Navigant Research Blog

Calculating the Benefits of Energy Storage

— June 9, 2012

A good example of the trouble with storage – that commoditizing the full value of energy storage in a system is difficult – is a recently commissioned advanced battery system in Northern Chile.

The system, installed in partnership with AES Energy Storage and AES Gener at a 544 MW thermal power plant in Antofagasta, Chile, is a 20 MW lithium ion battery system supplied by A123 Systems with power controls contributed by ABB.  The project is frequently called Angamos, after the AES Gener subsidiary that operates the system.

The primary benefit of Angamos is that the 20 MW battery covers AES Gener’s spinning reserves obligation (4% of generation capacity) for this particular power plant.  As a result, AES Gener can sell more energy each day than it could before the system was installed.  The market benefits because the cost of energy has decreased as the supply has increased. The power system itself benefits because the battery system has a better response time to events on the grid.  And, since the battery system responds more quickly than other types of reserve assets, the system operator does not have to resort to load shedding as much to recover from events. That’s an economic benefit, particularly since the area has a great deal of industry. The primary benefit, however, is to the utility, AES Gener, which can now sell more energy every day because its spinning reserves obligation is covered by the battery.  That is why the energy storage system was installed in the first place.

From an analyst perspective, although consuming a product may offer many benefits, typically one or maybe two major problems will push a consumer to buy a particular product.  One of the most important parts of market analysis is figuring out what those one or two problems are. When we know that, we know the market need.

The fact that there are additive benefits is fascinating, but those benefits occur outside the transaction for the energy storage product.  In the future, it will be interesting to see what emerging business models reflect these various benefits.


The Corn Ethanol Empire Strikes Back

— June 8, 2012

In recent weeks, Gevo flipped the switch on its first commercial-scale facility making advanced biofuels and renewable chemicals.  Retrofitting a brownfield ethanol facility in Minnesota to produce isobutanol from corn starch, a chemical that packs more energy than conventional corn-starch ethanol, the development may signal the beginning of the next wave of bioenergy innovation.

Principally designed to do one thing – ferment large quantities of corn starch into millions of gallons of ethanol – first generation production facilities are inefficient energy users and produce a great deal of waste.  Retrofitting first generation ethanol facilities, which are prodigious consumers of electricity and water, is proving to be a bankable (read: “capital light”) strategy for ramping up production of biofuels while reducing the industry’s environmental footprint.

In a typical ethanol retrofit, innovative conversion processes and technologies are “bolted onto” existing assets to create an integrated biorefinery.  Modeled after petroleum refineries, integrated biorefineries use biological matter to produce a range of end-products: transportation fuels, chemicals, and heat and power.  These facilities are designed to be more efficient, sustainable, and profitable than first generation corn-starch ethanol refineries.  Gevo’s 12 million gallon per year facility is just one of several integrated biorefineries arising from the ashes of first generation ethanol.

Accounting for around 10% of U.S. liquid fuel consumption in the transportation sector, corn starch-derived ethanol is a well-entrenched juggernaut in the global alternative energy landscape.  As discussed in Pike Research’s Biofuels Markets and Technologies report, the United States currently leads all countries in ethanol production with nearly 13.9 billion gallons per year in 2012 (Brazil is next with an estimated 7.3 billion gallons).  The industry grew 720% between 2000 and 2010, with strong foundational support from an even stronger agricultural lobby.  From a pure growth perspective, it has been hailed as the most significant success story in American manufacturing.

But despite ethanol’s rapid rise in the United States, the industry has faced significant backlash in recent years.  This opposition has stoked heated debate both inside and outside the industry.  From contributing to increases in food prices, causing indirect land use change (ILUC), and exacerbating efforts to reduce greenhouse gas (GHG) emissions, first generation ethanol has become a punching bag for environmentalists and tech-oriented clean energy enthusiasts alike.

Policy momentum has shifted as well.  The revised Renewable Fuel Standard (RFS2) administered by the Environmental Protection Agency (EPA) capped corn starch-derived ethanol at 15 billion gallons per year, shifting support to advanced biofuels derived from cellulose and other non-food resources.  VEETC, a key tax credit that played an instrumental role in the industry’s growth over the past decade, lapsed in 2011.

Lacking goodwill and facing a sluggish economy, growth within the industry has dropped off considerably in recent years from its 2008/2009 high.

Despite a precipitous drop-off in plant construction, existing ethanol facilities in the United States could provide fertile ground for the next wave of clean energy expansion.  With an estimated $45 billion in subsidies granted by the U.S. government over the past 30 years and more than $30 billion worth of steel already sunk by major players like Valero, ADM, and POET, the greatest near-term biofuels opportunity is likely to lie in brownfield plant conversions and retrofits rather than greenfield builds.  Gevo’s recent success suggests that we are likely at the bottom of this next innovation cycle.

