Understanding End-User Markets For Grid-Scale Energy Storage

by: John Petersen

Over the last couple years the topic of grid-scale energy storage has become increasingly important as market participants search for ways to integrate renewable power resources in the grid while delivering stable, reliable and cheap electric power at the flip of a switch. It's a massive challenge that gives rise to immense confusion among investors who are trying to understand the business opportunities and pick the specific companies that are likely to prosper as the trend toward grid-scale energy storage evolves and matures. The confusion is compounded by the fact that many resources investors tend to rely on for guidance use inconsistent terms, definitions, assumptions and performance metrics.

One of the biggest challenges for investors who want to understand grid-scale energy storage is understanding how market participants can improve their profitability by using grid-scale energy storage systems. As consumers of electricity, we tend to think of that market as having two key elements, the user side of the meter and the grid side of the meter. The reality is more complex because the grid side of the meter is broken down into several segments including conventional and alternative power producers, local utilities that provide retail distribution to commercial, industrial and residential users, and a wide variety of intermediaries including aggregators, wholesalers and transmission and distribution operators that must coordinate their respective efforts to keep the grid functioning smoothly as an integrated whole.

In February 2010, Sandia National Laboratories published an exhaustive study titled "Energy Storage for the Electricity Grid: Benefits and Market Potential Assessment Guide" that was one of the first comprehensive efforts to define the principal markets for grid-scale energy storage. It identified seventeen discrete applications, described key technical requirements for each application, estimated a range of economic benefits to the owners of systems dedicated to those applications and estimated potential national demand for application-specific energy storage systems in terms of both power capacity and economic benefit. For most investors, the detail was mind numbing.

In December 2010, the Electric Power Research Institute published a comparable study titled "Electricity Energy Storage Technology Options: A White Paper Primer on Applications, Costs and Benefits" that took a slightly different approach to identifying and valuing the principal markets. It identified twenty-one applications for grid-scale energy storage, described the key technical requirements for each application, estimated the range of economic benefits to the owners of systems dedicated to those applications and segregated the applications into user classes. Once again, the detail was mind numbing.

Both reports were extraordinary analytical accomplishments, but neither summarized the information investors need to understand about where the market is heading, how it's likely to evolve and where the investment opportunities lie. The following table is my attempt to combine demand model information from Sandia with pricing model information from EPRI. My effort is far from perfect, but I think it's accurate enough to give investors a reasonable overview of where the business opportunities lie.

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The most important take-aways from the table are that:

  1. Over half of the $164 billion in expected demand for grid-scale energy storage will be invested in behind the meter systems for commercial, industrial and other power users; and
  2. The most attractive economic returns are generally found in behind the meter applications, rather than distribution and transmission, system and ISO applications.

In my last article, I published the following table that I compiled from data in an April 2011 Sandia report titled "Energy Storage Systems Cost Update." The table summarizes the discounted present value of the 10-year total cost of ownership for grid-scale energy storage systems based on several generic technologies.

If you compare values of grid-scale energy storage in the EPRI report with the generic total cost of ownership estimates from Sandia, the biggest challenge of grid-scale energy storage becomes obvious. There are only a few cases where the value of a particular application exceeds the cost of an energy storage system to serve the need. When you move away from academic discounted present value analyses and focus instead on the three to five year payback expectations that are prevalent in the real world of commercial capital budgeting, poor economics get downright ugly. In most cases, grid-scale energy storage is not economic unless a user can find a way to combine or aggregate the value of several benefit streams.

Aggregation is very difficult in the distribution and transmission, system and ISO application space because energy storage facilities for those markets are usually purpose-built to perform a single function like frequency regulation or smoothing the minute-to-minute variability in power output from a wind farm. It is far easier in the end-user markets where a commercial or industrial concern that requires a high level of power quality, for example, can capture multiple value streams by using a single energy storage system to ensure power quality and reliability while generating savings from time of use and demand charge management.

