Why Energy Storage is Cost-Effective and in Need of a Clear Market Signal

By Janice Lin, Co-founder and Executive Director, and Alex Ghenis, Senior Analyst, California Energy Storage Alliance

California's electricity system has reached a transforming regulatory milestone. On September 3, Commissioner Carla Peterman of the California Public Utilities Commission (CPUC) authored a proposed decision ordering a 1.325 GW utility energy storage procurement target for California's electric grid by 2020, if viable and cost-effective. The CPUC is expected to decide on a final number for the target in the coming months.

But many view the “cost-effectiveness” part of the equation with curiosity: "If cost-effectiveness is a requirement," they ask, "why are procurement targets necessary?" It's a sensible question - and the CPUC’s conclusions show that specific targets are key to getting much-needed storage solutions onto the grid.

What is energy storage?

Energy storage does exactly what the name suggests: it takes energy and stores it for use at a later time. This can be accomplished many ways: chemically (e.g. batteries), gravitationally (e.g. pumped hydro), mechanically (e.g. flywheels) and thermally (e.g. molten salt).  On the electric grid, where supply must always equal demand, this enables more efficient utilization of existing system assets - whether it's by avoiding expensive transmission and distribution upgrades or substituting for the least efficient and most polluting “peaker” power plants. Energy storage is also a very diverse asset class, so it has many benefits that can address a variety of needs and locations across the grid.

As compared to many status quo grid solutions, energy storage demonstrates superior performance and system benefits. For example, while a state-of-the-art gas turbine can take 10 minutes to "ramp" to full power, many energy storage technologies can do so in under one second. In a system where supply must precisely equal demand, this flexibility and accuracy is extremely valuable. Whether it is substituting for less-efficient “peaker” plants, smoothing renewables’ output, integrating micro-grids, increasing efficiency of conventional generation, or alleviating local transmission/distribution congestion, energy storage enables greater system efficiency across the entire grid in a way that no other energy resource does.

Industry and government leaders are now recognizing the true value of these many benefits. New system models are showing that energy storage is cost-effective when its full range of services and benefits are fairly accounted for. The reason for this is that energy storage can deliver multiple services from one resource (e.g. reducing peak demand and providing frequency regulation). It is also recognized as a necessary part of the grid of the future: with more intermittent renewables, increasingly scarce and expensive fossil fuels, and system goals including emissions reductions and greater efficiency, energy storage is needed system-wide.

If energy storage is cost-effective, why are targets necessary?

AB 2514, California's law directing the CPUC to consider establishing procurement targets, directs the CPUC to “open a proceeding to determine appropriate targets, if any, for each load-serving entity to procure viable and cost-effective energy storage systems” for 2020. A comparable framework is required for publicly owned utilities. The cost-effectiveness requirement is appropriate because it ensures no incremental cost for ratepayers - but establishing targets is still crucial. Here are a few reasons why targets are necessary.

First and foremost, utility procurement targets will motivate utilities to embrace fundamental system change. This is necessary, as we need a comprehensive transformation of the electric power system, from public policy to markets to infrastructure. But energy storage has never been part of the core “toolkit” of load serving entities and other stakeholders. As a result, there are barriers to bringing energy storage resources online – including the inability to have ALL the benefits provided by an energy storage asset fairly accounted for in system planning and procurement. A procurement target will help overcome status quo inertia and more quickly bring about the change we need: a more efficient electric power system.

The importance of procurement targets is demonstrated by California’s renewables portfolio standard (RPS) adopted in 2004. With the RPS, load serving entities are directed to procure increasing levels of renewable energy over time. Renewable generation capacity in California increased by 77 percent from 2004-2011, compared to 33 percent from 1996-2003. In 2011, California generated almost 12 percent of all energy needs from renewable sources, and is on track to achieve the targeted 33 percent RPS by 2020. The California RPS is achieving its goals, and an energy storage target will do the same. Better yet, energy storage resources procured as a result of Commissioner Peterman’s proposed target must be cost-effective by law, so there will be no additional burden on ratepayers.

Installation targets (not just procurement targets) also provide a much-needed market signal to energy storage manufacturers, developers, installers and investors. This clear market signal is needed to justify vital investment in technology development and deployment, including many locally-sourced high skill jobs. With a constantly-evolving technology class such as energy storage, widespread investment is key to increasing cost-effectiveness, performance, deployment, and related grid benefits. Investments and related societal benefits occur throughout the value chain - in design, manufacturing, installation, commissioning, and maintenance.

Policies impacting energy storage abound - and procurement/installation targets will help focus them for the greatest societal benefit. With concrete targets, government agencies and utilities statewide will appropriately prioritize energy storage as part of their core toolkit for electric system planning and procurement. Cost-effectiveness evaluation and procurement processes will become standardized, installation and interconnection policies will become refined, and appropriate contracting mechanisms will be developed. Targets encourage focus – a prerequisite for any new market development.

In the case of energy storage, this market development is timely -- to help address California’s major near- and long-term grid challenges, including, for example, once-through-cooling plant retirements and permanent closure of the San Onofre Nuclear Generating Station. Energy storage will help bring more renewable energy resources online, reduce pollution, increase system efficiency and reliability, and decrease costs for ratepayers. Because any new energy storage added to the system must be cost-effective by law, everybody wins. For this reason, we applaud Commissioner Peterman’s vision - and encourage all stakeholders to consider her proposed target as a floor, rather than a ceiling.

[image credit: PNNL - Pacific Northwest National Laboratory: Flickr cc]