Part 2: Resisting Renewables — The Economics of Energy Storage
“Fossil fuels are required to… provide backup electricity when the wind isn’t blowing, and the sun isn’t shining.”
Although Ed Ireland is correct to argue here that renewable technology cannot produce power under certain circumstances, the maturation of Australia’s energy storage industry will support a move away from fossil fuel in the coming decades.
On one hand, as the Bloomberg NEF 2019 Battery Price Survey reveals, the price of batteries has fallen 87% since 2010, and is predicted to fall by another 50% before 2030.¹ These substantial decreases in price have brought both small and large-scale storage projects into the realm of economic viability, with Neoen’s Hornsdale Power Reserve (HPR) already proving to be a profitable venture. This reserve, built by Tesla after the company’s founder Elon Musk wagered he could build the facility in under 100 days, has made up for almost one third of its initial $90 million price tag in just one year of its 10–20 year life span.²
On the other hand, analysis from Wood Mackenzie Power & Renewables forewarns that substantial increases in energy storage capacity will be necessary for a renewable grid to remain a legitimate prospect.³ In the US mid-west, for example, an increase from the current 11 gigawatts of installed capacity to 278 gigawatts of regional energy storage is required, which vastly outpaces current storage projections.² Despite these challenges however, most experts remain confident that if the right path of development is taken in this emerging industry, energy storage will allow for a 100% renewable grid to become both technically and economically viable.³ As renewable energy continues to develop, the successful integration of reliable energy storage into the Australian energy grid remains a vital stabilising measure that demands legislative attention.
What’s holding back Australia’s energy storage industry?
In light of the increasing viability of battery storage technology, companies seeking to earn money from providing energy-related services can expect to do so in two main ways. Firstly, energy providers may engage in wholesale electricity price trading which involves buying electricity during cheap high-supply periods and then selling the same energy back to consumers during high-demand periods when the spot price of electricity has increased.⁴
Energy market participants may also bid to provide the Australian Energy Market Operator (AEMO) with ancillary network correction services by engaging in frequency control, network support and system restart services which help to stabilise grid frequency and offer additional power to the grid to jump-start generators in blacked-out regions.⁵ In exchange, energy providers can expect financial compensation, most notably through the frequency control ancillary services (FCAS) market. This can make up a substantial portion of an energy storage facility’s revenue.
In the case of Neoen’s project, a large portion of its revenue has been generated through the provision of ancillary services to AEMO. As Renew Economy reported, Neoen’s initial entry into the South Australian energy market has seen the company take a 55% share of all South Australian ancillary services by undercutting an existing cartel of competitors.⁶
Although this restoration of a competitive balance in the FCAS market has been a huge benefit to the South Australian Government who are estimated to have saved up to $30 million as a result of the HPR, the Australian Energy Market Commission (AEMC) remain concerned that a number of market failures continue to undermine the confidence of investors.⁷
The first of these market failures is the information asymmetry present in the national electricity market (NEM). Essential to fair market competition is the ability for firms, regulators and consumers to make consumption, investment and regulatory decisions based on basic information about the performance of the market. Information asymmetries not only prevent consumers from getting a good deal on their electricity prices, but also make it difficult for new investors to commit to energy storage projects when revenue and cost projections are made inaccurate by the current lack of data.
As the ACCC’s Retail Electricity Pricing Inquiry (REPI) revealed, problems for consumers arise “from the complexity of the market and the difficulties that consumers face in being able to easily and accurately compare the value of different electricity offers,” which hinders market efficiency.⁸ Although the REPI includes a number of recommendations for increasing market transparency, their 2019 report has since revealed that minimal progress has been made towards these objectives.⁹
Further evidence to suggest that the NEM is uncompetitive lies in the current lack of compensation for positive externalities produced by battery storage projects. Typically when power is transmitted up to 10% of all electricity is lost due to conductor heating and electrical resistance as it travels through the grid.¹⁰ These losses negatively impact the revenue of energy projects which incentivises producers to install loss factor-maximising on-site battery storage capacity. Whilst increasing project-specific loss factors benefits investors, consumers and the NEM, the loss factor improvements provided by one project have the unintended but positive impact of improving local network loss factors for projects in the surrounding area as well. Increasing local network loss factors thus creates a situation where pre-established energy market competitors can accrue revenue increases without contributing anything to the installation of battery storage capacity.¹¹ These uncompensated positive externalities point to a free-rider problem in the NEM which makes entry to the market a less attractive prospect than it would be if conditions were more competitive.
