A narrow focus on cost alone may be leading to misconceptions about the real value of energy storage, according to a new report by the London, UK-based World Energy Council. Following is an executive summary of this report, which focuses on solar and wind applications.
Following rapid cost reductions and significant improvements in capacity and efficiency, the global energy sector is captivated by the promise of deploying energy storage alongside renewables. Storage is promoted as the "game-changer" which could contribute to solving the volatility challenge of wind and solar electricity generation. Whilst there is plenty of visionary thinking, business models are not always fully understood and there are not many studies on cost data.
This report seeks to analyse what the cost base of an array of storage technologies really means. A key conclusion is that a narrow focus on levelised cost alone can be misleading. Throughout the cost modelling process, the same issues repeatedly emerged, namely the importance of defining the business model under consideration and how the storage plant was being operated. Although the report focused on cost, it led to a number of insights on the value of storage from which certain recommendations can be made.
Recommendations for policymakers include:
- To focus less on an investment cost only approach for storage technology assessment, where only technologies with the lowest levelised cost of storage (LCOS)[1] are rewarded. Cheapest is not always best, or possible.
- To examine storage through holistic case studies within a specific context, rather than place faith in generic cost estimations.
- To accelerate the development of flexible markets, working with transmission and distribution system operators and regulators to help quantify and realise the true potential value of increasing system flexibility[2] .
- To establish policy support and an enabling regulatory framework to facilitate further commercial deployment of storage technologies.
- To consider storage as a key component when planning for grid expansion or extension.
Metrics for cost of energy
A common metric employed when comparing the cost profile of different generation technologie is the levelised cost of energy (LCOE[3]). This report defines and models two plausible applications of storage: storage with solar plant and storage with wind plant, assessing the resultant LCOS of a storage plant4. The load factor and the average discharge time at rated power is an important determinant of the LCOS, with the cycle frequency becoming a secondary parameter.
- For solar-storage: The application case considered for solar-storage was dailystorage, with six hours discharge time at rated power. For this predefined application, the most competitive energy storage technologies had LCOS of 50-200 €/MWh. By 2030, a much wider range of technologies offered LCOS below 100 €/MWh. Looking to 2030, it is particularly striking that battery technology becomes much more competitive.
- For wind-storage: The application case considered for wind-storage was a two-day storage structure, with 24 hours discharge time at rated power. For this predefined application, few technologies appeared attractive. The levelised costs are higher for the wind-storage case than the solar-storage case, because of the high sensitivity of the LCOS to the number of discharge cycles per year, and the suboptimal energy-to-power ratios required for the wind-storage case as defined.
- General LCOS analysis: An important aspect about the LCOS of storage is that it will always depend on the load factor for discharging and therefore the way it is used cannot be ignored. However, for these hypothetical cases, if the constraints of the solar and wind application cases are ignored, the findings show a significant decrease in cost for the majority of storage technologies from the 2015 study period to 2030. Battery technologies followed by sensible thermal, latent thermal and supercapacitors show the greatest reduction in cost. Battery technologies show a reduction from the 2015 study period around 100-700 €/MW h to 50-190 €/MWh in 2030 (€_2014), which is a reduction of over 70% in the upper cost limit in the coming years. Pumped storage shows the lowest cost reduction, due to the current maturity level of the technology, followed by compressed air energy storage.
Important assumptions to note in relation to the LCOS formula are that it excludes the costs of the wind or solar plant; a zero cost for the energy imported into the storage system; Weighted Average Cost of Capital (WACC) was calculated at 8% and this figure was also used to discount future electricity discharge. Cost estimates were developed both for the 2015 study period (based on studies from 2012 to 2014) and for 2030 (€_2014). Cost ranges of the solar-storage and wind-storage plant are specific to the application cases.
Methodological challenges
The report uncovered various methodological challenges. The focus of the cost modelling was to better understand and investigate the underlying economics and cost methodologies for storage plant. During the process, challenges of using LCOS as a metric to determine storage costs became clear.
However, using the LCOS metric has many advantages:
- Familiarity: This metric is commonly used and well understood, as it is used as a key economic parameter for renewables and for power plants more generally.
- Comparison across technologies: This metric allows storage costs to be framed alongside the generation costs of other power plants.
- A comparison point against revenue: The LCOS can be compared against possible revenues, such as average price spreads or support mechanisms. However, it can only be considered to be a rough proxy of the revenue which would be required for the project to be economically viable.
On the other hand, the cost modelling of this report also revealed two challenges for energy storage cost modelling, which are not encountered when applying this metric to renewables:
- Arbitrariness: Storage levelised costs are arbitrary since the amount of energy (kWh) stored and discharged by the storage plant over a period can vary depending on the application.
- Incompleteness: Storage levelised cost estimations are incomplete, since they do not cover the needed business models and its characteristics for storage. In the LCOE philosophy, the required revenue is only reflected by the applied discount factor (which is related to a predetermined return for the investor, reflected in the 'weighted average cost of capital', the WACC). Since it neglects higher potential revenues, e.g., from providing flexibility, it is a simplified approach for the actual value of storage.
Shifting from cost to value: key messages
The key conclusions based on the analysis of this report are that:
- Context matters: Economic analysis of storage conducted without a specific context, is both arbitrary and incomplete. Applications should be assessed on a case-by-case basis.
- Wide variation in energy storage costs: This reflects the immaturity of the storage industry in combination with generation and grid applications. Increased use of renewable energy generation will increase the demand for energy storage and then economies of scale and improvements in the manufacturing and engineering of batteries will bring costs down further over the next couple of years.
- Public enthusiasm for storage is justified, but for the wrong reason. Cost reduction of storage is important, yet insufficient. The important metric is value, where value is a function of both cost and revenue. The value of storage can be evaluated differently according to the market; the intrinsic and extrinsic value of storage and the costs avoided by its operation.
- The industry's focus on cost seems to stem from two areas. Firstly, it is a legacy from the renewables industry, which tends to have a very narrow focus on LCOE, as it benefited from policy mechanisms which de-risk its revenue streams. Secondly, the focus on cost stems from the fact that in most energy markets, flexibility is not sufficiently valued or monetised. This narrow focus on levelised cost helps explain why the business case for storage is often poorly formulated, resulting in misperceptions.
- From a country and societal perspective, the value of storage is the ability to provide power quality and reliability, and security of supply. This can be in the form of uninterrupted power supply to end-users, providing some reserve margin or initial power to restart the grid after a blackout. In this context, high reliability is more important than high costs.
- Storage creates additional value through its function to level the load, it enables deferral of grid investment, especially at congestion points and creates the possibility of price arbitrage.