Business Models for Energy Storage Michael Pollitt With thanks to Francisco Castellano Ruz and Karim Anaya Judge Business School University of Cambridge UKES 2015 University of Birmingham 26 November 2015 With acknowledgement to the EPSRC Business, Economics, Planning and Policy (BEPP) for Energy Storage in Low-Carbon Grids Project
Outline Business Models Storage for power Storage for transport Storage for heat
Business Models (see Teece, 2010) Business models are about: Value Proposition what services being sold and to whom? Value Creation how will the service be created and provided? Value Capture how will the value be monetised? Business models are not just about pricing strategy 3
Business Model Innovation This involves competition with incumbent way of doing business. Disruptive if new services or markets created. Sometimes incumbents fail to adapt (e.g. Nokia) Often incumbents capture new sources of value (e.g. Radio manufacturers to TV). 4
Economic challenge in energy storage Fossil fuel allows easy, flexible storage. It has high energy density and low decay, with relatively low capital costs per kwh stored. No-one demands storage as a final consumption good. What consumers want is continuity of supply quantity and quality. This they will pay a premium for. All economic processes seek to minimise storage and seek just in time matching of supply and demand. 5
Back to business models Value proposition for future energy storage is based on intermittency of energy supply and inflexibility of energy demand. Value creation is around whether storage technologies can facilitate supply and demand matching in power, transport and heat. Value capture is about how energy storage investments will be able to earn a return. 6
Barriers to a viable business model High fixed up front costs for storage versus multiple volatile revenue streams. Volatility of returns to storage mean high cost of capital to compensate investors for increased risk. Stand alone storage businesses will face higher costs and lower ability to capture value than incumbents (generators, network companies and customers). Market design and regulation will determine the ability to monetise storage services. We set these to support technologies we favour. 7
Market design issues Generators and retailers sell and buy defined products under license in electricity markets. Storage products need to be defined in order to allow them to be monetised. In general small facilities often excluded from directly trading in electricity markets. Historically, the system operator has directly procured response and reserve capacity from existing generators as by products, rather than used organised markets that would allow storage to compete. 8
Regulatory barriers These include definition of storage is it generation or retail or something else? Regulated incumbent network companies may be able to include storage in their asset base, reducing the scope for non-regulated storage. Unbundling rules may mean that if network companies own storage they cannot dispatch it and must work through a third party. 9
Some basic economics of energy storage High frequency of use storage is more profitable than seasonal storage, given high capital costs. Storage which relies on multiple sources of value faces higher transaction costs. More storage reduces the value of each additional unit of storage, meaning that if non-integrated storage is likely to be less than globally optimal. The value of storage will depend on what else is on the energy system in terms of storage, demand and generation. If storage is not about energy then residual fossil fuel systems will compete strongly with advanced forms of storage, in a so called sailing ship effect. Also big interconnection (or other) schemes, e.g. to Norway / Iceland will seriously impact the local market for storage. 10
Storage for power 11
Sources of value for electrical energy storage (EES) 12
Sources of Value for generic battery storage $ Source: EPRI (2013, 2-2). 13
Can value be captured? $ Source: EPRI (2013, 2-2) 14
Value capture in the UK per MWh installed per year Source: SBC (2013, 83). 15
Business Model (an example): Smarter Network Storage by UK Power Networks 6MW / 10MWh of lithium-ion storage Fig. 2: SNS Business Model DNO Contracted 16
Market design barriers 17
Driver of demand for storage in California Source: CAISO More extreme ramping, no reduction in system peak 18
Plans for storage in California Proposed energy storage procurement targets (MW) (Source: CPUC, 2013, p.15) 19
Conclusions on barriers Inadequate definition and classification of EES which results in EES treated as generation asset. This, together with the unbundling requirements, prevents EES from providing multiple services across the different levels of the power system. Lack of markets for some of the services that EES can provide such as black start and voltage control. Inadequate market design that does not reflect all the value that the asset provide to the system. EES can perform better than traditional flexibility providers but both are paid the same under the current market conditions. The need for EES to deal with flexibility issues is not clear in the short/medium term in the case of Germany and Spain. 20
