How Energy Storage Resources Make Money
According to a recent McKinsey report on long duration energy storage, the energy storage sector will experience a whopping 400x growth in the next 20 years, and less than 1% of it has been built out. There are many ways that storage can make money today, and they vary based on the kind of storage technology and the region in which the storage asset is operating. In addition, there are many market mechanisms to incentivize development of, and pay for, grid-scale storage that haven't been designed yet. That’s why TerraStor is getting involved now: we want to be a part of shaping these conversations.
There are three main ways that grid-scale energy storage resources (ESR’s) can make money: energy price arbitrage, ancillary grid services, and resource adequacy.
Energy Price Arbitrage
In several markets, energy storage resources (ESRs) can make money by arbitraging the swings in the real-time wholesale electricity marketplace. Electricity prices tend to have fairly predictable swings in prices based on supply and demand: Historical hourly, daily, weekly, and seasonal data shows that arbitrage is a dependable source of revenue for an ESR and is profitable.
Certain extreme events, such as Texas’s Winter Storm Uri on February 13 - 17, 2021, while very unfortunate, can allow for profitable arbitrage opportunities because energy prices spiked very high (to the maximum price, determined by ERCOT): During this time, wholesale electricity prices spiked to $9,000 / MWh, when it is typically around $40 / MWh. Power providers that were able to generate electricity sold it to the ERCOT grid at $9,000 / MWh, a 225x increase from standard prices.
In addition, in many markets, power prices can even drop to zero or negative prices when there is too much renewable energy available. This happens because there are no incremental marginal costs to keeping the wind turbine blades turning, and since there is a federal production tax credit of 2.3 cents / KWh that applies to every kilowatt-hour of wind energy produced, wind power operators will continue to generate electricity and pay an ESR like TerraStor to take the electricity, up until they break even on the tax credit of $23 / MWh. For example, if the price of electricity has dropped to -$20 / MWh, the wind power producer will pay TerraStor $20 / MWh to take the electricity, because the wind power producer still makes $23 - $20 = $3 / MWh. Negative prices occur about 4% of the time across all electricity markets in the U.S. As more renewable energy is added, this percentage is likely to grow, and it allows for very profitable price arbitrage: We are getting paid to consume the electricity; and we are getting paid to sell it too.
Below is an example of arbitrage for the Houston, TX, area in the day ahead market where a $66 price swing is observed.
Energy arbitrage requires that you cycle the energy storage resource: This means charging up and charging down, intra-day, daily, weekly or seasonally. Therefore, its profit is affected by both the price of energy sold and the cost of energy to charge.
Ancillary Grid Services
A reliable electricity grid requires that the flow and direction of electricity is in near-perfect supply and demand. Therefore, the electricity grid requires ancillary services, a term that refers to a suite of functions that help the electricity grid maintain this reliability. The larger the grid’s connections are, the more stable it is, because one outage event has less of an overall impact on the electrical grid. Typical ancillary services include balancing of the system and non-frequency ancillary services such as voltage control and black-start capability (we define these terms below).
Because our ACAES plants involve rotating machinery, we can supply many of the ancillary services that the grid needs, and substitute for traditional fossil fuel power plants, which provided these services before.
Contingency reserves: Storage resources that respond to an unexpected failure or outage of a system component, such as a generator, transmission line, circuit breaker, switch or other electrical element. In many markets, this service is subdivided into spinning, or synchronous, reserves and non-spinning, or asynchronous, reserves.
Black-start regulation: Service that supplies electricity for system restoration in the unlikely event that the entire grid loses power
Frequency regulation: Power or storage that is on standby to add or remove power from the grid to correct short-term imbalances in the grid’s alternating current frequency (which is 60hz in the US and 50hz in Europe).
Inertia: Short-term (less than a few seconds) emergency frequency management achieved through the shedding of inertia in already rotating machinery. Just as a bicycle wheel that continues to spin after you stop pedaling, the physical turbines that power generators possess rotational inertia, and some of that inertia can be almost instantaneously converted to electrical energy to resist minor changes in grid frequency. While there isn’t a market for inertia in the U.S. yet, there will be as we add more inverter-based resources (such as solar and wind energy) to the electrical grid.
