ArrowHead Solutions – Energy Storage

ArrowHead Solution Helps Clients Understand the Impact of Energy Storage on Markets – Value and Profitability

Energy Storage Raises a Host of Questions and Opportunities

Interest in energy storage (i.e. electricity storage), both mandated and investor implemented, is becoming quite heated, and there are a number of reasons. Regulations and policies have led to increasing use of renewables, which do not provide acceptable reliability compared to more traditional generation sources. Short term energy storage is seen as a way to mitigate reliability issues emanating from intermittency. In addition there has been an advent of storage technologies (old and emerging methods of electrical storage are summarized below), and, as a result, the market and regulatory issues surrounding storage are now pivotal considerations in companies’ decisions. Energy storage fundamentally alters generation (just as gas storage fundamentally alters gas production), and thereby changes prices. Storage fundamentally alters transmission and distribution utilization, leading to problems such as stranded capacity or bypass. As much as any other technology in the electric system, storage holds the prospect of fundamentally altering the economics and reliability of power generation and consumption.

The crucial issue is not really the impact of markets and market prices on storage (i.e., whether a storage device would dispatch in the face of fixed prices) but rather the impact of storage on the market and market prices (which until ArrowHead has not been approached, calculated, or understood). ArrowHead knows exactly how to determine the impact of storage on temporal electricity market prices, quantities, and capacity additions. That is what decision makers want to know. The first problem (how and whether to dispatch storage) is actually quite trivial – buy when there is electricity supply the price is low and sell when there isn’t any supply and the price is high. The problem is that such a strategy fundamentally changes prices, both peak and off peak, and thus the decisions are dramatically more complicated. That is how ArrowHead can help – by accurately calculating prices considering these interrelated market dependencies and helping you understand the markets and your decisions.

There are many related issues that need to be considered and understood to make the right decisions, such as:

  • What impact does the increased use of energy storage have on:
    • Prices:
      • On-peak price, off-peak price, and price spreads between times of peak and off peak?
      • Price variability and volatility? Is the elevation of the off-peak price higher or lower than the depression in on-peak price?
    • Natural gas generation, capacity, and consumption? What about coal? Nuclear? Does storage increase or decrease: Gas burn? Coal burn? Nuclear generation? Installed generation capacity? Reserves? Reserve margin? Can storage substitute for reserves?
    • Power cost to ratepayers? Does storage increase or decrease rates? (Accounting not only for changes in electricity prices but also the operating costs and efficiency losses.
    • Environmental issues, such as AB 32 carbon capping and trading? Does energy storage help or hurt meeting environmental objectives?
  • Can energy storage positively impact the entry and operation of renewables? To what extent?
  • Does it matter where energy storage is built? Retail? Wholesale? Point of generation (as perhaps with wind)? Point of consumption? Somewhere in the middle of the system?
  • Are energy storage “reserves” needed as they are in natural gas where in colder climates regulators mandate storage reserves? Are such reserve mandates beneficial?
  • Will energy storage be built without subsidy or mandate? Is it competitive without them?
  • How sensitive will the implementation, operation, value, and profitability of storage be to: Injection losses? Capital cost? Operating cost? Serviceable life?
  • Does energy storage more efficiently utilize base load resources such as nuclear or coal?
  • Does energy storage change the load factor on any of your plants? If so, which ones? Lower or higher merit order plants?
  • Does storage represent an attractive, high rate of return investment for you?
  • What level of new energy storage will result in an “overbuilt” energy storage market?
  • Do multiple storage devices implemented at different levels of the electricity system compete with and nullify each other? Complement each other? Serve different market needs? Destroy price incentives for one another? Amplify price signals for one another?
  • Does storage exacerbate bypass threat against local electricity companies (LECs), reducing the aggregate capacity in place to meet a given level of demand and thereby exacerbating stranded cost risk? How might LECs measure, predict, and thwart stranded cost risk?