Storage for electric transport 21
EVs Market in UK Current situation: 9k EVs on the road: 63% (PEV), 37% (PHEV/E-REV). Annual demand of 16.75 GWh, peak demand of 2.38MW Projections (based on 4 scenarios): 22
EVs Market in UK Number of EVs projected per scenario 23
EVs Market in UK Annual demand from EVs by 2020, 2030 and 2050 represents 0.2%, 1.4% and 10% respectively of the total energy input to transport Gone Green Projected annual demand and peak demand from EVs over time 24
The challenge is local charging Page 57, 22 vehicles. 25
Storage for heating
Heat Demand Variability (annual) Large seasonal variation in heat demand driven by space heating in winter (up to 300 GW) Heat and electricity demand variability Source: Imperial College in DECC (2013, p. 103) 27
Heat Demand Variability (daily) Heat demand variability not only seasonal but daily (from 16 to 304 GW in winter) UK heat scale of demand Source: ETI (2013) 28
Heat Market Around 70% of heat used in the UK (homes, commercial buildings and industrial processes) comes from natural gas Domestic final energy consumption by type of fuel 29
The current model: gas storage in GB Rough Storage Site - Largest gas storage facility in the UK, owned by Centrica Storage Limited (CSL), a subsidiary of Centrica plc, legally, financially and physically separate from other Centrica business (gas supply, gas shipping, trading and storage procurement) - Composed of Rough reservoir, offshore installations, onshore terminal (Easington) - Covering 10% of the UK s peak day demand - Maximum working gas volume: 135.6 bcf (41.1 TWh), withdrawal rate: 44.7mcm/day (485 GWhs/day), injection rate (two compressors): 305 GWhs/day - Provides storage services to gas suppliers - Storage capacity is allocated by market based mechanisms (mix of firm/interruptible/long-short term/bundled-unbundled services) Fig. 6: Rough Storage Source: Centrica Storage 30
Impact of electric heating in France http://www.renewablesinternational.net/file s/smthumbnaildata/lightboxdetail/3/3/8/8/9/ 9/Frenchpeakdemand.png Source: RTE in French peak power demand nearly 50 percent electric heating in Renewables International; Electric heating component in purple. 31
Storage of heat - challenging - Equivalent electrical storage for different numbers of installed air source heat pumps for different peak loads and coefficient of performance (COPs) with 3 hours of heat storage - Phase change material based storage (instead of water based heat storage) allows a more reasonable store volume (0.2m 3 for 12kWh and 0.4m 3 for 24kWh) Source: UKERC (2014, p. 44) 32
Business model challenges Handling daily fluctuations in renewable energy supply relatively straightforward, if expensive. Not really an issue with electric transport, except perhaps at the local level. Replacing the heat storage in gas difficult: Biogas or Hydrogen? Getting demand down, using a mix of renewables and local storage will help. May be less of a problem in warmer countries. There is a need for new business models to support storage. There are market and regulatory issues that would need to be solved to guarantee a smooth deployment of new storage. Regulation can also help the expansion of energy storage by promoting market-based initiatives and by providing regulatory guarantees. Small amounts of storage may go a long way. 33
References DECC (2013), The Future of Heating: Meeting the challenge. Department of Energy and Climate Change, London. DECC (2015a), Energy Consumption in the UK. Overall data tables. 2015 update. Department of Energy and Climate Change, London. DECC (2015b), Energy Consumption in the UK. Domestic data tables. 2015 update. Department of Energy and Climate Change, London. DECC (2015c), Energy Consumption in the UK. Transport data tables. 2015 update. Department of Energy and Climate Change, London. DfT (2015), Table TRA0303. Department for Transport statistics. EPRI, 2013. Cost-Effectiveness of Energy Storage in California, Available: http://www.cpuc.ca.gov/nr/rdonlyres/1110403d-85b2-4fdb-b927-5f2ee9507fca/0/storage_costeffectivenessreport_epri.pdf. ERP (2011), The future role for energy storage in the UK. Main Report. Energy Research Partnership Technology Report. ETI (2013), Smart Systems and Heat: A perspective from the United Kingdom. Energy Technologies Institute. National Grid (2014a), The UK Future Energy Scenarios. UK gas and electricity transmission. National Grid. National Grid (2014b), UK FES database. National Grid. SBC Energy Institute, 2013. Electricity Storage. Available:https://www.sbc.slb.com/SBCInstitute/Publications/~/media/Files/SBC%20Energy%20Institute/SBC %20Energy%20Institute_Electricity_Storage%20Factbook_vf1.pdf. Teece, D. (2010), Business Models, Business Strategy and Innovation, Long Range Planning, Volume 43, Issues 2 3, April June 2010, Pages 172 194. UKERC (2014), The future role of thermal energy storage in the UK Energy System: An Assessment of the technical feasibility and factors influencing adoption. Research Report. UK Energy Research Centre. 34