The electricity grid is experiencing a historically rapid transformation in North America. Originally designed as a regulated, vertically integrated energy generation and delivery monopoly, various forces and factors are turning this model on its ear and these changes portend significant market adaptations for every member of the value chain.
Forces and factors underpinning market transformation
From a top-down perspective, federal and state regulatory changes, notably utility deregulation, increasing renewable portfolio standards and the shift away from carbon-based fuels and fissile materials are key macro-economic drivers of this market transformation. Dramatic changes in traditional power supply like the decommissioning of nuclear and “traditional” carbon-based power plants (e.g., Diablo Canyon and San Onofre nuclear plant decommissioning and Aliso Canyon disaster and related loss of a significant natural gas supply), are rapidly removing gigawatts of power supply from the grid. Federal bodies like the Federal Energy Regulatory Commission and state, utility regulatory bodies are not inclined to backfill with more carbon-based or nuclear capacity, despite recent attempts by the Trump administration. Finally, the proliferation of cost-competitive renewable energy (solar and wind) and other “enabling” distributed energy resources (DERs) like energy storage coupled with rapidly growing consumer demand for greater visibility and control over energy consumption, improved cost control and increasing focus on resiliency are coalescing to further catalyze this market. Changes in market supply and demand, technology and regulation are ushering in a new energy economy. But, we’re still early in the transition - energy consumers need to become more sophisticated and informed about the toolsets available if they want to take advantage of this industry shift and keep pace with their leading competitors.
Today, utilities walk a tightrope, needing to justify their rate base and requirement to provide a consistent return to their shareholders while facing increased competition from distributed renewables, community choice aggregators (CCAs), requirements to offer consumers more choice in their power supply, and improve efficiency. One key outcome of this dynamic is playing out in how energy is priced. Unlike residential energy consumers who pay a flat for “blended” fee for electricity consumption, commercial and industrial power consumers pay different time-of-use rates (TOU). TOU pricing is increasingly compounded by demand charges, a secondary charge that is typically based on the user’s highest 15-minute interval of electricity consumption. This pricing mechanism is meant to balance supply with demand and cover the costs of electricity delivery. However, with the rapid proliferation of DERs and the threat that renewables pose to utility revenue streams, and given the billions of dollars of deferred grid investment (see ConEdsion BQDM), utilities are responding by expanding the use of TOU and demand pricing to enable greater utilization of existing assets. For example, in Northern California and New York, electricity can cost up 4-5x more at noon that at midnight – demand charges can often represent up to 40% or more of a customer’s total bill. Further, there are plans to begin charging residential customers TOU and demand charges.
The structure of energy pricing, given the aforementioned market forces and factors, has given rise to the energy efficiency and demand response markets. However, demand response with its historically limited ability to scale and the related opportunity costs for hosts who participate (i.e., dimming lights or raising thermostat set points during the summer), do not come close to solving the issue of expanding renewables on the grid, ageing infrastructure and lost generation capacity. Further, oversupply of renewable energy on the grid mid-day followed by the need for the rapid ramp-up of grid power when the sun goes down ( California Duck Curve) is creating tremendous stress and instability for grid operators. What has been needed, is the ability for the grid to buffer supply and demand imbalances by storing energy.
The birth of the energy storage industry
The last five to ten years has seen significant investment in both grid-scale and behind-the-meter energy storage technology and service providers. This nascent industry is attempting to help both utilities and grid operators solve their immediate problems (grid imbalance issues, requirement to invest trillions in infrastructure, etc.) and help C&I customers control their costs and improve their portfolio’s resilience to power disruptions. Major industrials like Tesla, LG, and Panasonic are producing electrochemical batteries for this market at massive scale while smaller players like STEM, Greencharge Networks, Advanced Microgrid Solutions and Generate Capital are developing the software/applications, project development and capital services needed to originate, finance and operate energy storage projects in states with the most dramatic pricing and grid challenges. However, as C&I consumers become more educated about DERs and energy storage offerings, the more they will come to realize that a nuanced approach to manage energy costs and resilience will be required – different building types will require unique DERs to suit their load profile and economics.
One example is thermal energy storage – whereas electrochemical energy storage (commonly lithium-based chemistries or “LION”) are only economical in shorter-duration, high-power applications like peak-shaving and ancillary services for utilities, for commercial customers whose buildings feature significant air conditioning and refrigeration loads (i.e., supermarkets), LION-based storage systems don’t make economic sense because the load profile is “flatter,” lacking the dramatic spikes that characterize most other commercial buildings. Companies like Ice Energy and Axiom Exergy are deploying unique, thermal energy storage solutions that store energy, inexpensively by cooling/freezing a phase change material like salt-water at night when energy is inexpensive and grid congestion is low and conversely provide cooling services mid-day when energy is most expensive and when the grid is under the most strain. This application, shifts electricity demand from power-intensive air conditioning and refrigeration equipment for extended periods (six to eight hours) resulting in significant utility bill savings. Further, these loads can be aggregated across multiple facilities and provided to the grid operator as a dispatchable resource (demand response) which is increasingly important to strained grids like those in the Con Edison BQDM territory and in areas of California and Hawaii that see the highest growth rate in demand charges. Finally, companies like Axiom Exergy are also providing their target markets (in Axiom’s case, supermarkets and cold food storage facilities) greater resilience via applications like Back-Up Cooling, which is designed to “bank cooling” to protect perishable inventory during power outages (see comments by Walmart’s Mark Vanderhelm).
Commercial and industrial consumers have more tools than ever to respond to these dramatic changes in the grid and related energy pricing. As with any new industry, energy storage has thus far been largely a one-size-fits-all market dominated by electrochemical battery suppliers. However, we are seeing examples that this market is maturing and innovative technology companies are responding by taking a very focused approach and targeting underserved segments like refrigerated facilities that thus far, have not been a good fit for electrochemical energy storage. In the case of cold storage facilities, central refrigeration accounts for 9.1% of all electricity consumption in US commercial buildings (EIA 2012) and requires an application-specific solution to economically manage energy costs.
As the market rapidly transitions to the new energy economy, where energy consumers become “prosumers” and engage in a more transactive in energy market, cost effective technologies designed for unique user cases will be needed. C&I decision makers will need to become knowledgeable about their portfolio’s unique energy behavior and deploy the energy resources best designed to take advantage of changing energy pricing if they hope to remain competitive and resilient.