As I’ll highlight in Pike Research’s upcoming Scaling the Bio-Based Economy webinar, emerging business models are demonstrating that existing ethanol assets provide a platform for the integration of a host of Smart Energy technology systems.  Bio-digesters, for example, can process waste streams into biogas for onsite power generation and process wastewater.  Companies like Lanzatech and algae producers such as Algae-Tec are seeking to prove that the waste carbon dioxide produced by ethanol facilities can be used to produce advanced biofuels and renewable chemicals.  Meanwhile, the integration of combined heat and power (CHP) technology offers plant managers the ability to consume energy more efficiently.


Ameren and ComEd Face Tougher Reality after Illinois Regulator Weighs In

— June 8, 2012

Two Midwest utilities are smarting after the Illinois Commerce Commission issued new rulings: Ameren Illinois had its smart grid proposal rejected by the ICC, and Chicago-area giant ComEd had its revenues cut by $169 million for 2012.

In Ameren Illinois’s case, the commission voted 5 to 0 to send the plan back to the utility because the $625 million proposal lacked the required details and did not clearly show how the new technology would benefit consumers.  Ameren has not indicated what its next step will be, but a spokesman said the company is looking forward to cooperating with the ICC. That’s a sure sign that it will return with a new proposal that satisfies the need to show clear benefits to consumers.

Citizens Utility Board, a consumer watchdog group, had opposed Ameren Illinois’s plan as weak on specifics, and its previous arguments appeared to have had at least some influence on the commission’s ruling.

Meantime, the ComEd ruling is more complex.  For 2012, the reduction in revenue to ComEd will hurt the company’s bottom line. ComEd says in a regulatory filing that the ruling will cost parent Exelon Corp. 16 cents a share this year, and an additional 8 cents to 10 cents per share in 2013 and 2014.  For ComEd customers, however, the ruling is expected to mean lower rates in 2012.  But a new rate structure, which went into effect late last year, will allow for higher rates starting in 2013 when consumers are expected to pay $3 more a month, on average, as the utility continues its $2.6 billion smart grid upgrade over 10 years.  So, while ComEd loses expected revenue in the near-term, it will still get to recover costs with higher rates later on.

The new rate structure – based on a complex formula aimed at encouraging smart grid investments – is itself controversial.  Previously, the ICC had full authority to reduce ComEd rate hike requests, but now the commission plays a lesser role.  The ICC can still question costs, but cannot change the formula for determining how those costs are calculated, according to a Chicago Tribune report.

These two decisions by the ICC show how difficult the path ahead can be for utilities embarking on smart grid projects, at least in Illinois.  Incomplete or vague proposals will not cut it, as regulators and consumers continue to take a hard look at how smart grid investments will – or will not – benefit consumers.  And, similarly, regulators are going to keep rate hikes somewhat in check as smart grid deployments move forward.  That’s not a surprise, really.  It reflect the ongoing push and pull between private utilities driving new technology and regulators doing what they can to allow for innovation while protecting broad public interests.  The road can be bumpy for all the players, but in Illinois, where I once lived, that’s expected.


Sizing Up the Community and Residential Energy Storage Market

— June 8, 2012

In an earlier blog post, I explained that the community and residential energy storage sector may be exactly what the storage industry needs for widespread adoption: a market that expects more from storage, and hopefully, is willing to pay for it.  So what is this market worth, realistically?

There are three key characteristics that make the CRES market distinct from the rest of the storage market.  First, the CRES market will require new business models, different from those we’ve seen to date in the storage industry.  This is partly because the residential side of the CRES market will mean selling directly to consumers, instead of to businesses.  It also has to do with the size of the storage units participating in this market.  Most units are between 1 kilowatt (kW) and 25 kW; even with hundreds of units, that’s a drop in the bucket compared to the total generation capacity of a system (by way of comparison, Korea, Texas, and the United Kingdom each have a generation capacity of about 70 GW).  Will a home-based system supply power back to the grid? It should, it would make sense, but how does the grid operator compensate the residential customer?

Second, we’re now seeing pilots and demonstrations in Asia Pacific, North America, and Europe.  Each case has slightly different goals, but nevertheless key utilities in each of these regions is trying to understand the value of CRES.

The third key characteristics that makes the CRES market unique is the importance of dynamic pricing – at least for the residential portion of the CRES market.  Why will residential electricity consumers install a battery in their homes? To save themselves money.  In markets without dynamic pricing (by which I mean any pricing structure that is not flat-rate) there is no differentiation between consuming electricity in the dead of night or during peak time in the late afternoon.  Unfortunately for the market, many dynamic pricing programs, like the Tempo program offered by EDF in France, are opt-in.  This program sends very clear pricing signals to residential customers.

Given all of these challenges, our forecasts for the CRES market are fairly modest compared the markets for long-duration storage or energy storage for ancillary services.

While these figures are not perhaps what the industry would like to see, I fully expect we will be revising our forecasts for the CRES sector upwards as these key market issues resolve in the next two years.


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