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What’s the Point of an Electricity Storage Mandate?

An aptly named picture – the “duck graph” – is captivating the California energy policy world. It depicts electricity demand net of projected renewable generation (“net load”) on a representative day in the not too distant future. (For an update on the duck curve, see Meredith Fowlie’s recent blog: The Duck Has Landed, May 2, 2016)

duckgraph_Page_3
The Duck Graph

One point of concern is the duck’s long neck, representing a 14,000 MW swing in net load in a roughly one hour period from 5 to 6PM. Currently, the largest swing system operators typically have to deal with is less than half that size. Adding insult to injury, the duck graph swing is projected to happen in shoulder months like March or October, when total system load will be low.

The duck graph encapsulates the collective uncertainty about how the electricity system will operate as the state adds more and more renewables. If the California electricity system has significant solar capacity, what happens on a typical March weekday when the sun gets low on the horizon just as office buildings are turning on their lights? How will system operators deal with a wild swing in net load as they lose solar generation?

One answer policymakers are offering is electricity storage. For example, the California Public Utilities Commission is in the process of implementing legislation requiring it to consider electricity storage procurement mandates.

I am accustomed to thinking about electricity storage as an arbitrage play – capture energy in the middle of the night when prices are low, store it until the middle of the day when electricity prices typically double or even triple relative to 12 hours ago and then sell at a substantial margin.

But, regulators seem interested in storage primarily as a resource to provide the capacity necessary to address the operational issues associated with the duck graph. (Why the duck graph is not projected to generate very low energy prices at the duck’s belly and very high energy prices at the duck’s neck could be the subject of another post.)

What gives me pause is that the policymakers seem to be legislating a means to an end rather than the end itself. If we want to address the duck graph, why not set up incentives that reward behaviors and technologies that help smooth the worrisome swing in net load from 5 to 6 PM?

For example, why take load as given? In other words, why subsidize storage operators to smooth net load fluctuations before giving consumers the ability to shift their loads?

Until my family switched to the PG&E SmartRate (inspired by Severin’s blog post), we had no incentive to run the dryer after 8PM instead of from 5 to 6PM. We paid $.31 per kWh no matter when we dried our clothes.

Now that we are on the SmartRate, we try to keep our electricity consumption low from 2 to 7 PM on SmartDays (roughly, the 12 hottest weekdays each summer). As we tried to figure out how to do that, we learned that our dryer is a major part of our midday load, so we try to keep it off when prices spike.

The SmartRate was not designed to address renewables integration. The problems highlighted by the duck graph are most pronounced in spring and fall months, when the sun sets before the daytime load subsides. Presumably, though, similar dynamic pricing schemes could incentivize consumers to shift their load to help smooth the duck graph. Given that the vast majority of households are starting from prices that do not vary at all over the course of the day, week or month, I have to believe that there’s room for improvement.

Ideally, regulators should pit storage providers against pricing schemes that reward consumers for shifting their load, and any other technologies that can help shorten the duck’s neck. That way, the market can make the call about the best way to integrate more renewables.

We don’t want storage just to have storage; we want services that storage providers can supply. But, if there are cheaper ways to achieve the same objectives, policy should be designed to find them.

Catherine Wolfram View All

Catherine Wolfram is Associate Dean for Academic Affairs and the Cora Jane Flood Professor of Business Administration at the Haas School of Business, University of California, Berkeley. ​She is the Program Director of the National Bureau of Economic Research's Environment and Energy Economics Program, Faculty Director of The E2e Project, a research organization focused on energy efficiency and a research affiliate at the Energy Institute at Haas. She is also an affiliated faculty member of in the Agriculture and Resource Economics department and the Energy and Resources Group at Berkeley.

Wolfram has published extensively on the economics of energy markets. Her work has analyzed rural electrification programs in the developing world, energy efficiency programs in the US, the effects of environmental regulation on energy markets and the impact of privatization and restructuring in the US and UK. She is currently implementing several randomized controlled trials to evaluate energy programs in the U.S., Ghana, and Kenya.

She received a PhD in Economics from MIT in 1996 and an AB from Harvard in 1989. Before joining the faculty at UC Berkeley, she was an Assistant Professor of Economics at Harvard.

61 thoughts on “What’s the Point of an Electricity Storage Mandate? Leave a comment

  1. The discussions above touch on many salient points. I don’t mean to be repetitive, but there are several key issues that should be emphasized.

    One: In this application the storage is simply used as a generator. But it is a generator with a small, and expensive, fuel tank. It will most likely be “fueled” by natural gas since natural gas is likely to be on the margin when it charges. Given the efficiency of storage, its fuel will not be especially cheap on most days of the year–not expensive, but not cheap either.
    As a generator a storage device has some advantages: for some technologies, there is no start up costs (unfortunately that is not true of CAES) and very short start up time.
    While these are clear advantages, they are pretty marginal. Conventional generators can serve nearly as well.
    Overall, we have to recognize that in this application storage is not doing anything that we cannot already do. It might be a little better, but it is not different.