Previous Storage Analysis/Valuation

The storage models that have been used to date all take electricity price and price variation over time as a given and dispatch (meaning operate) the assumed storage unit. They do not take account of the crucially important fact that storage fundamentally and profoundly changes electricity price, and changes it a lot. They do not take account of the fact that multiple storage techniques with different natures actually compete with each other. Storage entry and operation fundamentally change price, both in absolute terms and temporally. In the absence of storage, electricity is a fundamental “just-in-time commodity,” replete with all the inherent instabilities and volatilities. If storage renders electricity less of a “just-in-time commodity,” assuredly its price volatility is bound to decrease. Average price levels – base, peak, average – all change in response. ArrowHead can measure and predict this.

The reality is that energy storage fundamentally alters wholesale and retail price. It alters generation and transmission patterns and their profitabilities. Once one realizes this fact, taking a survey of historical hourly power prices that might persist in a wholesale or retail market with storage facilities and inferring from that survey how the storage would operate and what its value would be is a waste of time. What is important for decision makers is quantifying and understanding how and to what degree energy storage alters price. As price is changed, the value of storage in place and any future storage that might prospectively be built is fundamentally altered. This has happened systematically in every other commodity that is stored (from gas and oil to alfalfa and soybeans), and it makes sense to expect that the same thing will happen with electricity, but more decisively so, and on a dramatically faster time cycle. Intraday prices can be substantially affected. From an economic perspective if an energy storage device buys at time of off peak, then that storage device elevates demand and therefore price at time of off peak. If that storage device sells at time of peak, then that energy storage device depresses demand and therefore price at time of peak. Storage elevates the off-peak price and depresses the on-peak price, driving them closer together, and thereby decreases the incentives for further storage entry. ArrowHead has the ability to model such interrelated market aspects at the hourly/daily level, enabling clients to truly understand the price-time changes that storage induces.

How Arrowhead Economics Can Help

ArrowHead Economics market experts can help you understand the issues and answer the questions listed above. They provide our clients a comprehensive and careful understanding of the effect of electrical storage on the market and simultaneously a comprehensive and careful understanding of the effect of the market on electrical storage. Companies cannot make decisions on energy storage and interrelated issues without such knowledge. How will varying implementations of energy storage affect your business? How will your business decisions affect energy storage? Storage is not a benign, passive player in electricity markets as all of the current storage models assume (with the exception of ArrowHead’s Models). Storage is a very proactive, price-influencing player, and we quantify for clients precisely how and why that happens and how that impacts the profitability and risk of every successive storage project in a region.

ArrowHead Models are unique in their ability to accurately represent market competitive and operational behavior under different potential conditions. They have been doing so for over 3 decades, and the models have been continuously improved over this time with a primary objective of more accurately representing the way markets behave under various conditions. ArrowHead models are able to represent all of the complexity of the markets (e.g. the fact that markets are interrelated and global, that there are many different market influences, such as regulatory actions and market contracts; and especially pertinent to this solution, an accurate representation of storage and the economic decisions involved in storage). For more detail on ArrowHead Models used in this solution please see Models.

The ArrowHead Storage Solution helps clients understand the questions and issues above. Our market experts use the ArrowHead Models to provide analysis customized to our client’s needs. Based on requirements we provide the analysis using factors of the client’s choosing, such as:

  • The specific region, e.g. North America, State of California, or RTO
  • Specific questions or issues they are trying to understand, such as those listed
  • Specific client-provided assumptions or data (true customization)
  • Specific combinations of storage technologies to be used

For more detail on this offering and its deliverables, please contact us.

A Unique Offering

This offering provides an integrated economic understanding of energy storage in real world electricity systems, a completely integrated representation from generation and inbound transmission through transmission and distribution to time-varying final use, with storage and intermittent renewables at every level. ArrowHead methods and models are differentiated by their ability to comprehensively and accurately represent future market behavior (prices, flowing quantities, capacity additions and retirements) under any combination of potential market events all the way from wholesale through distribution to retail and final consumption.

No comparable method or analysis exists or to our knowledge has ever been attempted commercially. Our team uniquely has the experience, expertise, technology, and knowledge to credibly accomplish this analysis. We bring unique perspective that melds keen and current knowledge of electricity pricing with the uncertainties and opportunities in storage. The use of our unique time-tested models, the efficiency of our market experts, and the low overhead approach of our company enables us to provide this offering for rates that are less than far less sophisticated, less comprehensive, and less accurate analyses from other sources.