How Aggregation Will Destroy Niche Markets for Smart Grid Energy Storage
Last week I introduced a new study titled "Energy Storage for the Electricity Grid: Benefits and Potential Market Assessment" that was commissioned by the DOE's Energy Storage Systems Program, identified seventeen discrete storage applications for the electricity grid, discussed the technical requirements of each application and summarized the potential economic benefits.
If the Yahoo! message boards are any indication, investors are already jumping to inaccurate and wildly optimistic conclusions because they don't understand that many storage applications are synergistic and every storage system purchaser will try to maximize the value of its investment by capturing as many value streams as possible. The process is called "aggregation" and while it will speed the implementation of storage on the smart-grid, it will ultimately destroy the high value niche markets for frequency regulation, short-duration wind integration, electric service reliability and similar ancillary services.
To truly understand the issues, investors need to stop looking at individual trees and focus instead on the forest.
One of the biggest challenges facing developers of grid-based energy storage systems is that electricity is cheap and abundant, and storage can be incredibly expensive. As a result, most of the grid-based applications identified in the new DOE study are not attractive as stand-alone value propositions. In the following table, the applications highlighted in blue make economic sense today as stand-alone value propositions. Conversely, the applications highlighted in yellow won't generally work unless a particular installation can capture and monetize several value streams. As utilities and other users begin installing significant storage capacity and aggregating value streams to maximize their returns, total system capacity will rapidly outrun demand for niche services, thereby eliminating the value premium. Over the long-term, the economics of grid-based storage will obey the laws of economic gravity. The only companies that will survive, much less thrive, are manufacturers of cheap, durable and dependable energy storage systems that can do the required work at the lowest cost.
A prime example of the prevailing "can't see the forest for the trees syndrome" is the wildly over-hyped idea that we can use plug-in vehicles to provide ancillary services while they're connected to a charging station. The silly values floating around for vehicle to grid, or V2G, services are all based on the theory that EV batteries can be used for frequency regulation and other high value ancillary services. While the theory sounds wonderful in the telling, the fundamental premise is fatally flawed and the promised benefits to plug-in vehicle owners will never be realized because they violate the law of supply and demand. The easiest way to demonstrate the point is with an example.
At last year's EESAT conference in Seattle, a representative of the PJM Interconnect estimated that total national demand for frequency regulation was on the order of 6,000 MW. Storage companies that are actively pursuing opportunities in frequency regulation include Beacon Power (BCON), Altair Nanotechnologies (ALTI) and A123 Systems (AONE). In general the battery companies that are working on fast response products claim their systems can provide two to four MW of frequency regulation service for each MWh of battery capacity. Beacon is claiming a 20-year life for its flywheel systems. Demonstration projects are currently under way to determine whether these performance claims will withstand the tests of time and intensive use. For purposes of this example I will assume that all systems perform up to expectations.
President Obama has established a policy goal of one million plug-in vehicles on the road by 2015. If that goal is reached and the average plug-in vehicle is equipped with 20 kWh of batteries, a figure that's mid-way between the GM Volt and the Nissan Leaf, then the total battery power available for V2G services will be roughly 20,000 MWh and the aggregate amount of frequency regulation those batteries could theoretically provide would be somewhere between 40,000 MW and 80,000 MW.
It doesn't take a PhD economist to know that if sellers try to force 40,000 to 80,000 MW of supply into a 6,000 MW national frequency regulation market, prices will collapse. Similar issues exist across the entire spectrum of grid storage applications.
In a 2007 "Guide to Estimating Benefits and Market Potential for Electricity Storage in New York" that was commissioned by the New York State Energy Research and Development Authority, Mr. Eyer and his colleagues identified and evaluated a number of potential synergies between different grid-based storage applications and concluded that users would need to carefully consider the potential value of the following complimentary uses when planning a new grid-based storage installation.
|Electric energy time shift||Transmission and distribution
(T&D) upgrade deferral;
Transmission congestion relief; Electric service reliability; Electric
service power quality; and Ancillary services.
||T&D upgrade deferral; Transmission support; Electric service reliability; Electric service power quality; and Electric supply reserve capacity.|
||Electric energy time shift; T&D upgrade deferral; Electric service reliability; Electric service power quality; Transmission support; and Ancillary services.|
|Transmission congestion relief||Electric energy time shift; T&D upgrade deferral; Electric service reliability; Electric service power quality; Transmission support; and Ancillary services.|
||Electric energy time shift; Transmission congestion relief; Electric service reliability; Electric service power quality; and Ancillary services.|
||Voltage support; Electric service reliability and Electric service power quality.|
and frequency response
|Electric service reliability||Electric service power quality
and Demand charge management.
|Electric service power quality||Electric service reliability and Demand charge management.|
|Demand charge management||Electric service reliability and Electric service power quality.|
||Generation capacity deferral; T&D upgrade deferral; Transmission congestion relief; Electric service reliability; Electric service power quality; and Ancillary services.|
||Electric service power quality;
Electric energy time shift; T&D upgrade deferral; and Transmission
The point of the foregoing is not to pick winners and losers in the emerging market for grid-based storage solutions. Rather my goal is to highlight the immense differences between demonstration projects that establish whether a particular storage device can meet the technical requirements of a specific application and a detailed cost-benefit analysis that establishes whether a particular storage system will be cost effective for a particular user. As the market unfolds, I expect many demonstration projects to be impressive technical successes. Most of those technical successes, however, will be dismal economic failures because the cost of the storage system will be far too high for widespread implementation by potential users. The utilities all understand they can't buy a service for dime, sell it for a nickel and make it up on volume.
In a July 2008 report on its Solar Energy Grid Integration Systems–Energy Storage (SEGIS-ES) program, Sandia National Laboratories provided a summary table of current and projected capital costs for grid-quality manufactured energy storage systems. While commenters often criticize this table for conflicting with more the optimistic numbers that appear in corporate presentations and the mainstream media, I tend to believe Government studies are more reliable than public relations.
When I compare the capital cost figures in the SEGIS-ES table with the economic benefit per kWh values that I derived from the new DOE report on grid-based storage applications, the only companies I see that are within reasonable striking distance of a 10-year product life and a capital cost that compares favorably with the economic values are:
- Enersys (ENS), a leading manufacturer of lead-acid batteries for commercial and industrial applications;
- C&D Technologies (CHP), a
leading manufacturer of lead-acid batteries for uninterruptible power
- Active Power (ACPW), an established manufacturer of flywheel-based uninterruptible power systems;
- ZBB Energy (ZBB), which is scaling up manufacturing of a zinc-bromine flow battery system; and
- Axion Power International (AXPW.OB), which is preparing to begin commercial production of its PbC line of asymmetric lead-carbon supercapacitors in cooperation with Exide Technologies (XIDE).
The grid-based energy storage sector is in its infancy and there is no reasonable way for an average investor to learn enough to pick individual stocks with any level of confidence. While I'm a stock picker when it comes to my personal holdings, I believe that a balanced portfolio of established and emerging energy storage companies is the only rational way for non-professionals to invest in the sector. Disproportionate investments in individual companies should be avoided unless you're prepared to do a whole lot of investigation and analysis.
Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its stock. He also has small long positions in Enersys (ENS), Exide Technologies (XIDE), C&D Technologies (CHP), ZBB Energy (ZBB) and Active Power (ACPW).