Will Gas Win For Bridging Power? Or Batteries And Demand Response To The Rescue?

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Includes: ABB, AES, BYDDY, DMLRY, ENGIY, ENGQF, EONGY, GE, LGCLF, ORCL, SIEGY, SSDIY, TOT, TSLA
by: Keith Williams
Summary

GE and APR Energy win bid for temporary provision of 276 MW gas/diesel backup power in South Australia.

Will demand management and batteries make the temporary diesel/gas supply redundant?

Implications for gas peaker backup for grids with high percentage of renewable power.

GE TM2500 gas/diesel mobile plant; Source: GE.

Sometimes it takes a crisis to address and resolve emerging problems. This seems to be the case in South Australia where a genuine crisis, which is also highly political, has the State Government under siege. Here I address the latest developments, which have relevance to the transition from centralized coal/nuclear/gas power to distributed and intermittent renewable energy. The conventional wisdom is that gas will provide the needed backup for intermittent solar PV and wind power. The South Australian example is starting to look like gas may be outcompeted by batteries and a variety of demand response proposals. This has implications for investors as to which technology to back.

The crisis which triggered the need for grid stabilization and back up power

South Australia has ~50% of its power generated by wind. In a country dominated by coal power generation, this adoption of renewable energy has attracted a lot of criticism. Last year a major storm destroyed a number of power pylons and the grid went down. Subsequent analysis showed that apart from some issues with settings on wind turbines (which were quickly remedied) the issues were not renewable energy-related and indeed gas generators paid to reboot the power system failed. Subsequently there was a major power outage in South Australia resulting from a gas utility keeping one of its generators offline to cause a price spike. With an anti-renewable energy Federal Government, the South Australian Government was under siege so it took matters into its own hands and devised a fast track solution to the power supply issues in the state. The solution needs to be in place by December of this year.

The South Australian Government solution had three components

Firstly a large scale (100MW/100MWh) battery storage system was required largely for grid stability. This was to be complemented by a 250 MW gas peaking plant and finally emergency backup generators. There has been some confusion over exactly what the South Australian Government was considering, as at one stage it seemed that it might be considering a hybrid battery plus gas turbine such as the GE (NYSE:GE) LM6000, which includes a 10 MW battery made by GE subsidiary Current combined with a GE 50 MW gas turbine. Five such units would have delivered 250 MW gas plus 50 MW battery storage.

Now it is becoming clearer what the South Australian Government plans to do. At this stage two technologies are being acquired. These are:

1) Large scale battery

First there was a tender for a large battery to assist grid stability. This gained international prominence when Elon Musk offered to install a large battery within 100 days of receiving a contract or Tesla (NASDAQ:TSLA) would provide the battery for free. Virtually all large scale battery manufacturers bid for this tender but Tesla and French wind power group Neoen were successful in proposing a 100 MW/129 MWh battery to be located at the 309 MW Hornsdale wind farm being constructed by Neoen. This makes for low cost integration of the battery with the grid. The battery provides some dispatchability to the wind power being generated, but mostly it is about stabilising the grid. The installation of the Tesla battery is planned for operation in December, so that this facility will be in action for the Australian summer. It is the biggest battery to be installed anywhere in the world.

2) Back-up gas/diesel powered mobile generators

The bid for a $A360 million gas backup facility was keenly contested with 31 proposals. This week's announcement is that GE's technology has won the gas tender to supply back up generators, but it is a little more complicated than a straightforward gas peaking plant, possibly because of some history with gas supply in South Australia. The winning mobile GE TM2500 can use either diesel or gas as the fuel source. Privately held APR Energy won the tender to deliver the GE mobile plants.

Like the large battery delivery, APR Energy will deliver the mobile backup generators by Dec. 1, for use in the upcoming Australian summer. The nine 30 MW TM2500 units will be connected to the South Australian Grid at two sites at the Edinburgh and Lonsdale substations. South Australian Premier Jay Weatherill indicates that the mobile units will deliver up to 276 MW of power while emitting less carbon pollution than the Torrens Island Power Station, a gas powered facility near Adelaide. This is possible because the multiple units offer a lot of flexibility in power delivery by controlling how many get switched on. The units are quick to install and can ramp up to full power within minutes. This solution offers more power (276 MW) than the originally planned 250 MW.

The above solution covers what had been expected to be two different initial requirements, i.e. for a gas peaking plant and for emergency backup generators. It seems that for the first two summer seasons the plants will be run on diesel rather than gas. They will be switched on only when needed.

3) Batteries and demand response to replace the backup gas/diesel generators?

There is a twist to the backup diesel/gas generator systems described above. I've wondered if this facility could become a stranded asset quite quickly and it seems that the South Australian Government may have had the same view, because the Government has not purchased the GE TM2500 units, but instead entered into short-term contracts with APR Energy. There is an option to enter into a long-term contract, but this is not locked in. The reason for this lack of commitment makes sense in the light of evidence for substantial demand management options to complement the large scale battery installation.

The Australian Energy Market Operator (AEMO) asked for expressions of interest in demand management and it received 90 responses. AEMO stated:

We had a fantastic response from the market … a combined total of 693MW of demand response (excluding diesel) could be delivered by December 1 this year and a 'whopping' 1,938MW (also excluding diesel) by Dec. 1 next year.

