application makes standalone The unique characteristics of batteries also help storage economical. Therefore, analyzing and renewable generators avoid curtailment, which stacking as many revenue streams as possible is occurs when grid operators direct certain plants to crucial. These revenue streams will be unique to stop generating power because the transmission every battery and proposed location, therefore they system in that area does not have the capacity to require detailed analysis and can’t be quantified move more energy. Other unique transmission with blanket statements. benefits provided by batteries are voltage support Since a standalone battery is connected directly to and frequency regulation. Batteries can help the grid, the first consideration of its benefits is regulate the voltage and frequency that is being with respect to the transmission system to which carried through the wires. it will be connected. When the battery charges For grid operators, batteries can help the overall and discharges to generate revenue, it naturally system and planning process by providing capacity balances the variability of renewable energy. This and resource adequacy. In California, the California reduces congestion on transmission wires, decreases Independent System Operator (CAISO) has rules for transmission losses, increases system reliability, and resource adequacy that standalone batteries qualify even helps defer transmission investments and to fulfill. This line of thinking is spreading to other upgrades that would otherwise be necessary when system operators. Grid operators are required to new generators connect to the grid. This last point is have sufficient capacity resources to meet their peak most obvious with new renewable generation plants load to ensure that they can meet the demand of that are connecting in many diverse locations where the system under the most stressful conditions and the transmission system may not have the capacity avoid blackouts. These capacity resources need to required. prove they are available and have ramp rates that Speaking of delaying investments, since batteries can respond to rapid changes in demand. Batteries can transfer renewable generation to more valuable can be used in this planning process and meet these or scarce parts of the day, this benefit can be used requirements. to delay or eliminate the need to build new fossil Lastly, batteries can be built in a few months’ time fuel plants built to meet peak loads only a few and take up a smaller footprint, allowing them to hours each year. In addition to delaying fossil fuel be built close to load with lower environmental plant expansion, batteries on the grid enable fossil and visual impact on the surrounding communities fuel plants to optimize their generation better. quickly. These factors could be considered This reduces stress on those plants and improves additionalities to battery owners when they are efficiency. trying to make the maximum positive impact with their investments.

THE BUSINESS OF STANDALONE GRID-SCALE ENERGY STORAGE IN NORTHERN STATES 7 7 Energy Arbitrage In this data, you can see the “duck curve” in the SP_15 values and the opportunity for energy While these are all attractive benefits, the main arbitrage being visually more attractive than at revenue generator for most standalone batteries Minnesota Hub (MINN) and Western Hub which are is energy arbitrage. This is a process where energy in Minnesota and Pennsylvania respectively. In the is bought from the grid at the cheapest hours and SP_15 data, it can be seen where solar generation then discharged during peak hours. The wider the pushes down energy prices starting at 8 am. spread of these energy prices, the more revenue can be captured. This spread is the largest in California This phenomenon may be starting at Western Hub and you can see this phenomenon at the CAISO but isn’t visible at MINN Hub. MINN Hub power SP_15 energy trading hub in Figure 1 below. prices are driven by demand more than supply, whereas the opposite can be said for SP_15.

70 AVERAGE HOURLY LMP

30 Price ($/MWh) 20

0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Hour

Average of SP_15 Average of Western Hub Average of MINN Hub

Figure 1

THE BUSINESS OF STANDALONE GRID-SCALE ENERGY STORAGE IN NORTHERN STATES 8 To help quantify energy arbitrage revenue, a A more robust model would use price forecasts in basic standalone energy battery system model addition to historical data and optimize the battery with commonly used parameters (100 MW, 4-hour cycling along with the operational constraints. In a duration, 25-year life, considerations for round- real application, this is a highly iterative process to trip efficiency, auxiliary load and losses to the find the best mix of battery traits to maximize value. point of interconnection) can be used along with Figure 2 below shows the model outputs for yearly the historical hub pricing data from Figure 1 as a revenue at each hub and the net present value of forecast for future prices. The battery was charged that revenue discounted at a five percent interest and discharged during the historically lowest and rate. highest priced four hours of every day.

18.00 ENERGY ARBITRAGE REVENUE BY YEAR

16.00 NPV SP_15 MINN Hub Western Hub 14.00 Revenue 182,044,795 52,186,611 70,108,293

12.00

10.00

8.00 Yearly Reveue ($/M) Yearly 6.00

4.00

2.00 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Project Life Year

SP_15 MINN Hub Western Hub

Figure 2

THE BUSINESS OF STANDALONE GRID-SCALE ENERGY STORAGE IN NORTHERN STATES 9 Revenue Streams Lastly, ancillary service payments can be made to batteries in places with rules enabling them. On the next page, we will cover the costs of a For these specific payments, a battery should be battery plant and see how these revenues stack up developed with different characteristics making it to costs of building and operating battery storage, better suited to cycle many times in a day to help but first let’s consider other monetary revenue with grid regulation and other transmission needs. streams. This puts a heavy burden on the battery and can A large and developing storage revenue stream is significantly reduce its useful life. Ancillary services capacity payments. An example of this is in CAISO can be an important revenue stream but generally where operators pay for resource adequacy which require a high-power, low-duration battery system. they are required to procure. Another is PJM which has a developed capacity auction system where payments are made to operators for committing to generate at a certain time in the future. These mechanisms are being developed in other parts of the country as well and can be a source of revenue for batteries.

THE BUSINESS OF STANDALONE GRID-SCALE ENERGY STORAGE IN NORTHERN STATES 10 Now that we have covered the benefits, what is the cost and downside of a standalone grid-scale battery plant?

