Electricity price volatility: Does storage bring the end of it?
Won’t storage just eliminate price volatility in electricity markets?
This question gets bounced around a good bit – and the short answer is “Nope.” While it should help buffer peaks and troughs in pricing, unless we get to nearly cost-free abundant storage and generation, volatility in electricity prices is inevitable.
For the long answer, let’s start with what causes price volatility in the first place. In many ways, it’s basic supply, demand economics. Our electricity demand varies over the course of the day – when demand is low, we can use the lowest cost options to meet it, but when it is high, we have to resort to more expensive generation options.
Renewables can add to the price variations: with effectively zero marginal cost, renewables are the lowest cost energy source available. Renewables will meet as much load as possible, leaving the remainder, or net load, to be supplied by more expensive generation options. As renewable penetration grows, it’s not just load variation that causes price fluctuations, but wind, solar, and load combined. This can lead to even more dynamic price variations – if wind dies off in the morning before the sun is up but as load is rising, the rate of growth in net load exceeds the baseline load growth as it is exacerbated by falling wind. Addressing the rapid change in net load requires the most expensive peaker plants to ramp up generation, causing a price spike.
Storage can help modulate these dynamics by following the basic tenant of capturing price variations: buy low, sell high. If prices fall too low, batteries will start consuming power – increasing net load and reducing price troughs. If prices rise too high, batteries will start dispatching power back into the grid – reducing the price spikes. However, the economics of this model requires there to be a variability in price for batteries to make money. The difference between trough and peak price necessary to make battery economics work depends both on costs – capacity, operations, and maintenance – as well as the frequency and duration of price swings.
These key factors will help determine extent to which storage buffers price volatility. While short duration price spikes could be reduced, as the duration of the high prices increases, it becomes questionable as to whether there will be enough energy capacity to fully ride out the spike. To fully cap volatility of prices on the grid, we would need to have enough energy capacity to be prepared for the longest duration price spikes.
Winter Storm Uri from Feb 2021 provides an extreme case study of a long-duration price spike. Over a 3-4 day period, insufficient generation led to rolling blackouts and high prices. On average over that time, about 10 GWs of load went unmet. Given there were no price reprieves at which storage assets could have recharged during the event, you would have needed enough energy storage capacity to have completely filled the gap and helped alleviate the high prices. This would have required roughly 800 GWh of energy capacity.
To put that number in context, at the end of 2021 there was only 56 GWh of battery storage globally – not even 1/10th of what you would need in Texas alone to alleviate the high prices during Uri. Even with rapid growth of storage forecasted and buoyed by the Inflation Reduction Act, global storage capacity is expected to grow to 1,194 GWh by 2030*. Storage could dull the volatility of extreme events like Uri – but only if we built all of it in Texas over the next 7 years.
This also assumes you had perfect foresight, knew Uri was coming, and all storage assets went into the event completely charged. Forecast errors and imperfect dispatch will mitigate storage’s ability to capture variability.
Because storage relies on price variability for revenue, it is impossible for it to fully alleviate price fluctuations. If we somehow build out so much storage that variability disappears, we’ll have a lot of uneconomic assets that will go bankrupt. If there aren’t new kinds of revenue streams to prop these projects up, storage projects would shut down until there was enough volatility in the markets to make the remaining ones economic again.
Variability will still exist. Forecasting will be essential to ensuring project economics are viable – you need to be prepared to capture the peaks when they come.
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