TODAY’S STUDY: Making The Business Case For Energy Storage

Making Sense of New Public Power DER Business Models; The Business Case for Energy Storage

Peter Asmus and Mackinnon Lawrence, 2Q 2016 (Navigant Research/Sunverge Energy)

Executive Summary

Making Sense of New DER Business Models

Pessimists see growth in capacity from solar photovoltaic (PV) panels, advanced batteries, and other forms of distributed energy resources (DER) as the supreme threat to incumbent distribution utilities, echoing the much-ballyhooed utility death spiral storyline. A new report from the National Renewable Energy Laboratory (NREL) is fueling this fire. NREL has dramatically increased its estimate of the technical potential of rooftop solar PV in the United States to 1,118 GW, which represents the equivalent of 39% of current U.S. electricity sales.

Despite these large numbers, optimists see future growth in solar PV as an opportunity for utilities—especially publicly owned utilities—to reinvent themselves, aligning their business strategy with the emerging digital economy and creating new two-way and mutually beneficial relationships with customers.

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Where does the truth lie? The key to future success in this emerging market for smart DER solutions is aligning the right technology with the right business model. Maximizing the value of each asset deployed within a network hinges, in turn, upon a controls platform that can anticipate the future, react to changing grid conditions on a sub-second basis, and incorporate contingencies to ensure reliability and resilience. Energy storage technologies, if coupled with state-of-the-art software, can provide this array of services to various energy ecosystem stakeholders, including:

• At the site of a home or business

• At the poles and wires infrastructure that populate the distribution system

• At the high-voltage transmission system that underpins wholesale market trading It is possible to create win-win scenarios by leveraging the diverse services that energy storage can provide.

Advances in software that can optimize DER to provide bidirectional value, along with the bridging capabilities that energy storage brings to the market, can create order out of what would otherwise be chaos.

Why conduct a residential energy storage pilot project in 2016? A survey of 1,000 people conducted by Edelman Berland in late 2015 revealed that 3 in 5 respondents interviewed want their utilities to be innovative. Furthermore, the most popular response was this: “I want my utility to use technology to provide me with better service” (68%), followed by, “I care about ways that my utility innovates both inside my home and across the entire power grid” (63%).

This white paper highlights key advantages that public power entities have that are enabling select pioneers to push the innovation envelope in developing new creative relationships with customers if they embrace energy storage in an intelligent way. Public power entities—municipal utilities, rural cooperatives, and other forms—are uniquely positioned to harness the innovation now occurring specifically with solar PV and energy storage systems (ESSs), as well as complementary and supporting technologies that include smart inverters, demand response (DR) and, most important of all, software controls. These supporting IT infrastructures are creating opportunities for public power entities.

Is there a way for everyone to come out as winners? The key is intelligent distribution networks, an ecosystem of solutions that spans concepts such as nanogrids, microgrids, and virtual power plants (VPPs).

These three distribution network concepts correlate with major advances occurring with smart buildings and the smart grid (see Figure 1.1). A common analogy is the Internet, which organizations such as the EMerge Alliance have applied to emerging energy networks and dubbed the Enernet, noting the bidirectional exchanges now possible with new IT thanks to advances in telecommunications that have migrated over into the energy sector.

A growing number of cutting-edge DER innovators now offer asset performance software for managing assets and operations. Smart grid analytics are also now available as cloudbased software as a service (SaaS), the ultimate virtualization of energy services. Among these innovators is Sunverge Energy of San Francisco, California, which has deployed solar PV plus energy storage nanogrids that have been aggregated up into both microgrids and VPPs. The key enabling technology for all three of these new aggregation and optimization platforms (nanogrids, microgrids, and VPPs) is energy storage that is smart, scalable, and secure.

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Emerging Ecosystem Of DER Solutions

Drawing Lines between DER Distribution Network Models

Navigant Research has been sizing and forecasting aggregation and optimization platforms for distributed energy resources (DER) since 2009. It has come up with the following definitions of three approaches to organizing DER technologies so that they provide the most possible value. The most established of distribution network concepts is the microgrid. Borrowing largely from a U.S. Department of Energy (DOE) definition, here is the Navigant Research definition of a microgrid:

“A microgrid is a distribution network that incorporates a variety of possible DER that can be optimized and aggregated into a single system that can balance loads and generation with or without energy storage and is capable of islanding whether connected or not connected to a traditional utility power grid.”