The location of an ESR will dictate the optimal service or revenue mix for that ESR. Some markets or nodes within markets will experience regular, large price swings, and therefore arbitrage may be the primary profit-generator. On other nodes, frequency regulation or another ancillary service may be far more profitable. For example, CAISO created an illustrative battery economic analysis in their recent annual market report, which shows that a 100 MW / 400 MWh battery can make more than 7x the profit pursuing ancillary services and arbitrage as opposed to just arbitrage (see section 1.3.3) based on system-wide prices. As another example, most batteries added to the PJM market in the past few years are only intended for ancillary services–the developers do not deploy them for arbitrage.
Below is an example of ancillary services in the day ahead market in the Houston, TX, area.
Most ancillary services are “standby” in nature, and an energy storage resource can generate profit by making its capacity available without fully or even partially discharging or charging, allowing for potentially better economics than arbitrage. Therefore, most batteries today make far more money providing ancillary services than generating profit from arbitrage.
Due to the flexibility of ACAES, we are a unique storage resource that can supply all of the types of ancillary services globally and we can participate in energy arbitrage.
ACAES can generate income from energy arbitrage activities and ancillary services simultaneously.
This is because ACAES plants have the unique ability among energy storage resources to charge and discharge at the same time, allowing for greater opportunities to optimize and maximize profitability. This also derisks the development of an ACAES facility because we have many ways to make money in wholesale electricity markets.
System operators must ensure that today's electricity demand is met with enough supply. Just as importantly, they must make sure there is enough supply tomorrow, next week, next year, and years from now. Since energy resources can require years to permit and build, some ISOs have instituted a resource adequacy (RA) market, which might also be known as a capacity market. Under an RA scheme, utilities that serve end customers are required by their ISO to contract for their generation capacity years ahead of time. They do this by agreeing to pay owners of existing and future energy resources a fee for making their resources available. In practice, utilities often sign multi-year contracts with energy resources to pay them monthly fees on a $/MW basis. This market mechanism helps to ensure there are always enough generation resources (including energy storage resources) to meet demand. If resources available for contract are scarce in forward years, capacity prices will rise, which incentivizes energy suppliers to build new plants. For an energy storage resource, the RA market offers another opportunity to generate firm, dependable cash flow.
Captive Partner Sales
Energy storage resources can also make money by serving as a captive storage partner for a renewable energy resource such as a wind farm or solar farm. Due to the intermittent nature of renewable energy, large-scale installations often experience times when their power generation is curtailed, or they are compensated extremely poorly for their power, or they have to endure periods of negative prices for their power. Therefore, by partnering with TerraStor, such renewable energy resources can temporarily “park” unprofitable generation and dispatch it to the grid during times of reasonable system power prices, effectively turning an intermittent generator into a reliable dispatchable power plant.
This business model can serve a grid-attached renewable energy resource, but it can also be used to achieve 24/7 carbon-free energy goals for data centers, or used in remote locations, such as a mine or remote town that relies on diesel power generation. This type of energy storage resource is the key to unlocking full reliance on renewable energy.
Most people recognize the dire need for energy storage as renewables continue to be rolled out. However, electricity markets historically haven’t been designed to either require storage or incentivize its rollout, simply because it has never been needed. Energy remained stored in the form of fossil fuel until electricity was needed, and then that fuel was burned on command and turned into electricity. Therefore, ISOs, state utility commissions, and legislatures are only in the beginning stages of adding regulations to either require or encourage more storage on the grid. 7 U.S. States have already created energy storage mandates and we expect the number of legislative bodies that mandate energy storage to grow domestically and internationally.
While we have discussed how energy storage resources can make money right now based on prevailing market structures, we expect there to be additional market mechanisms that allow our ACAES facilities to be even more profitable. For example, ESRs provide other benefits that markets don’t currently compensate for, which include:
- Preventing energy and emission intensive startups of polluting peaking plants
- Reducing the need for transmission line upgrades by addressing local line congestion
- Avoiding curtailments of renewable power
We are forward compatible with our ACAES facilities and can provide any of these services.