    Two: Other commentors pointed out that this particular shape with the very steep late afternoon ramp is a result of the assumptions that CAISO has made about the penetration of solar generators. If we were to install as much solar as is assumed, we could have these ramps. However, the level of solar generation that is assumed drives the net load during the day down to the levels that are seen overnight. This implies that generation prices will be very low during the day. These prices will be too low to sustain the assumed investment in solar. From an economic standpoint, it is unlikely that this scenario will actually come to pass (unless there is a government mandate).

    Three: This particular load shape only occurs in the winter, spring, and late fall when the sun sets early in the day. During the summer, when the system is strained, the solar generation continues late enough that we do not see the fall off in generation during business hours and we do not see this late afternoon ramp in net load. This implies that storage device will only earn revenue from serving this ramp part of the year. Moreover, the ramp only occurs in months when there is actually considerable generation capacity available to meet the ramping needs.

    Overall, we need to be more careful in accepting the underlying premise of of the net load shape, and we need to recognize that storage is not unique in being able to meet this need.

  2. You’re right, compelling utilities to move all energy thru the PX spot market ended up being the wrong way to run a market. So now they seem to do as little of that as possible and self schedule with contracted generators. The problem is the ISO cannot dispatch this generation, limiting flexibility to manage all the new duck ramps. The ISO needs more flexible generation, that means fewer self schedules and more real time market dispatches.

    • The ISO has the capability of contracting and scheduling flexible ramping capacity through its ancillary services markets. The LSEs can decide on an economic basis whether to self schedule in the DA and HA markets or submit bids into the various AS markets. I’m not sure of the limitations on scheduling inherent in the bilateral contracts (because they are confidential), but it’s up to the LSEs to determine the mix of flexibility over time. Right now, the mix appears sufficient, but we may not know whether the mix in the future will be sufficient.

  3. The Internet was, indeed, built with government money, but the amounts were modest and no one was required to buy or use the service. In that respect, it is different from a mandate. The proposed ruling does include a limited off-ramp based on cost-effectiveness and it requires the IOUs to conduct a cost-effectiveness analysis, but I’d be much happier if the ruling imposed a requirement that all projects be cost-effective.

    As for risk, every technology carries at least some, including renewable energy. I’m not suggesting the risk has to be zero because that’s not feasible, but I do think it makes sense to be a bit more cautious. Just as it took some time to learn how kerosene and gasoline could be used and sold safely, so it is with storage, in which large amounts of energy are contained within a small package.

    I’m afraid I don’t have a very high opinion of legislators, who are driven to demonstrate a record of accomplishment without regard for the long-term impacts and who are typically not energy subject matter experts. If they really understood all of the economic, environmental and political implications of a 100% renewable energy supply, they might make a whole different set of decisions.

    After reading your posts last night, I was reminded of another reason for foregoing a storage mandate. California’s investor-owned utilities recently spent several billion dollars to install what some people refer to as “smart” meters. After all is said and done, the only real benefit they provide is to put meter readers out of work. They don;t play well with energy management devices, consumers don’t receive real-time prices, and even if consumers did receive price information, it’s not presented in a way that’s actionable. It’s not that I don’t like interval meters, because I think they’re a fine idea that’s long overdue. What I do find objectionable about the interval meter deployment is a) the flawed business case that counted on consumers savings for a significant part of the justification, b) they don’t work as advertised (home energy management interface), c) the job was rushed in order to mine federal stimulus money.

    So once again, I don’t object to storage. I object to the mandatory targets, because I think it’s the wrong way to roll out the technology. Storage providers should be focused on cost-effective applications that don’t require the blessing or involvement of regulators, the legislature or the IOUs There’s still a significant risk that regulatory intervention will mess things up, but that;s a problem I’d gladly take on to avoid the complexity and bureaucracy of the regulatory process.

  4. Chris, I never said we should not pursue storage. I’m simply adamant that a mandate is unwise, unnecessary and needlessly costly. The cost of solar has come down and mandates might have something to do with it, but no one I’m aware of has attempted to objectively assess whether the early costs are likely to be worth the purported future benefits.

    If storage is cost-effective, it should be installed. if it isn’t, subsidies are a very expensive way to drive down costs. And if storage technologies are not mature enough, deploying lots of it is wasteful. In February, I learned that batteries delivered for two different utility projects – both in California I believe – caught fire. Another battery project in Hawaii was consumed by a fire shortly after it was installed. Little needs to be said about Boeing’s experience with advanced lithium ion batteries. These problems will almost certainly be solved, but not by deploying storage for its own sake.