The distribution of responses was 33% residential, 30% industrial and 20% commercial. A variety of technologies were covered by these responses, including industrial load containment (pumps, motors, etc.), batteries, distributed generation and residential appliances. The proposals came from groups who have control of the above sources, including energy retailers, networks, technology vendors, specialist aggregators, local councils and large energy users.

The focus of these initiatives is to stop building more capacity for very short periods of power shortfall, but instead to manage the power in these critical periods. If it sounds simple, it is because in today's world it is and there are lots of commercial operators getting ready to participate. Finally, to provide dispatchable energy with a longer time frame than batteries, there are several other projects, including a solar thermal facility. A recent study suggests an abundance of pumped hydro sites in South Australia, with 185 identified as potentially suitable.

Take-home message for investors

The above shows just how quickly things are changing in relation to managing stability and backup for intermittent, distributed renewable power. There are several take home messages:

1) Batteries are a clear winner

The challenge is to decide which companies to invest in. There are a number of options including the obvious South Korean (e.g., LG Chem (OTC:OTCPK:LGCLF), Samsung SDI (OTC:OTC:SSDIY), Japanese (e.g., Panasonic OTCPK: PCRFY), U.S. (Tesla, AES Corporation (NYSE:AES)), European (e.g., Siemens (OTCPK:OTCPK:SIEGY), Daimler (OTCPK:OTCPK:DMLRY), Sonnen GmbH) and Chinese (e.g., BYD (OTCPK:OTCPK:BYDDY)) companies. Note that Siemens and AES have joined forces to create Fluence, as a global energy storage company; this transaction will close in Q4 2017. This could become a significant presence in the energy storage space.

2) Demand Management

Managing power on the grid is an obvious interest for large infrastructure and engineering companies such as ABB (NYSE:ABB), GE and Siemens. Software providers such as Oracle (NYSE:ORCL) are also seeking to find a niche. It is worth paying attention to what these big companies are doing in this space. I've written previously about Total Energy Ventures (NTSE:TOT) and E.ON (OTCPK:OTCPK:EONGY) investee company AutoGrid. AutoGrid is one of a number of young companies that are software-based. They build virtual power plants to manage excess power and power from companies willing to forgo power use in return for payment. The list of AutoGrid's clients is a "who's who" of the U.S. energy system. The question that the recent South Australian actions raises is whether gas will have a future in the light of batteries and demand management getting into their stride. Time will tell, but we don't have long to wait.

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Author Update, August 4, 2017:

South Australia isn’t standing still on renewable energy

In news just in renewable energy powerhouses GE and ENGIE (OTCPK:OTCPK:ENGIY)(OTC:OTCPK:ENGQF) have announced plans to build a 119 MW wind farm in South Australia, which will power the equivalent of 80,000 homes. The new Willogoleche Wind farm will comprise 32 GE wind turbines (twenty-four, 3.8MW systems and eight, 3.4MW turbines). This indicates that two of the biggest players in the energy transition have confidence that South Australia can cope with renewable energy providing substantially more than 50% of the State’s energy needs, and also that the companies are comfortable with the South Australian Government plans to manage the intermittency of the wind power.

Senior representatives of both companies are enthusiastic about working together to grow the Australian renewable energy industry.

ENGIE Australia CEO Matt Donaldson said:

“This is a key project for ENGIE as it tackles the major challenges in the energy transition and moves us towards a decarbonised, decentralised and digitised energy system. It’s great to be working with GE, a company with a similar mindset where digital is at the heart of everything it does. This ensures solutions are future-proofed and our customers enjoy world-leading technology that meets their energy needs.”

Jérôme Pécresse, President & CEO of GE Renewable Energy, said :

“This is an incredibly important region for GE globally, and we are committed to supporting Australia achieve its renewable energy goals while maintaining reliable and affordable electricity supplies to businesses and households across the country. It’s excellent to have the opportunity to partner with ENGIE in Australia as it looks to bring more renewable projects online in the country.”

The GE/ENGIE wind farm is not the only substantial renewable energy project announced in South Australia recently. Another 212 MW wind farm (Lincoln Gap) is being developed. And construction has commenced on a huge 300 MW solar farm in South Australia. Two major European investors (Italy’s Enel Green Energy and the Dutch Infrastructure Fund) are purchasing this asset. Battery storage will be a feature of this facility.

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Conclusion

While I've focused on an Australian story here, this is relevant to investors interested in participating in the energy transitions from centralized to distributed intermittent power. Most commentators see gas as the bridge fuel for the transition and this has been the case so far in the US. I think that batteries and demand management are rapidly emerging as competing solutions for managing energy intermittency. These shifts need to be considered when deciding on investment strategies. There are a number of battery manufacturers indicated above who will benefit from this emerging market. Demand management is a less well defined business opportunity, although the elements needed are becoming clear. Companies like GE, ABB, Siemens and Oracle are cashed up early participants, while there are a number of innovative and agile companies that may be heading for market listing in this space.

I am not a financial advisor and suggest you either consider carefully the many aspects to investment in energy in these changing times, or discuss this with your financial advisor. If my commentary helps shape your thoughts, please consider following me.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

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