“Capacity deferral is the primary source of storage value”

The more variable renewable energy there is in the grid, the higher the value of utility-scale storage systems. Researchers from the Massachusetts Institute of Technology (MIT) have used a high temporal resolution capacity expansion model called GenX to determine the least-cost approach to deploying large-scale storage into a low-carbon power system. 

Lead-author and research scientist at the MIT Energy Initiative, Dharik Mallapragada, and his colleagues published their results in the journal article, Long-run system value of battery energy storage in future grids with increasing wind and solar generation, which appeared in the academic periodical Applied Energy.

In this research, the team attempted to identify the various sources of value generation that a storage system can tap into and the respective economic dynamics connected to these value sources. The most significant source of value for battery storage assets is the subsequent capacity deferral. Where a grid operator installs battery storage capacity, expensive transmission line capacity or natural gas plants can be avoided. 

“Battery storage helps make better use of electricity system assets, including wind and solar farms, natural gas power plants and transmission lines, and that can defer or eliminate unnecessary investment in these capital-intensive assets,” says Mallapragada. “Our paper demonstrates that this capacity deferral, or substitution of batteries for generation or transmission capacity, is the primary source of storage value.”

To come to this conclusion, the researchers analyzed the holistic system value of energy storage. Specifically, the team looked at two variants of abstract power systems in the U.S.' Northeast and Texas regions. To this end, information on load profiles and generation data for variable renewable energy was consistent with real-world figures. 

In both power systems, the value of storage originated primarily from avoiding investments in additional generation capacity and transmission infrastructure. However, this effect is limited because the more storage assets are installed within one system, the lower their value. After all, the storage of numerous storage assets will compete for the same grid service. 

“In practice, there are few direct markets to monetize the capacity substitution value that is provided by storage,” says Mallapragada. “Depending on their administrative design and market rules, capacity markets may or may not adequately compensate storage for providing energy during peak load periods.”

When a power system comprises about 40 to 60% variable renewable energy, storage value increases. Current prices for lithium-ion dictate that the cost-effective storage capacity would only cover about 4% of peak demand. Industry projections claim that lithium-ion batteries' costs could come down to the capital investment of $150/kWh for four hours of storage, the scientist claim. In the scenarios that were modeled in the research, battery storage could cover 16% of peak demand cost-effectively.

“As more and more storage is deployed, the value of additional storage steadily falls,” explains Jesse Jenkins, co-author and assistant professor of mechanical and aerospace engineering at the Andlinger Center for Energy and the Environment at Princeton University. “That creates a race between the declining cost of batteries and their declining value, and our paper demonstrates that the cost of batteries must continue to fall if storage is to play a major role in electricity systems.”

Battery storage goes into direct competition with natural gas plants. Adding 1MW of storage does not make it possible to switch off 1 MW of natural gas. The reason is that gas plants run for longer durations at a time than most batteries are designed for. The longer the duration of storage assets, the higher their value, though sometimes the added value is not enough to compensate for the added system costs. 

“The first gas plant knocked offline by storage may only run for a couple of hours, one or two times per year,” Jenkins explains. “But the 10th or 20th gas plant might run 12 or 16 hours at a stretch, and that requires deploying a large energy storage capacity for batteries to reliably replace gas capacity.”

Storage creates additional value because it allows grid operators to avoid fuel costs like natural gas. It can enable natural gas plant operators to cycle their assets up and down less often or ramp at smoother angles. This, the scientist stipulated, reduces wear and tear on the equipment. Also, storing energy makes it possible to shift its value from low retail price to high retail price times. However, none of these value sources can match that of avoiding grid and generation infrastructure spending. 

This remains true even when wind and solar become cheaper, according to the MIT analysis. “Since storage derives much of its value from capacity deferral, going into this research, my expectation was that the cheaper wind and solar gets, the lower the value of energy storage will become, but our paper shows that is not always the case,” explains Mallapragada. “There are some scenarios where other factors that contribute to storage value, such as increases in transmission capacity deferral, outweigh the reduction in wind and solar deferral value, resulting in higher overall storage value.”