    I also think you’re stretching the analogy when you compare investments by Apple and Google using private capital with investments mandated by government bureaucrats using taxpayer or consumer money. They aren’t the same. Particularly in California, politicians can spend money with surprisingly little accountability and no real responsibility for the consequences. For that reason, they should be a bit more cautious than a private enterprise.

    • Jack – If you think technology companies have received no government support, I am not sure what to say. They get massive tax breaks – and the internet itself was built on government research (which was quite a good investment, in my opinion).

      Regardless, as you well know, the proposed energy storage targets include a cost effectiveness requirement, so it seems as though your cost concerns have long since been answered. I am not sure why you keep pressing those points.

      Finally, since we are evaluating risk, we should probably compare energy storage and renewables to the alternatives: fracking, oil production, and coal mining. Modern storage technologies which have a fire risk are now fully contained with fire suppression, and the vast majority of energy storage worldwide (well over 100GW) has absolutely no fire risk at all. It is clear that a historical risk evaluation of storage plus renewables versus fossil generation would be a bit lopsided. I think that legislators understand this and are acting appropriately.

  5. Unfortunately, your post is overly optimistic about the prospects for pricing-based demand response to help solve the “duck chart” problem. Your anecdote about your household smart meter is actually a perfect example: the smart meter bumps your household energy pricing for five hours on 12 days per year (60 hours total). These are relatively long time frames implemented infrequently, and require such simple customer action as shifting dryer loads a few hours later in the day. Widespread deployment of smart meters, customer tariffs, and effective communication accurate enough to provide the amount and specificity of demand response is either far off or entirely unattainable. Basically, expecting customers to predictably respond to the setting sun is not a realistic way to operate the grid. Are they supposed to not turn on their lights when the sun sets (a significant reason for the “neck”)? All the sudden shut down computers? And what type of radical, accurate pricing scheme and communication will realistically provide that demand response on a reliable basis? Demand response can contribute to cutting down the duck’s neck, but it’s by no means a solution to the problem. Energy storage has been shown to be able to reliably provide such time-shifting services in a way that provides grid reliability and stability. That’s why it’s important to get moving on integrating storage into the grid, and providing goals that realistically support its needs.

    You generally point to energy storage procurement targets as unnecessary because some sort of tariff could provide enough demand response to eliminate the need for storage. Under the storage rulemaking, though, energy storage resources are being procured because energy storage can provide multiple benefits, even from one resource. So in addition to managing the “duck chart,” an energy storage resource could provide regulation, spinning reserve, reliability, transmission upgrade deferral, and more. Each of these grid needs will increase with continued integration of intermittent renewables and the retirement of both SONGS and OTC power plants. Energy storage resources have also been recognized as providing far better performance than conventional resources for multiple ancillary services, namely regulation – thus their strong value under FERC’s Order 755 (pay-for-performance). These are exactly the types of services that pricing-induced demand response simply can’t address. Energy storage in general is thus nearly a practical necessity; and if one resource could provide ancillary services and demand response-style timeshifting, all the better.

    As for this notion that the energy storage resources procured pursuant to the Storage OIR will somehow be a waste of money, the targets specifically call out cost-effectiveness as a requirement. That means that procurement is evaluating whether storage resources provide services cost-effectively, and do so beneficially compared to alternatives. This is also with forecasted grid characteristics, including pricing systems and demand response – so energy storage will still be appropriately procured even with your proposed pricing panacea (which is actually one piece of the energy transformation puzzle).

    Finally, this is shaping long-term grid investments. The CPUC and CAISO recognize that there will be pricing reform, and are looking toward demand response to provide some help to upcoming supply & demand changes. But they’ve also recognized that grid-connected energy storage will be a necessity for providing cost-effective grid stability with the SONGS closure and OTC retirement, plus expanded renewables. Other resources are procured with years- or decades-long operation in mind; we can’t shape a clean and functional energy system by simply instituting pricing schemes and hoping that supply & demand will respond accordingly. We have to identify the best resources and get them plugged in in time to keep things running. The CPUC has done that for energy storage, and it’s a wise move.

    • “But they’ve also recognized that grid-connected energy storage will be a necessity for providing cost-effective grid stability with the SONGS closure and OTC retirement, plus expanded renewables. ”

      I’m not so sure about the necessity part, especially as it related to “shaping a clean and functional energy system”. Moreover, as far as I can tell the mandate comes from the Governor’s office, which has preempted the CPUC by forcing it to issue a ruling before the technical analyses are complete that show where storage is cost-effective and practical, and where it is too expensive and/or impractical.

