Maximizing Energy Storage System ROI in the Electric Grid

Why actionable price forecasts are key to maximizing ROI potential for ESS

This article describes energy storage trends, applications, challenges, and opportunities and explains the necessity of accurate actionable price forecasts to maximize Energy Storage System ROI potential in the electric grid. While the specific examples discussed focus on grid-scale battery storage, the takeaways apply equally to other ESS such as pumped hydro storage.

Electric power markets in the United States are undergoing significant structural changes, including a massive buildout of Energy Storage Systems. The market for renewable energy and technologies that support renewables is experiencing rapid growth. Drivers of this growth range from business opportunities to Environmental, Social, and Governance (ESG) aspirations and associated activities by companies. The costs of installing and operating large-scale battery storage systems in the US have fallen by 72% between 2015 and 2019 – a 27% annual rate of decline.[2] The convergence of all these factors contributes to the rapid expansion of battery ESS assets. By 2023 large-scale battery storage will contribute 10 Gigawatts to the grid. This represents a 10-fold capacity increase from 2019.[2]

Applications for ESS

As market participants deploy Energy Storage Systems, they have options for how to operate and monetize those assets. Applications for ESS include:

Ancillary Services

ESS can respond almost instantaneously, which has made them a natural fit for ancillary services – the adjustments needed to keep the electric grid operating. ESS operators can generate revenue by providing these services in the ancillary market.

Reserves – Reserve resources provide resiliency for power grids and are required to operate the grid effectively. They support generation by supplying energy should there be any peaks in demand or sudden disruption in supply. There are several types of reserve resources. Spinning reserves can react immediately, while non-spinning reserves take longer to come online. Most ESS can provide energy in the timeframe of spinning reserves.

Frequency Regulation and Frequency Response help stabilize the power grid by managing the real-time changes in the demand or supply balance of the power grid, which affect the frequency of AC power. In North America, excess generation causes the frequency to increase above 60 Hz. Insufficient generation causes it to drop below 60Hz. While small frequency shifts do not degrade reliability, large ones can damage equipment, degrade efficiency, or even lead to a system collapse. ESS can assist with frequency regulation and frequency response by rapidly charging and discharging to offset any real-time grid imbalances. Historically, frequency regulation has been one of the most lucrative ancillary services markets.

Voltage Support – Utilities manage the carrying capacity of the transmission and distribution system by maintaining the voltage level within a preset range. Swings in power use by customers impacts system voltage. Energy storage can provide voltage support by controlling the addition of energy and reactive power to offset those swings.

Energy Arbitrage

Energy arbitrage generates net revenue through the difference between the revenue received from energy sales (discharge) during peak hours and energy costs (charging) during off-peak periods.

Wholesale Arbitrage – ESS can be used to purchase low-cost, off-peak power and sell it during peak net load when its value is highest. To maximize ROI, an ESS must operate efficiently to cycle the maximum energy at times of the highest price differentials through the system.

Congestion Arbitrage – Congestion occurs when transmission capacity is insufficient to carry the energy needed to meet demand. Energy storage assets located downstream of the congestion point can discharge energy during congestion events to alleviate system strain and charge to replenish stored energy during other periods.

ESS Challenges for Owners and Operators

Modeling pricing for the electric grid to optimize assets is extremely challenging. This is even more true for storage assets. One must consider how to utilize the applications described in the previous section to optimize the ROI of storage assets. ESS (like battery storage or pumped hydro) are not standalone generation sources. Unlike other energy sources, they can supply and consume energy at various times of the day. They have cycles of charging and discharging and must purchase electricity to recover the energy they discharge. The associated cost and revenue stream combination for ESS makes it uniquely different from generation-only technologies and much more complex. As a result, many owners/operators of ESS assets find themselves unable to fully optimize the operation of those assets – despite their previous experience in the electric grid.

The ESS Opportunity & Business Case

Ancillary Services have dominated monetization efforts by ESS market participants to date. Energy Storage System investors should be wary of building investment cases based upon future ancillary service market value expectations. While ancillary prices remain relatively stable, increased ESS entries to the market imply a decline in capacity awards for any given ESS asset, which reduces margins. The outlook trend for long-term revenue from ancillary services for ESS is declining. As ancillary markets become saturated, wholesale arbitrage revenue will make up a larger proportion of ESS gross margins. In the case of batteries, gross margins will become dominated by wholesale arbitrage, rising from 20% in 2022 to representing 80% of annual value in 2031.[3] Wholesale arbitrage is where the long-term future opportunity lies for ESS.

Energy spot markets drive returns for ESS. For batteries, wholesale energy markets will account for more than 80% of gross margins over the life of an asset. Maximizing these margins requires a deep understanding of nodal prices to maximize arbitrage opportunities on the grid. Nodal prices, however, are exceptionally complex and driven by local and grid-wide conditions. Operators who can take advantage of wholesale energy markets will be the industry leaders.

The Path Forward – Accurate & Actionable Wholesale Price Forecasts

Accurately modeling wholesale electricity prices across the grid is beyond human capability. AI is needed, and yet, AI alone is not sufficient because of the dynamic nature of the grid. AI and machine learning work well for predictions based on historical data. Current weather and planned, or unplanned, grid topology changes make the forecasts from AI-only prediction solutions sub-optimal. Due to the dynamic nature of the electric grid, the only way to provide accurate and actionable predictions is to couple AI with physical modeling of the grid and scenario analysis. This combination harnesses the predictive power of AI to provide probabilistic price forecasts grounded in the current state of ever-changing physical grid topology and conditions. This hybrid approach provides actionable spot market visibility to drive an effective dispatch strategy and higher returns for ESS owners. Accurate price forecasts will also alleviate price risk for even the most basic strategy. The net result for ESS asset owners and operators is higher returns, lower risk, and a faster payback period for the ESS asset investment.

Conclusions

Energy Storage Systems is a fast-growing market full of opportunities, yet its complex nature can make capitalizing on that market potential a challenge. For those looking to maximize revenue streams and returns of their ESS assets, while minimizing risk, access to accurate price forecasts for wholesale energy markets is essential. It is the key to unlocking the ESS market opportunity for those who plan to become market leaders in the energy storage space: those who will dominate the grid of our future.

[1] Photo credit UniEnergy Technologies, CC BY-SA 4.0, via Wikimedia Commons

[2] US Department of Energy – US Energy Information Administration; Battery Storage in the United States: An Update on Market Trends; August 2021

[3] Aurora Energy Research; Merchant Batteries: Key Considerations for Investors and Lenders; February 2022