Renewables Innovation Stored Here — Handle With Care

“If you don’t like what is being said, then change the conversation” — the writers of Mad Men could have been contemplating renewable energy PR. If someone argues that realizing deep and comprehensive renewable energy deployment hinges on technological revolution, they probably haven’t listened to the likes of Amory Lovins — or browsed the recent International Energy Agency’s reports.

The energy sector teeters on a renaissance age and everyone in the business should fashion themselves pioneers. Yet history is full of missed opportunities. Renewables could remain marginalized if the sector’s mindset does not become market-oriented and follow the frequency regulation market’s model.  Frequency regulation market emerged as a success story with an incredibly wide implication for the energy world through battery storage innovation.

Frequency Regulation

The solution to storage, which represents a major complication of renewables deployment, does not necessarily have to come from the renewables sector.  Pay for performance, enacted in 2011 through FERC 755, a new rule from the Federal Energy Regulatory Commission, opened the door for market pricing in the frequency regulation market.

Frequency regulation is what allows consumers to receive a steady electricity stream, without any flickering lights or factory equipment shutdowns. This requires a consistent level of power production from multiple power producers that constantly respond to energy demand fluctuations. Batteries can adjust to the fluctuations requirement in milliseconds, as opposed to the minutes it takes to fire up a new generator.

FERC 755

The new FERC rule applies a simple market-economics concept to an industry accustomed to only government incentives — better performing units receive a premium over the lower performing units. The top down signal trickled through the grid operators of regional markets. As recently as mid-2014, Eastern Interconnection grid operator PJM passed an amendment to the FERC rule that increased requirements for frequency regulation providers. The regulation market price will price in these tougher standards, rewarding innovation along the battery storage value chain. In late 2014, New England adjusted to the FERC 755, the last region to do so. Large-scale battery producers now have a potentially new market to help realize a lower risk-reward ratio.

Even with a well-known range of applicability, storage technology has not realized its full potential. A report published by FERC a decade ago proclaimed energy storage as an “ideal supplier” in efficiently providing instantaneous ancillary services. The new FERC 755 rule increased the regulation market clearing price by a factor of three. On the one hand, the expected rise in natural gas prices will lead to the rise of market clearing price, as the two are tied.  On the other hand, fast-responding solutions in the regulation market hover under 20 percent penetration levels. Given that the market can support 60 percent penetration, who will realize the returns by meeting the three fold increase in the penetration levels? In current conditions, pay for performance still remains viable technology pull in the market.  But achieving the extra 40 percent penetration level needs a more than a marginal change in the status quo battery technology.

Current Storage Projects

Frequency regulation market offers a hedge against the risk associated with unproven technology. Yet innovative projects continue need a higher target ambitions and focus. Swiss-based company bought a North Carolina factory and promised commercial scale battery array production by mid-2015 — as well as a USD 1bn fund for system development.  The promised game-changer battery will target waste reduction at power plants — the side market will be frequency regulation market. At a glance, the project seems well organized and customers have committed to the end products. However, with estimates of 11 percent waste reduction in coal plants, improvements seem marginal. Even though general interest in storage technology is flourishing, without specific and targeted criteria, project goals can become vague and overdrawn. 

Investment Potential

The perception of the market, be it energy storage or the general renewables sector, has already evolved. While once thought of as an environmentally-focused niche market, the renewables sector now boasts a $32 billion market potential in the next two years and promises long-term commercial investment opportunities. With great market potential, comes great investments — investments will flow to the sector that promises returns, given diversified and managed risk. Thus the challenge remains to create appropriate incentives that encourage organic renewables market maturation.

Improved batteries allow for decreased regulation needs and increased renewables grid integration. Pay for performance model demonstrates the benefits of market orientation. However, frequency regulation storage needs are only a piece of the market puzzle. Other players must emerge for continuation of the innovation process. Creating open market environment, such as the pay for performance in the frequency regulation market, hangs a welcome sign on the industry door: open for business. 

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Salome Saliashvili is a financial analyst at The Urban Institute. She recently finished the Clean Energy Leadership Institute Fellowship that focused on understanding the dynamics and trends of the renewables sector. She has great interest in entrepreneurship and has been a part of a number of startups, including one in wind energy. She was the lead author for a publication in a premier aerospace conference, researching management theory in relation to large scale engineering projects. She is currently based out of Washington, D.C.

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