One final market failure undermining the competitive integrity of the NEM is the problem of public goods and its relation to FCAS market incentives. Theoretically, when Australia’s electricity grid becomes sufficiently unstable a variety of generators should bid to offer frequency control services to restabilise the grid for a market-determined fee.¹² After the grid is stable, the AEMO then penalises the owner of the unstable generator through “causer pays” charges which compensate the FCAS provider for stabilising the electricity grid.¹³ This stabilisation service benefits everyone and a well-regulated market ought to compensate those who provide it.
Unfortunately, what often happens instead is that owners of multiple generators allocate their less efficient units to frequency control duties whilst their more efficient units are allowed to run without any primary frequency control systems operating.¹⁴ Generating power in this way not only decreases overall network stability, but also prevents grid operators from tracing frequency disruptions back to those generators without frequency control mechanisms installed.
The result of this practice is that power providers are incentivised to increase network instability without penalty in order to maximise power generation revenue. These incentives are then reinforced by the FCAS market as power providers can subsequently capitalise on the increasingly unstable grid by offering frequency control services at the cost of taxpayers.
As a result, the blatant failures of the NEM provide large existing energy projects with a significant competitive advantage over newer power operations. These failings have already negatively impacted various renewable energy projects, as AEMO warned last year that the generation capacity of new wind and solar farms would need to be cut due to grid stability issues.¹⁵
Despite the demonstrable viability of renewable energy as a reliable power source, the technology will remain handicapped until the NEM can be regulated fairly. It is clear, however, that once competitive balance is restored to the NEM, fossil fuels will not be required to compensate for the low-production periods experienced by renewable power sources. Instead, a mature energy storage industry will provide stability to energy supply whilst keeping the NEM as green as possible.
[1] Veronika Henze, “Battery Pack Prices Fall As Market Ramps Up With Market Average At $156/kWh In 2019,” December 3, 2019. Accessed January 19, 2020. https://about.bnef.com/blog/battery-pack-prices-fall-as-market-ramps-up-with-market-average-at-156-kwh-in-2019/.
[2] Giles Parkinson, “Tesla big battery delivered a $22 million profit in 2018,” Renew Economy, May 14, 2019, accessed January 20, 2020, https://reneweconomy.com.au/tesla-big-battery-delivered-a-22-million-profit-in-2018-2018/.
[3] Dan Gearino, “100% Renewable Energy Needs Lots of Storage. This Polar Vortex Test Showed How Much,” Inside Climate News, February 20, 2019, accessed January 19, 2020, https://insideclimatenews.org/news/20022019/100-percent-renewable-energy-battery-storage-need-worst-case-polar-vortex-wind-solar.
[4] AEMO, Guide to Ancillary Services in the National Electricity Market, (Canberra: AEMO, 2015), 4.
[5] Ibid,.
[6] Sophie Vorrath & Giles Parkinson, “The stunning numbers behind the success of Tesla big battery,” Renew Economy, May 11, 2018, accessed January 20, 2020, https://reneweconomy.com.au/the-stunning-numbers-behind-success-of-tesla-big-battery-63917/.
[7] Ibid,.
[8] ACCC, Retail electricity pricing inquiry, (Canberra: ACCC, 2018), 150.
[9] ACCC, Inquiry into the national electricity market, (Canberra: ACCC, 2019), 30.
[10] AEMO, “Loss factors and regional boundaries,” accessed February 14, 2020. https://aemo.com.au/energy-systems/electricity/national-electricity-market-nem/market-operations/loss-factors-and-regional-boundaries.
[11] PwC, “Energy storage financing speed bumps and opportunities,” February, 2019. Accessed January 18, 2020.
[12] Bruce Miller, “FCAS Markets — how they impact power systems,” August 29, 2018. Accessed January 23, 2020. https://www.linkedin.com/pulse/fcas-markets-how-impact-power-systems-bruce-miller/.
[13] Ibid,.
[14] Ibid,.
[15] Natalie Filatoff, “Australia’s AEMO radically curtails output of five large solar farms,” PV Magazine, September 16, 2019, accessed January 23, 2020, https://www.pv-magazine.com/2019/09/16/australias-aemo-radically-curtails-output-of-five-large-solar-farms/.