      If you want to understand the practical realities of using storage to displace most or all fossil-fired generation, read Dr. Thomas Murphy’s blog at http://www.resilience.org/author-detail/1154228-tom-murphy, and in particular, his posts on batteries and pumped storage. If you’re still not convinced, consider this thought experiment. California currently consumes about 660,000 MWh of energy per day on average. It’s reasonable to assume that at least one day’s worth of energy storage will be required to support a clean and functional grid if all nuclear and fossil-fired generation is eventually retired as some advocate, because there will be days when the sun doesn’t shine and the wind doesn’t blow. Now imagine a pumped storage plant with Lake Tahoe as the upper reservoir and some sort of man-made reservoir at an adjacent location in the Sacramento Valley. The height of the bathtub ring at Lake Tahoe would be at least five feet, and Lake Tahoe is arguable the best, most suitable, cheapest place to build lots of energy storage at low cost from a purely technical perspective. Spreading out the impact among a number of pumped storage plants along the Sierra crest would require about 100 plants the size of PG&E’s Helms project, with a lot of extra transmission and the attendant environmental impacts, assuming one could find enough workable locations.

      The mandate is grounded largely in wishful thinking rather than a thoughtful analysis. I think there are applications where storage makes a lot of sense, but I object to any suggestion that the mandate was necessary because there’s no evidence that it is.

      • The same arguments were used against solar. “Traditional generation is cheaper.” “Current system sizes will never be able to provide for our energy needs.”

        Now we are realistically chasing $1/watt installed cost in solar and systems are nearing 1GW in size. Technological development requires vision. The proposed procurement targets, unlike those for solar, specifically require that the systems be cost effective over their system life. Your argument that we should not pursue cost effective storage now because you cannot visualize how storage can immediately solve all of our peak load problems is limited and limiting.

        Our state’s economy is driven by vision, from Apple to Google. Imagine if Apple had built a prototype iPhone and declared, “That cost us a million dollars! No one will buy it!” Imagine if Google had said, “AltaVista already exists! No need to improve search!” Many of us see beyond the near term barriers and see invention as a reasonable path to pursue.

  6. As you point out, the load should not be treated as fixed, and incentives should be aligned with the goals. Loads can be dynamic and responsive, if prices correspond more closely with the costs, and if two-way interaction between price signals (to consumers) and responses to loads (by customers) are facilitated. I am not opposed to some support for storage, whether central or decentralized, but agree that (electrical and thermal) storage should compete with the enormous potential from responsive demands.

  7. Steve Rudnick wrote “The technology will not develop without government mandate, and probably some government support.” The better response is that the technology will not develop without economic incentives, such as better real time prices, that reward such technology. Having prices that swing massively was the loads swing massively will provide the incentives for load shifting mentioned by others and for entrepreneurs to try technologies that have yet to be proposed. But, I have said this already in the California storage initiative.

  8. I agree, Catherine, that proper valuation of energy is the most efficient approach. CAISO, for example, could create a new product class like “fast-ramping resources” that then receives bids and clears in the most efficient manner. And indeed, time-of-use rates (as well as demand response programs that properly remunerate demand reductions) can mitigate rapid and sudden supply-demand imbalances.

    That said, it seems to me that the CPUC energy storage mandate proposal is intentionally choosing to prioritize market certainty for energy storage project developers. I think there’s some sense to this. For one, initial grid storage deployments will be the most expensive and risky projects, and a storage mandate lowers risk much in the way RPS provided certainty for early renewable energy project developers. It also drives learning-by-doing–which is particularly important with new technologies and the technically sophisticated systems that characterize utility and grid operations. Similarly, valuation and bidding rules for energy storage probably need to develop further before major capital will be sunk for grid storage (although not for behind-the-meter storage, which appears to be moving along well)–and a learning-by-doing, supply-push approach may catalyze rule changes faster than without many additions of storage occurring. These efforts will certainly cost a lot–we know several billion dollars would be a given–but they may increase the ability of the grid to integrate variable resources at a rate faster than would happen without a mandate. If the mandate drives energy storage unit costs down through learning-by-doing and economies of scale, there is value in that as well–and value which accrues beyond just California. Not insignificant if you want to decarbonize energy more generally.

    (Then again, you could argue that the CPUC shouldn’t be running green industrial policy, and it’s not the job of CA ratepayers to assist with market transformation. Valid as well, and a debate perhaps worth having.)

    All this is not to say that the CPUC is correct, but rather there is a trade-off. Is the value of market certainty for project developers (and the attendant developments) greater than the lost value in energy market inefficiency? Over what timeframe? In year one, it’s obvious that the lost value of market inefficiencies are far greater than the value of new storage investment. But what about in year five? Ten? Particularly since the mandate ends at 1.3 GW, it seems like the market inefficiencies will be temporary.

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