A few weeks ago I gave a talk at the UKES energy storage about the work we are doing in Birmingham on the value of distributed energy storage systems. The talk was specifically related to our case study of the Birmingham University main campus as a potential location for a “behind-the-meter” energy storage device. In the introduction I briefly mentioned that there appear to be three main business model classifications for energy storage operation. These are; cost-of-service, direct market participation and behind-the-meter energy storage. This post aims to explain these classifications and expand on how a unique business model for energy storage may use aspects from one or more of these classifications.
There appear to be three main “umbrella” business model classifications under which energy storage could operate in a power market. The term “umbrella” is used because there are very many sub-model variations that can sit underneath one of these terms, and indeed a specific business model can have aspects of all of the umbrella models, however for explanatory purposes still seems useful to broadly classify the models in this manner.
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In this model, the cost of the energy storage is included in the final utility cost (electricity bill) to the customer. Ideally the price would be set based on the costs incurred in providing the service. In practical terms of electricity and electrical energy storage this translates to the storage operator being paid a regulated return on investment. This would probably constitute a part of the final electricity bill to the customer. This is a business model that would be typical of a vertically integrated utility, i.e. a nationalised electricity system. However aspects of this model could be introduced in a competitive electricity market, for example by having third parties compete to provide the energy storage service, but rewarding them in the a regulated manner. Typically this would arise out of an integrated resource plan in line with public policy (for example a mandate requiring a certain level of storage, much like targets for a certain percentage of renewables).
- Direct participation in a competitive market
In this model, a storage operator would notice that there was an opportunity to earn a return on their investment through taking advantages of the prices offered in the competitive electricity market. Their participation in the market would then reduce the average electricity price slightly (or the price for whatever service they were offering – for example price of fast reserve, frequency response etc) and in doing so increase the global surplus, that is the consumer surplus plus the producer surplus. Consumer surplus is the difference between what the consumers would pay for the commodity of interest and it’s market price, and producer surplus is the difference between the market price and the price they would be willing to accept. To be effective this model ultimately relies on the energy storage being able to provide a market-service cheaper than current alternatives. This market participation could include entering in long term power purchasing agreements with other market players and/or contracting its services to other market players. The government can also perturb the market through the addition of subsidies to attract investment in technologies which would not otherwise be profitable – for example renewable subsidies. These subsidies will then encourage the development of certain technologies favored by public policy.
- “Behind-the-meter” energy storage
This refers to energy storage devices that are located on the consumer’s/generator’s/end-user’s side of the electricity meter and off-grid energy storage applications. In these cases the generator/consumer/end-user would analyse their own energy economics to determine the viability of the storage unit. This could depend on the available energy-tariffs, any renewable incentives, the value of increased reliability, the perceived value of increasing consumers own renewable energy use, etc. A behind-the-meter energy storage device could also theoretically participate in the competitive electricity market provided there were no regulatory barriers to entry from this point (for example as a form demand response). This model includes energy storage owned by a large utility with a portfolio of power generating plants (etc) that is used for internal trading.
Action under each of these umbrella models has associated issues and barriers. For example the barriers for “cost-of-service” type are probably highest, as it likely requires significant changes in utility planning which are slow to occur even if they are very well aligned with public policy goals. Direct entry in a competitive market has less barriers to entry, however two significant problems are that real electricity markets are never perfectly “competitive” and participation in a competitive market carries a significant risk (i.e. market conditions and thus economics can change over time). In practice there are also market regulations that can stop storage from being able to compete for some market services. The behind the meter case should have the least barriers, but entry into this market would likely require a very cheap technology with good performance. A storage device that could be economical behind the meter of domestic consumers is probably the most favourable for an energy storage developer as it offers the largest customer base for their product.
As I’ve already mentioned, an individual business model may include aspects of some or all three of these umbrella model types. For example, electricity storage would be a useful transmission asset but under current UK market rules transmission and distribution companies are generally prohibited from owning storage assets (as well as generation). To get around this the storage could be owned by a third party but be rented and operated by the transmission/distribution company as a transmission asset, and the storage operator rewarded on a cost-of-service basis. Third parties would then compete with each other to provide this energy storage service. This is essentially what happens with the ancillary services market, except that the storage provider can only provide one use out of many. Another example of a business model involving aspects of two of these umbrella models would be a behind-the-meter storage device used to firm the output from a wind farm that also provided the market with frequency response.
One interesting point to note is that in the UK, all of our bulk storage facilities (four pumped hydro plants – Dinorwig, Ffestiniog, Ben Cruachan, Foyers) were constructed under cost-of-service models, at a time when the electricity industry was a nationalised utility. They are now all owned by utilities with a portfolio of generation methods, so it seems likely that they are also used for internal trading. The picture above shows the dam for the upper reservoir at Ben Cruachan – I’d definitely recommend walking up to it if you are up that way!