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Here’s the Deal

I have a frustration. While my views might be seen as slightly “right of center”, I am not a climate denier. Indeed, I am in favor of a national cap-and-trade regime. I have told my climate-skeptic friends that that a cap-and-trade regime should make sense to them as well. In the event they are wrong in their beliefs, a cap-and-trade regime would allow for some prudent “risk management”.

I also believe in the transition of the electric grid to predominantly renewable and storage resources. I believe in the vision of an energy market where, in the not-too-distant future, renewable sources of electricity and storage will dominate the energy markets and get most of their revenue from those markets.

Getting to this vision should be the focus. A clean electric grid and efficient markets are worthy goals in their own rights and will also lead to electrification of transportation and other parts of the economy. Again, this should remain the focus – but not without unwavering consideration of grid reliability. Without that, the rest of the economy may not trust electricity as the method to power the future.

So in light of all that, here is my frustration: if I mention the limitations of current technology for long-duration storage, I am often branded as not really taking the need for the reduction of carbon seriously. I hope, having convinced you that is not the case, we can consider the issue of storage limitations here.

How to use a battery…

I recall a conversation with an administrator in one of the RTOs who said to me that, in his experience, batteries were used mostly to meet ancillary service needs rather than energy. Part of the issue had to do with duration, part with the discharge rates, and of course part with market design. In the CAISO, batteries mostly serve to meet upwards regulation (RegUp) and downward regulation (RegDown) requirements.

I came across the limitations of what a battery can do in a newsletter from EnergyGPS, the excellent data and consulting group that seems to be composed of folks who just love numbers. EnergyGPS makes the point that batteries, just like any source of electricity, must estimate its energy arbitrage opportunities (buying or storing power when it is cheap and selling when the price is high) and when to bid in the energy market. This must be balanced with the value the battery can get by providing ancillary services.

The limitations of a battery to provide both energy and ancillary services simultaneously have to do with inverter capacity, storage limitations and timing of charging versus discharging to take advantage of the price signals. A battery can provide RegUp by discharging and still provide energy at the same time. It cannot provide RegDown and Energy at the same time.

Look at the chart that EnergyGPS provided which represents a battery operating on NP15 average prices. To quote from their note: RegUp prices are positively correlated with LMPs and RegDown prices are negatively correlated with the other two… The DAM prices tell the battery to charge in the middle of the day, but in doing so it will sacrifice its ability to provide RegDown when those services are most valuable.

The conflict of what market in which to participate continues later in the dispatch: The DAM prices are also telling the battery to discharge in the evening, but it will miss out on the most premium RegUp prices if it does. In this example, the battery loses revenue by engaging in energy arbitrage as compared to engaging in the regulation-only market. The estimates are based on prices over 700 days in NP15 so it would seem a representative picture.

Participants operating batteries in the CAISO market have figured this out, of course. Almost exclusively they are providing regulating reserves, rather than engaging in energy arbitrage.  The CAISO Department of Market Monitoring (DMM) notes that the structural reason for this in their most recent Quarterly Report on Market Issues and Performance, posted October 6, 2020, is the CAISO’s own non-generator resource (NGR) model.  The current market participation structure available for storage resources is such that “the real-time market generally does not look out far enough to be able to capture spreads between the lowest and highest net load hours in a day.” Of course, there is the additional challenge and resulting risk of predicting price spreads.

There is much more detail that the EnergyGPS note provides on the technical workings of a typical battery that I will not attempt to convey here. So, what is the deal here? It is not to throw shade on batteries; they are a great add to the electric resource mix and the technology regarding duration will doubtless improve. The point is that, today, there are limitations to storage technologies and to the market mechanisms for their participation. Achieving grid reliability with renewables and batteries alone would seemingly require procuring heroic capacity – certainly more than the nameplate equivalent needed to meet reliability over time and changing climatic conditions.

Therefore, some amount of thermal capacity may need to be retained to provide necessary balancing in extreme situations. The energy market will almost certainly be dominated by renewable resources. The same with ancillary services. That said, a compensation mechanism for whatever thermal assets are needed to provide critical balancing is still required.

Meanwhile, prices are moving…

It has become apparent, in the aftermath of the August blackouts and resulting prices in the Western power hubs that the coming summer may be tight throughout the West. I knew this intuitively, but the picture was brought home to me when I saw that Q3 2021 power at Palo Verde is trading at a $65/MWh premium to SP15 (CAISO) day-ahead prices.

Before the August blackouts, Palo Verde Q3 2021 power was trading at about a $25 premium to SP15. It began to spike after the blackouts, but what made the price really go up was when CAISO announced the following week that they were going to cut exports. This signaled to the bilateral market that less power was going to be available than normal. One utility executive who serves load outside of California said that the bilateral market was looking very tight and liquidity seemed to have disappeared. That is how one gets a widening spread; recent experience tempered by expectations and data shining light on the road ahead.

Here’s the deal…

One should be able to express different viewpoints in any debate without being vilified for having impure intentions. Our political environment could certainly be improved by such a mindset. How we achieve a cleaner, decarbonized future could be improved by everyone avoiding the “outrage button” when discussing the road forward. We need to integrate renewables and storage. We need reliability in order to electrify the economy. If we agree on these two points, we should have a way forward.

I would be remiss if I did not reiterate the fact that a regional power market will help that path forward. It may be that governance limitations will force CAISO to operate as one market with the rest of the West choosing to operate another market. These markets could then be integrated the way that the Eastern markets transact. A West region with two network markets that have joint operating protocols will 1) be an improvement on the status quo, 2) will improve the sharing of resources, and 3) make the financing and operation of renewables much easier.

Oh, and the folks at EnergyGPS asked that I let everyone know that getting their valuable notes and reports is easy if you subscribe. Their work is valuable to me in my other consulting work outside of WPTF as well as my role as Executive Director of WPTF. If you want their stuff, go to sales@energygps.com. I get no commission on this. I just like their stuff.