Deciphering the Energy Storage Value Proposition - Pace …

1 Deciphering the Energy Storage Value and Summary Findings While Energy Storage has grown rapidly over the past couple of years and several hundred MWs of projects are under development, the Value to investors of Energy Storage remains somewhat nebulous. This paper identifies leading Energy Storage technologies, defines key applications, reviews current leading battery projects, and estimates investor returns for differing applications and markets. Further, the paper discusses the key factors driving Storage economics and investor returns. Today, in the right application and market, battery Storage can provide attractive returns. Clearly, there are other applications where the economics today do not meet a minimum threshold.

2 The Storage economic Proposition will improve in all applications as capital costs fall, which they are expected to do. By its very nature, Storage offers multiple Value streams. A rational investor would take advantage of all possible Value streams, so long as each Value stream in practice can be realized and there is no double counting of benefits. Storage Technology Discussion Grid reliability and power quality are generally met through the integrated contributions of generation, transmission, distribution, and customer assets as depicted in Exhibit the Energy Storage Value Propositon | White PaperIn real-time operations, the electric system (which could be a small utility system managed as a balancing authority or a large ISO footprint, also managed as a balancing authority) has to be in perfect balance between load and generation at every instant.

3 To achieve this, system operators (small utility or large ISO) have to rely on a hierarchy of reserves and capabilities which can be called upon in different time frames (Exhibit 1). Some reserves are available through the generation system based on their physical characteristics ( , ramping, spinning reserve), while other capabilities such as system inertia can be made available through transmission system operation. Yet other capabilities like power quality can be maintained by taking advantage of equipment such as capacitors located close to the customer. Two key events are spurring Energy Storage technology development (1) increasing generation from uncontrolled renewable generating assets with variable output ( wind and solar), (2) increased desire to manage variable generation from these renewable resources with cleaner technologies.

4 To meet these and other grid needs, numerous Storage technologies have been developed or are currently under development. As depicted below, typical short duration technology options include flywheels, lead acid batteries, and lithium ion batteries. Common long duration Storage solutions include pumped hydro, to a lesser extent compressed air Energy Storage , and lithium ion batteries as well. Also of note are the new technologies currently under development, many focused on various flow battery chemistries which could serve either short or longer term needs. There are also many new and novel Energy Storage technologies under development. One such technology, not shown in Exhibit 2, is a gravity rail system recently deployed in Nevada in which train loads of rock are raised to mountain tops using low cost electricity which is then recovered during periods of higher prices by lowering the rail cars.

5 This device operates using the same potential Energy concept as pumped Storage 1: Energy Storage Response by ApplicationSource: Southern California Edison3 White Paper | Deciphering the Energy Storage Value Propositon Mature Storage technologies include lead-acid batteries, compressed air Energy Storage (CAES), pumped Storage hydro (PSH), flywheels and lithium ion batteries. With better performing technologies, traditional lead acid battery sales for the stationary market have waned and flywheels have suffered vendor attrition. While CAES and PSH have been employed at scale, they are only applicable where the geography or geology is appropriate. Lithium ion battery costs have experienced, and are predicted to continue rapid price declines driven by economies of scale primarily from their use in vehicular applications, and learning curve effects resulting in strong competition both with other Storage technologies and between lithium ion battery vendors.

6 Driven by these changing economics, EPRI opines that lithium ion batteries will be the dominant battery technology for at least another decade and perhaps beyond 2030. Based on this view and the emerging ubiquity of lithium ion battery technology, the battery investment analysis presented later in this paper is focused on lithium ion battery battery technologies are beginning to show promise, though maturity remains some years away. Perhaps most notable is the class of flow batteries, led by vanadium redox batteries, an example of which was recently installed for Avista in Washington State. Flow batteries offer better cycling, greater longevity, essentially no cell degradation, and are more customizable than Li-Ion Source: Electric Power Research Institute (EPRI)batteries; however, their size limits them to stationary applications, which limits application and may ultimately extend the time needed to meet the scale required to sufficiently lower costs.

7 Both Sodium Ion and Metal-air (zinc-air, lithium-air) batteries are also making progress, though the technology is End Uses and Value Streams As mentioned briefly, Storage applications can range from very short duration requirements like frequency response and regulation, operating and planning reserves, to longer term needs of Energy management ( , to store Energy from renewable resources generated in off peak periods an consume it during on-peak periods). Exhibit 3 indicates the rated power and discharge time for each key Storage technology available to meet the system frequency response and regulation, operating and ramping, and Energy management needs. As shown, Li-Ion batteries are quite versatile in terms of the range of applications they capture.

8 For example, such batteries can respond quickly (seconds) to cover frequency response and regulation needs with small Storage sizes and at the same time cover longer duration Storage needs where speed of response is less critical. Flywheels, on the other hand, can provide an even quicker speed of response and hence are ideal for frequency response applications but the Storage duration or capability is much 2: Energy Storage Technology MaturityDeciphering the Energy Storage Value Propositon | White Paper4As discussed above, Energy Storage may serve three generic system needs - frequency response and regulation, operating and ramping, and Energy management. By applying Storage in either the transmission, distribution, or customer portion of the electric delivery system, the Energy Storage owner/ operator may solve one or many system issues and in doing so, earn revenues from supplying multiple service to the grid.

9 For example, in some jurisdictions batteries are paired with renewables to supply quick power bursts to network segments thereby assisting in frequency response when, for instance, clouds pass overhead. After that burst, additional slower acting higher power resources step in to maintain system Storage applications in the transmission and distribution systems are sometimes termed utility scale or in front of the meter solutions, while those sited with consumer facilities are often termed behind the meter solutions. Storage applied in transmission infrastructure support the bulk delivery of electricity, ancillary services, and infrastructure weaknesses. When added in the distribution systems, Storage may also support a challenged infrastructure, as well as enhance customer Energy management.

10 When applied behind the meter , Storage may improve Energy quality, support local infrastructure, or help to reduce customer Energy 4 represents the range of potential Storage applications (end uses) across the electric delivery system. A Storage system could earn revenues from several sources, depending upon where it is placed in the system (geography), what services the system is designed to serve (design), the market in which the system operates (market), type of owner (owner), and incentives. As the color coding in Exhibit 4 indicates, there are several common Storage Value themes including: upgrade deferral, voltage/ VAR support, power quality, reliability, load time shifting, and renewable : EPRI, Pace GlobalExhibit 3: Battery Energy Storage CapabilityWhite Paper | Deciphering the Energy Storage Value Propositon5 Exhibit 4: Battery Energy Storage End UsesEach Storage theme is discussed below in Exhibit 5.