Battery storage: The next disruptive technology in the power sector
Low-cost storage could
transform the power landscape. The implications are profound.
Storage prices are
dropping much faster than
anyone expected, due to the growing market for consumer electronics and demand
for electric vehicles (EVs). Major players in Asia, Europe, and the United
States are all scaling up lithium-ion manufacturing to serve EV and other power
applications. No surprise, then, that battery-pack costs are down to less
than $230 per kilowatt-hour in 2016, compared with almost $1,000 per
kilowatt-hour in 2010.
McKinsey research has
found that storage is already economical for many commercial customers to reduce their peak
consumption levels. At today’s lower prices, storage is starting to play a
broader role in energy markets, moving from niche uses such as grid balancing
to broader ones such as replacing conventional power generators for
reliability, providing power-quality
services, and supporting renewables integration.
Further, given
regulatory changes to pare back incentives for solar in many markets, the idea
of combining solar with storage to enable households to make and consume their
own power on demand, instead of exporting power to the grid, is beginning to be
an attractive opportunity for customers (sometimes referred to as partial grid
defection). We believe these markets will continue to expand, creating a
significant challenge for utilities faced with flat or declining customer
demand. Eventually, combining solar with storage and a small electrical
generator (known as full grid defection) will make economic sense—in a matter
of years, not decades, for some customers in high-cost markets.
In this article we
consider, as these trends play out, how storage could transform the operations
of grids and power markets, the ways that customers consume and produce power,
and the roles of utilities and third parties. Our analysis is directed mostly
at developments in Europe and the United States; the evolution of storage could
and probably will take a different course in other markets.
Implications for the utility industry
Storage can be deployed both on the grid and at an individual consumer’s
home or business. A complex technology, its economics are shaped by customer
type, location, grid needs, regulations, customer load shape, rate structure,
and nature of the application. It is also uniquely flexible in its ability to
stack value streams and change its dispatch to serve different needs over the
course of a year or even an hour. These value streams are growing both in value
and in market scale. Cheap battery storage will pose a challenge for utilities
behind the meter (that is, small-scale installations located on-site, such as
in a home or business). But it will also present an opportunity for those in
front of the meter (large-scale installations used by utilities for a variety
of on-grid applications).
Behind the meter
Cheap solar is already proving a challenge to business as usual for utilities in some markets. But cheap
storage will be even more disruptive because different combinations of storage
and solar will likely be able to arbitrage any variable rate design that
utilities create.
Specifically, net energy metering (NEM) refers to rules that allow excess power to be
sold back to the grid at retail rates; and feed-in tariffs, which are guaranteed
price adders for renewable power, have played an important role in expanding
the global market for renewables. In the US states that have implemented such
rules, NEM has proved to be a powerful incentive for consumers to install solar
panels.
Although it has been
helpful for solar, NEM also has put utilities under pressure. It reduces demand
because consumers make their own energy; that increases rates for the rest, as
there are fewer bill payors to cover the fixed investment in the grid, which
still provides backup reliability for the solar customers. The solar customers
are paying for their own energy but not paying for the full reliability of
being connected to the grid. The utilities’ response has been to design rates
that reduce the incentive to install solar by moving to time-of-use pricing
structures, implementing demand charges, or trying to reduce how much they pay
customers for the electricity they produce that is exported to the grid.
However, in a low-cost
storage environment, these rate structures are unlikely to be effective at
mitigating load losses. This is because adding storage allows customers to
shift solar generation away from exports to cover more of their own electricity
needs; as a result, they continue to receive close to the full retail value of
their solar generation. This presents a risk for widespread partial grid
defection, in which customers choose to stay connected to the grid in order to
have access to 24/7 reliability, but generate 80 to 90 percent of their own
energy and use storage to optimize their solar for their own consumption.
We are already seeing
this begin to play out in places where electricity costs are high and solar is
widely available, such as Australia and Hawaii. On the horizon, it could occur
in other solar-friendly markets, such as Arizona, California, Nevada, and New
York. Many utility executives and industry experts thought the risk of load
loss was overblown in the context of solar; the combination of solar plus
storage, however, makes it much more difficult to defend against.
Full grid
defection—that is, completely disconnecting from the centralized electric-power
system—is not economical today. At current rates of cost declines, however, it
may make sense in some markets earlier than anyone now expects. Of course,
economics alone will not dictate how much and when customers choose to
disconnect from their utilities. For example, another important factor is
confidence in the reliability of their on-site power. But this dynamic
will affect business-model and regulatory decisions sooner.
In front of the meter
Storage can also
benefit utilities by helping them to address the challenges of planning and
operating the grid in markets where loads are expected to be flat or falling.