Over the last couple years, the grid-scale energy storage systems that garnered the lion's share of the headlines have been purpose built facilities for the distribution and transmission, system and ISO markets. Frequency regulation systems from Beacon Power and Altair Nanotechnologies (ALTI), for example, were deployed for the sole purpose of providing 15 minute regulation in the ISO markets. It's a high value application, but a very small niche. Similarly, several systems from A123 Systems (AONE) were deployed for the sole purpose of smoothing minute-to-minute variability in wind farm power or providing utility substation support.

When you drill down to the bone of the grid-scale energy storage market, the lion's share of the anticipated value will be derived from behind the meter in systems that serve a single user. These are basically large-scale uninterruptible power supplies for factories, data centers, communications hubs, hospitals, airports and other installations that demand more power security and reliability than the grid can offer. Historically the market has been dominated by companies like Enersys (ENS) and Exide (XIDE) that have long histories in the conventional UPS business and emerging competitors like Active Power (ACPW) that focus on high value installations like data centers that demand nine nines of power reliability in all events.

Over the last few years the power markets have been changing rapidly as data processing and communications systems emerged that can facilitate the use of conventional UPS systems to aggregate value streams and improve the economic returns for system owners. When smarter power control systems are combined with emerging trends like demand response, an entirely new dynamic emerges that favors the installation of larger systems that can provide the power quality and reliability many users require, while helping users reap additional economic benefits from power cost management and even providing ancillary services to the grid.

Just before Thanksgiving, the PJM Interconnect announced that Enbala Power and Viridity Energy had launched novel projects to use behind the meter variable loads to provide frequency regulation services in the ISO market. The Enbala project uses big pumps in a water treatment plant to provide frequency regulation by changing pump speed in response to PJM's regulation signal. The Viridity Project uses a 500 kW PowerCube at Axion Power International (OTC:AXPW) to provide frequency regulation by shifting plant loads back and forth between the grid and the PowerCube in response to PJM's regulation signal. Enbala and Viridity both envision portfolios of flexible commercial loads that can be aggregated and operated as a virtual utility to instantly respond to changing supply and demand dynamics on the grid side of the meter.

In the rapidly evolving market for grid-scale energy storage, I'm convinced that behind the meter power reliability systems and aggressive aggregation of diverse benefit streams are the shape of things to come. As users that need uninterruptible power for all or part of their operations learn how to use their systems more efficiently to aggregate value streams, larger and more complex systems will become more common. As demand response service providers find new ways to deploy behind the meter systems as revenue generating assets for grid support services, the trend will accelerate. Over time, systems that are designed primarily for behind the meter applications may well become an important if not dominant source for the storage required on the grid side of the meter. The individual contracts probably won't be newsworthy, but the cumulative impact of a large numbers of small, distributed installations will almost certainly outweigh the impact of a few large installations.

Once again, it's the baby steps that matter and will eventually change the world.

I'm pleased that my old team at Axion Power partnered with Viridity Energy for the first behind the meter storage system that uses a large battery array to provide grid-side frequency regulation services for the PJM Interconnection, but I also understand that no battery manufacturer will have a lock, or for that matter a particular advantage, in behind the meter systems. It's an open opportunity for all manufacturers of grid-scale energy storage systems including Enersys, Exide, Active Power, Axion, A123 Systems and ZBB Energy (ZBB) to sell their respective products to a wider range of potential customers, and that's ultimately what business is all about – serving the customer's needs and making a buck in the process.

There is no way to know for sure who the industry leaders will be as the market for grid-scale energy storage systems evolves and matures. Mercifully, the universe of potential contenders is small and it's a safe bet that everybody who can introduce a cost-effective product to the market will make every reasonable effort to do exactly that. In my view, investors who want to position their portfolios today for a mega-trend that will evolve rapidly over the next five years should focus on companies that are selling economical products to business and industry, instead of specialty products for the grid side of the electric meter.

Disclosure: Author is a former director of Axion Power International and holds a substantial long position in its common stock.