There is much less consensus about what differentiates a nanogrid from a microgrid, or even a nanogrid from a relatively simple distributed generation (DG) installation. Here is the Navigant Research definition of a nanogrid:

“A small electrical domain connected to the grid of no greater than 100 kW and limited to a single building structure or primary load or a network of off-grid loads not exceeding 5 kW, both categories representing devices (such as DG, batteries, EVs [electric vehicles], and smart loads) capable of islanding and/or energy selfsufficiency through some level of intelligent DER management or controls.”

Last is the VPP. Closely related to both nanogrids and microgrids, here is the Navigant Research definition of a VPP:

“A system that relies upon software and a smart grid to remotely and automatically dispatch and optimize DER via an aggregation and optimization platform linking retail to wholesale markets.”

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VPPs can be viewed as one manifestation of the concept of transactive energy, transforming formerly passive consumers into active prosumers. In essence, prosumers are active participants in delivering services tailored to their own needs and preferences that also serve the larger grid. Another way to describe the VPP vision of the future is the Energy Cloud, a concept Navigant Research uses to describe how DER can be managed virtually via software that can deploy hardware in a dispersed network.

Perhaps the ideal illustration of the Energy Cloud and/or transactive energy is the VPP, which is the ultimate example of the Enernet. A VPP can tap existing grid networks to tailor electricity supply and demand services for a customer, distribution utility, or wholesale grid operator in real time. This is the DER business model that may hold the greatest promise for public utilities looking to reinvent themselves in the evolving DER landscape. Nevertheless, both nanogrids and microgrids can be viewed as building blocks for VPPs, with a primary focus on reliability and resilience. The VPP is more geared toward economic dispatch to serve the larger wholesale market, in essence linking DER previously ignored by the transmission system into viable sources of asset value beyond the site host.

VPPs maximize value for both the end user/asset owner and the distribution utility through software and IT innovations. They deliver greater value to the customer (e.g., lower costs and new revenue streams) while also creating benefits for the host distribution utility (e.g., avoidance of capital investments in grid infrastructure or peaking power plants), as well as the transmission grid operator (e.g., regulation ancillary services such as spinning reserves). As a result, VPPs deliver benefits to a broad array of energy market stakeholders.

However, both nanogrids and microgrids also offer value in the way of bidirectional exchanges. Due to the unique capabilities attached to energy storage devices when optimized by sophisticated software controls, the lines between all three of the DER business models described in this white paper are blurring. This convergence speaks to the transformative role of energy storage in the DER landscape. It also captures trends in the power delivery systems that Navigant has described as the Energy Cloud, which is depicted in Figure 2.1.

It would be foolhardy to think that past investments in a centralized power system will not be left stranded, even as large coal and nuclear plants are being phased out in key industrialized markets. At the same time, it is clear that a diversity of DER will play an increasing role in the energy future. While the complexity of such a system may seem daunting, the vital role for new forms of distribution networks becomes even more compelling. The Energy Cloud concept sees convergence between large and small energy resources, as well as renewable and fossil generation, with energy storage providing a bridging function that can also link retail to wholesale market optimization.

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DER Technology Trends And Cost Convergence

Distributed versus Centralized Power

Navigant Research estimates that between 2014 and 2023, different forms of DG will displace the need for more than 320 GW of new large-scale power plants globally.2 Navigant Research’s Global Distributed Generation Deployment Forecast report estimates that new DG capacity additions will exceed new centralized generation capacity additions by as early as 2018.

This significant shift in emphasis from centralized to distributed power will be led by technologies such as solar PV and energy storage. These trends are a direct result of the declining costs attached to both of these DER technologies. While government subsidies and incentives will continue to play a role, energy markets are evolving with a greater emphasis being placed on the monetization of the ancillary services that DER can provide to the larger grid network. Ironically enough, limits on policies such as net metering or feedin tariffs may actually build the business case for increased penetration of behind-themeter distributed energy storage technologies. If utility customers cannot fully leverage the storage capability of the larger utility grid, distributed energy storage applications look more attractive, especially as deployment costs come down in regions with high retail residential rates. Anticipating these changes in market conditions, utilities are seeking to reinvent themselves, placing a greater priority on services rather than the traditional focus on throughput of kilowatt-hours.