The biggest cost drivers that battery developers If a buyer is engaging a developer to acquire a need to consider are in capital and operating battery plant, there are a few different ways the expenditures. The technology and procurement plant can be priced and contracted. The simplest is costs are the most significant. These costs have been a “design, build, sell” contract where the developer coming down quickly according to a Bloomberg New builds the entirety of the plant and hands over the Energy Finance report from May indicating that the keys while charging a margin on top of the costs. levelized cost of electricity for lithium-ion batteries The next most simple contract is a tolling agreement has fallen 35% since the first half of 2018. In a more where the developer continues to own and operate policy-driven twist, batteries may become eligible for the plant and charges a fixed $/kW-month rate to the investment tax credit (ITC), which could reduce the buyer. The buyer is responsible for scheduling initial capex costs by up to 30%. the actual charging and discharging. Other large costs include the purchase or lease of Lastly, the developer can own, operate and schedule land, the equipment needed to interconnect to the the cycling of the battery and charge a set $/MW grid, and the infrastructure such as foundations, cost for the energy that is cycled. The developer fencing and maintenance buildings. The biggest gains more secure revenue from the offtaker, and operating expenses are part replacement, balance of the buyer does not have the risk of scheduling, plant repairs and taxes. cycling and operating.

THE BUSINESS OF STANDALONE GRID-SCALE ENERGY STORAGE IN NORTHERN STATES 11 Putting it all together

Now it is possible to revisit the revenue figures This analysis is shown in Figure 3 below along with and other battery benefits in comparison with the quantifying what a 30% ITC or $5/MWh capacity outlined costs. Does energy arbitrage alone cover payment would generate in terms of net present capex and operating costs in any market? If not, value. how much would a battery storage system have to Other benefits discussed earlier, such as transmission earn from other payments to get a return on the upgrade deferral, have been increasing of late and investment? Simplistically, if you assumed in the could be valued in the tens of millions of dollars. earlier model that the initial capital expense of This analysis shows how the California market for the system was $300/kWh and operating expenses battery storage is farther ahead of some of the averaged $7/kW-year, you can solve for the other northern states. It will take multiple factors like ITC, benefits necessary to break even in terms of net capacity payments, reduction in technology costs present value in markets that fall short on energy and increased renewable penetration to strengthen arbitrage. the business case for storage in these parts of the country.

NET PRESENT VALUE

Line Item SP_15 MINN Hub Western Hub Revenue $182,044,795 $52,186,611 $70,108,293 Capital Costs $120,000,000 Operating Costs $39,463,045 “Other” necessary - $107,276,433 $89,354,751 payments NPV $22,581,750 $0 $0

30% ITC $36,000,000 $5/MW $7,993,674 Capacity Payment

Figure 3

THE BUSINESS OF STANDALONE GRID-SCALE ENERGY STORAGE IN NORTHERN STATES 12 In Conclusion

Batteries are a crucial technology to implement on a gird-scale size to help integrate renewables and increase their penetration across the whole country. They are seeing great success in California and southern parts of the country and are set to see rapid growth in the rest of the country.

We have seen that the energy arbitrage business case is well laid out in California because of high solar generation during the day and a load/generation flux in the late afternoon. This may take time to play out in the northern states, but as solar panels become cheaper, utilities fulfill their IRP and renewable portfolio standards and residents buy panels, solar penetration can get closer to California’s.

Batteries will make a good business case in these scenarios, and with improvement from policy, transmission and other monetary benefits, their necessity is well established.

THE BUSINESS OF STANDALONE GRID-SCALE ENERGY STORAGE IN NORTHERN STATES 13 References

Scrosati, Bruno (4 May 2011). “History of lithium batteries.” Journal of Solid State Electrochemistry. 15 (7-8): 1623-1630. doi:10.1007/s10008-011-1386-8.

SNL.com – Plant Summary

Pacificorp Draft IRP https://www.pacificorp.com/content/dam/pcorp/documents/en/pacificorp/energy/integrated-( resource-plan/2019-irp/2019-irp-presentations-and-schedule/PacifiCorp_2019_IRP_October_3-4_2019_Public_Input_ Meeting.pdf) https://www.utilitydive.com/news/first-battery-storage-project-begins-operating-in-miso/422505/ https://about.bnef.com/blog/battery-powers-latest-plunge-costs-threatens-coal-gas/ https://energystorage.org/wp/wp-content/uploads/2019/10/ESA-comments-MN-storage-study-workshop-1_FINAL.pdf

THE BUSINESS OF STANDALONE GRID-SCALE ENERGY STORAGE IN NORTHERN STATES 14 This piece was written by Erik Ejups, CFA, Origination Analyst, EDF Renewables.

Erik has been working with EDF Renewables since early 2019, using financial modeling, research and analysis to provide analytical support to source, negotiate and close structured power transactions with leading corporate and utility buyers of renewable energy products. In addition, he assists in developing the business’s energy market strategy and provides analytics that facilitate customer dialogue. Erik earned his BSE from the University of Michigan in Industrial and Operations Engineering with a minor in Mathematics. Before joining EDF, he worked in Chicago, trading quantitative equity option strategies for seven years.

ABOUT EDF RENEWABLES EDF Renewables North America is a market leading independent power producer and service provider with over 30 years of expertise in renewable energy. The Company delivers grid-scale power: wind (onshore and offshore), solar photovoltaic, and storage projects; distributed solutions: solar, solar+storage, EV charging and energy management; and asset optimization: technical, operational, and commercial skills to maximize performance of generating projects. EDF Renewables’ North American portfolio consists of 16 GW of developed projects and 10 GW under service contracts. EDF Renewables North America is a subsidiary of EDF Renewables, the dedicated renewable energy affiliate of the EDF Group.

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