Gas Peakers Vs. Storage Batteries: End Of Natural Gas Is Near? Part 3

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Includes: ABB, AES, LGCLF, TSLA
by: Siddharth Dalal

Summary

I continue my series on renewable energy in electricity generation with a look at storage batteries.

I look at the economics of battery storage compared to gas peaker plants.

I look at the advantages of battery storage vs. peakers.

What companies are poised to benefit from this?

This is part 3 on my series on renewables in electricity production.

In my first article, I discussed the growth of renewables compared to natural gas in the US. Thanks to the overwhelming response in the comments, I decided to turn this into a series.

In the second part of the series, I looked at utility scale solar vs. the cost of natural gas generation. One thing I did not mention in the article is that utility scale solar PPA pricing is guaranteed for 20 years, while natural gas is likely to rise from the record lows it is at now.

In this article I will talk about the economics of storage batteries. Once again, credit for some of the math goes to Seeking Alpha user J* H* M*.

Gas Peaker Costs

Here are the capacity factors for various electricity generation sources:

graph of monthly capacity factors for select fuels and technologies, as explained in the article text

Source: EIA

Note the less than 10% capacity factor of natural gas combustion turbines. These are much less efficient than combined cycle plants but cheaper to build and used mainly to provide power during peaks.

The cost to build an advanced combustion turbine plant is $671/kW. Let's take a 200MW plant as an example. The cost to build is $134 million. According to the EIA, the plant has fixed O&M of $7.04/kW/year, giving us $1.4 million. Assuming a 5% capacity factor, the plant produces 87,600MWh per year. Using the numbers from my previous article we have fuel costs of $3.15 million.

Assuming the life of the gas plant to be 20 years and assuming no rise in natural gas prices to keep things simple, we have total cost of $225 million over 20 years.

Battery Costs

Tesla (NASDAQ:TSLA) announced their grid storage battery at a price of $250/kWh. On average, our gas plant is used 1.2 hours/day. Let's take a peak usage of 50% more than that of 1.8 hours/day. Also let's assume a worst case scenario where all the peak hours are continuous and at a time when solar panels are not producing. That would require 360MWh of batteries. Let's add another $100/kWh for installation. That gives us $126 million to build our battery plant.

Now if we pair these batteries with our 4c/kWh solar PPA and assume the same annual usage as a gas peaker we get fuel costs of $3.5 million. Batteries need minimal maintenance but let's assume quarter the maintenance costs of a gas turbine to be conservative and we get $0.35 million/year.

Let's assume the worst case scenario that all the batteries need to be replaced after 10 years and that the cost of replacement is a conservative $250/kWh, we have $50 million in replacement costs.

That brings our total costs of a storage battery plant over 20 years to $253 million.

So with best case assumptions for NG (record lows last forever) and worst case for batteries (more than needed, all need replacing in 10 years, high maintenance and insignificant drop in pricing in a decade) batteries look only slightly worse.

It will only take a 50% rise in natural gas to make the natural gas peaker look worse. And we haven't even started looking at what else batteries can do.

These are my numbers. Here is a recent analysis by Lazard about levelized cost of energy from storage.

Battery Advantages

1. Soak up excess power: Fossil fuel plants cannot be turned on and off instantaneously and wind and solar power production is intermittent. Often power is wasted if there is not enough load on the grid. When there is too much excess power on the grid, wholesale power prices go to zero, or even negative. Batteries can soak up this excess power instead of it being wasted.

2. Distributable with instantaneous response: Unlike power plants, batteries can be installed anywhere from residential basements to commercial buildings to neighborhoods to utility scale. The output from all these batteries can be aggregated to provide power to the grid anytime and the batteries can respond instantaneously.

3. Can make renewables dispatchable: Solar and wind in combination with batteries can be dispatchable. The same batteries that provide power during peaks can also be used otherwise to make renewables dispatchable. Clark Kent by day, Superman by night.

4. Lower environmental impact: Let's take our 200MW battery powered by solar PPA example above. Over 10 years the battery would displace 1 billion cubic ft. of natural gas from peaker replacement duties alone.

Taking everything together, it is a no brainer to avoid building any peaker plants if possible until global battery production ramps enough to be able to build out storage replacements for peakers.

Companies that benefit

The more batteries are added to the grid, the higher the renewable penetration possible. So all the renewable energy companies mentioned in my previous articles are benefactors of more battery storage.

Tesla currently has plans to make 15GWh of storage batteries by 2020. LG Chemical (OTC:LGCLF) is supplying 1GWh of batteries to AES (NYSE:AES), which is one of the largest grid storage installers. ABB (NYSE:ABB) is another global leader in storage. Here is a list of 43 companies involved in energy storage. Grid storage batteries are a nascent business expected to grow exponentially as the world transitions to renewables. More on the global renewable growth trend in my next article and what it would take to go 100% renewable.

Disclosure: I am/we are long TSLA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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