Regulators in some US states, for example, are testing new models of
compensation by offering utilities incentives to earn returns by providing
contracts for distributed generation. This would, among other things, allow
utilities to defer expensive new investments and reduce the risk of long-lived
capital projects not being used.
Utilities are also
acting to procure storage assets to address both long-term regulatory
requirements and short-term needs, such as reliability and deferring the
construction of a new substation. As storage costs drop, such projects could
lower generating costs—and, thus, consumer electricity rates—by putting further
pressure on existing conventional gas and coal-generation fleets, depressing
prices in capacity markets and providing load-following services.
What utilities can do
Utilities must start
now to understand how low-cost storage is changing the future. In effect,
utilities need to disrupt themselves—or others will do it for them. There are
two broad categories of action to consider.
Redesign compensation structures and explore new
opportunities
Sooner or later—sooner
is better—regulators and utilities will need to find new ways to recover their
investment in the grid.
The grid is a
long-lived asset that is expensive to build and maintain. Fixed fees for grid
access are unpopular with consumers, and regulators are therefore not
particularly keen on them, either. However, imposing fixed fees could ensure
that everyone who uses the grid pays for it. The volumetric or variable rate
structure in general use today is a historical construct. People are used to
paying for the energy they use. But as more and more customers generate their
own energy, the access to the grid for reliability and market access becomes
more valuable than the electrons themselves.
Because any rate-design
changes will likely be slow and incremental (particularly those transitioning
to fixed charges), utilities need to respond to these new market realities by
capturing new earnings opportunities from expanded services and new transaction
fees. There are already some interesting initiatives along these lines. In
Australia, utilities are becoming solar-and-storage installers and providing
advisory services; while in the United
States, one pilot program is selling advanced analytics and data-management
services to consumers to help them manage their energy use.3Utilities in several
states are also exploring new services and investing in grid modernization and
electrification.
Rethinking grid-system planning
Utilities must
radically change their grid-system planning approaches. This means investing in
software and advanced analytics to modernize the grid. It also means changing
how traditional system planning is done, by reconsidering codes and standards
(some of which have been in place for decades), moving to circuit-by-circuit
nodal planning, and employing asset health assessments to ensure the highest
priority needs on the system are addressed.
Storage can be a unique
tool in support of this. The straight economics of changing grid planning, with
respect to return on capital, may not look different at first glance. But,
because storage is more modular and can be moved more easily, the risk-adjusted
value is likely to be much higher. That will enable utilities to adapt to
uncertain needs at the circuit level and also to reduce the risk of
overbuilding and stranded investments.
The role of third parties
As for third
parties—meaning distributed-energy-resource (DER) companies, technology
manufacturers, and finance players—there is tremendous potential for growth.
But they must be nimble to take advantage of these opportunities.
Distributed-energy-resource
companies can devise new combinations of solar and storage, tailored to
specific uses. While storage could eventually provide more customer value and
lower bills, new rate structures will be more complex and policy is unlikely to
lock in rates for long periods. But shorter periods of defined rates and more
complex rate schedules will make it more difficult for DER providers to add new
customers, who don’t like complexity and want to be sure their investment will
pay off. New product offerings and financing creativity could solve these
challenges and tempt customers currently sitting on the fence.
Technology players will
need to understand how and where to play along the storage value chain, and
adapt their offerings to meet customer needs as the technology and use cases
quickly evolve.
Financing players, such
as banks and institutional investors, will need to create options that adapt
and match the investment horizon of the customer. As the market grows more
confident of the underlying economics and performance of storage, they will
develop financial products adapted to the technology’s specific needs. When
that happens, financing costs will fall, further expanding the market’s
potential, creating a virtuous cycle akin to what has happened to solar this
past decade.
Battery storage is
entering a dynamic and uncertain period. There will be big winners and losers,
and the sources of value will constantly evolve depending on four factors: how
quickly storage costs fall; how utilities adapt by improving services,
incorporating new distributed energy alternatives, and reducing grid-system
cost; how nimble third parties are; and whether regulators can strike the right
balance between encouraging a healthy market for storage (and solar) and
ensuring sustainable economics for the utilities. All this will be treacherous
territory to navigate, and there will no doubt be missteps along the way. But
there is also no doubt that storage’s time is coming
By David Frankel and Amy Wagner
http://www.mckinsey.com/business-functions/sustainability-and-resource-productivity/our-insights/battery-storage-the-next-disruptive-technology-in-the-power-sector?cid=other-eml-alt-mip-mck-oth-1706&hlkid=9130f00e2df5442dbb166d3cfd86ee5d&hctky=1627601&hdpid=31921e74-b754-415f-8b6b-3a8899b080c8
No comments:
Post a Comment