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Cost Curve Trends for Solar PV and Energy Storage

While solar PV costs have dropped relatively steeply since 2011, it has only been within the last year that energy storage costs have followed a similar downward trajectory. These cost trends are having the biggest near-term impact on the nanogrid market, but are also helping the business case for microgrids and setting the stage for future VPPs. Chart 3.2 shows three different scenarios for distributed solar PV systems sized at no more than 5 kW. Note that by 2025, the base case shows solar PV costs dropping to approximately $2,250/kW.

To make these generalized cost curves more tangible, consider the map in Figure 3.1, which shows the zip codes where solar PV will be at grid parity when the cost reductions guiding the DOE’s SunShot Initiative are reached (from approximately $3.50/W today to $1.50/W).

Solar PV technologies are not the only DER technology showing rapid declines in cost. Chart 3.3 comes from Navigant Research’s Energy Storage for Renewables Integration report published in 2015 and highlights the energy storage system (ESS) cost data underlying Navigant Research’s market forecasts. More recent cost data from commercial and industrial (C&I) applications show a much more pronounced cost decline.

The intermittency of solar PV has long been viewed as a drawback to its widespread deployment as a substitute for 24/7 fossil generation. The primary shortcoming of solar PV is its low capacity factors. Rooftop solar PV in particular can feature capacity factors as low as 20%. If such small systems—whose primary advantage for residential applications is providing financial benefits (offsetting expense peak grid power)—are coupled with energy storage, the value of solar energy is magnified. Energy can be stored and then discharged during times most advantageous to asset owner, be it the homeowner or local utility. These same storage systems can also offer resilience benefits when the larger grid goes down.

The Value Proposition for Li-Ion Batteries

Why have Li-ion batteries emerged as the lowest-cost option? The low density and high levels of reactivity of elemental lithium give Li-ion batteries very high, specific energy characteristics, making them the technology of choice for mobile devices and EVs. Li-ion batteries are also the leading technology for new stationary energy applications. This is largely because they are already available in mass production and further down the experience curve than many other newer technologies. Li-ion batteries have excellent energy and power densities, high roundtrip efficiency, and decent lifecycle expectations, making them well-suited for grid applications—particularly power-intensive ancillary services. However, stability and thermal runaway remain a significant concern. Li-ion systems require complex thermal management and safety systems. Additionally, compared to other leading battery materials, lithium is a less abundant resource and requires higher levels of processing.

How Big Is This Market?

Navigate Research has developed market forecasts for nanogrids, microgrids, and VPPs. However, the key common thread between all three of these distribution networks is energy storage in the form of batteries. Zeroing in on just the market for residential solar PV plus energy storage nanogrids in North America, the scale of forecast future growth is dramatic, expected to reach over 1.8 GW by 2025.

Navigant Research estimates that between 30% and 40% of these nanogrids will be aggregated into VPPs. That portion of the solar PV plus energy storage nanogrid market is likely to grow incrementally over the next 10 years and beyond. This will be the result of the creation of new organized markets for ancillary services and efforts by utilities and grid operators alike to manage increased DER portfolios in ways that capture value upstream.

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Public Power Case Studies…How Sunverge Helps Deliver Two-Way Value…

Conclusions

Utilities face increased demands to reduce the stress that DER installations can place on the grid. At the same time, consumer adoption of solar PV (and now energy storage) is driven largely by the promise of realizing bill savings by generating their own power or storing low-cost energy for use during peak times. These two forces might seem to be in opposition, but in reality, DER can deliver significant economic benefits on both sides of the meter—but only if managed properly. Doing so requires a dynamic approach that adjusts for the complex interaction of many factors of demand, storage capacity, and energy price. The energy arbitrage offering from Sunverge can accomplish this difficult task.

Public power entities are uniquely situated to leverage value from prosumer assets and foster innovation at the distribution network level. Their self-governing structure, scale, and lack of conflicts between shareholders and ratepayers create opportunities to explore new energy service delivery models. While all three distribution networks profiled in this white paper—nanogrids, microgrids and VPPs—deliver DER synergies, it is the VPP model that holds the most promise in terms of systemwide benefits. The key enabling technology to make these new emerging organizing structures reach their full potential is smart energy storage.

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