New U.S. DOE White Paper: Compensation Mechanisms for Long- Duration Energy Storage
October 17, 2022 -- This is the Executive Summary of the recently published white paper, Compensation Mechanisms for Long-Duration Energy Storage (August 2022, U.S. Department of Energy)
Rapidly changing power system conditions, driven by decarbonization goals, are leading to significant growth in renewable energy sources, which can be both variable and uncertain. This has been accompanied with increased reliance on and rapid growth in deployment of energy storage technologies. Currently, approximately 90% of installed, utility-scale energy storage capacity in the United States comes from pumped storage hydropower (PSH). However, development of new PSH has been limited and all recent growth in energy storage has come from batteries, , especially as technology costs have decreased over the years. Most of the current deployment still remains in the form of short-duration (<6 hours) energy storage technologies; the average duration of new storage was 3.7 hours for projects deployed in the first half of 2021 (Wood Mackenzie and Energy Storage Association 2021).
There is growing recognition that longer duration energy storage technologies (more than 6 hours of storage capacity) will be needed in the future to ensure grid operational reliability and resilience (NREL 2022). These needs will be driven by a combination of factors: 1) extreme weather events; 2) decommissioning of conventional generation resources; and 3) increased electrical load from transportation and other sectors. However, the current regulatory, policy, and market-driven compensation and business models are not well suited for incentivizing development of new long- duration energy storage (LDES) assets. For example, the most recent major pumped storage project, arguably the most mature LDES technology, was installed in the U.S. in 1995. There are three projects that have passed the Federal Energy Regulatory Commission (FERC) licensing process, but are not yet built: the Eagle Mountain Pumped Storage facility in California, the Swan Lake North Pumped Storage Facility in Oregon, and the Gordon Butte Pumped Storage facility in Montana (FERC 2022).The reasons range from lack of off-taker agreements, and financing options. There are another three projects in final licensing, and 70 more in various stages of the FERC licensing process. All are likely to face similar challenges (Greenhalgh 2021) to get built.
In this white paper, we use descriptive statistics characterizing extended periods of renewable energy unavailability—wind and solar “droughts”—as potential indicators for requirement of LDES. We then present a review of emerging compensation and business models from around the world, drawing insights for the United States in terms of regulatory, policy, and market design implications. The key findings are as follows:
1. The growing incidences of extended periods of renewable generation unavailability, expected or unexpected, can be a potential indicator for the requirement of LDES technologies. It should be noted, however, that the additional generation, coupled with short-duration storage and transmission, can serve as potential alternatives to LDES, and the trade-offs between these options will need to be considered.
2. The current, market-based business case for LDES is primarily prevailing arbitrage opportunities, i.e., price spreads between peak and off-peak periods. Evidence from U.S. and outside markets suggests that price spreads are shrinking, resulting in reduced revenue opportunities. Further, arbitrage opportunities are presently based on intraday price spreads, and hence do not incentivize energy to be stored beyond a day because of the lack of long-term price signals (i.e., beyond a 24- hour period). Therefore, current market-based incentive signals may not provide adequate investment incentives in the future.
3. In recognition of future needs for LDES, regulatory and policy changes are being introduced in different parts of the United States:
– In 2020, the California Public Utilities Commission released a decision on long-term planning frameworks that identified a minimum 1 GW of LDES needed by 2026 to maintain reliability. Stakeholder studies as part of the commission’s analysis suggest that longer term, up to 55 GW of LDES (10 hours and longer), will be needed by 2045.
– PJM, in its compliance filing for Federal Energy Regulatory Commission Order 841, indicated that energy storage assets participating in capacity markets would have to have at least 10 hours of duration to receive full credit (PJM Interconnection 2021).
4. There are potential lessons to be learned from capacity market design changes in other countries. For instance, Colombia's Energy and Gas Regulatory Commission, driven by weather-related energy supply shortfalls, changed its generation expansion market from one based on installed capacity (capacity market) to one based on available energy (firm energy) over periods of times.
– Reliability Charge Colombia provides incentives to ensure energy adequacy; assuring the energy supply even during periods of drought, by making sure adequate generation is procured ahead of time. This mechanism guarantees that power plants can supply the demand for extended periods, even during peak hours, through a mechanism based on penalties.
– Capacity market and resource adequacy constructs in the United States are presently designed to ensure that sufficient generation capacity is available to meet power demands during peak hours. However, as we encounter greater incidences of energy deficits, i.e., generation nonavailability over extended periods of time, then the U.S. markets will need to consider changes to capacity market designs that function to ensure energy sufficiency.
5. New forms of compensation mechanisms are emerging around the world, mostly backed by long-term revenue guarantees through regulated returns, long-term power purchase agreements, etc. New agreement structures include multipart payment schemes based on capacity availability, energy delivery, and performance. Such structures help off-takers to hedge against market, technology, and renewable energy generation risks, while providing revenue guarantees and sufficiency (contingent on meeting performance requirements) to the project developers.
6. New business models, such as the storage-as-a-service model, are also being discussed. These models offer a paradigm change via the introduction of a new energy storage asset class, which will require compensation for storing energy rather than generating energy. These models can be implemented by third-party resource owners or follow multiutility ownership structures with precedents from multiparty transmission ownership. The regulatory changes needed to accommodate such business models are not known yet and will require development.
The full white paper may be viewed here.
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