Storage Business Cases: Many Pitfalls, Rare Viability

It is generally believed that storage technologies are a prerequisite for a sucessful transition from fossil and nuclear fuels towards renewable energies such as solar and wind power. While this is not perfectly wrong, there are quite a few fallacies even among storge industry professionals that I observe frequently in my consulting practice; fallacies, which might and which do prevent the transition from a written business plan into a viable business. Storage might be very profitable, but only with the right precaution.

Cost center, no profit center

Firstly, energy storage itself does not generate profits.  Storage is deployed to optimize a power supply system elsewhere. Whether the optimization through storage makes economic sense depends on the cost of the second-best solution. For example, for decades the pumped hydropower storage power plants in Germany used to be cash cows for utilities, since building additional power plants to cover peak power loads would have been far more expensive than hydropower storage plants. And the price differences for power between night and midday were so great that good profits could be realized. (Pumped storage uses „excess“ electricity at times of low power demand to pump water from a valley lake up to a mountain lake. If energy is required, the water is released and flows back down via turbines, thus generating electricity. The lakes are usually constructed artificially. Today, pumped storage is no longer profitable, a fact that will be discussed further below as well as the questionable notion of “excess” power.)

Self-sufficiency aspiration

Secondly, the economic efficiency of storage depends on how it is used.  For a homeowner with a photovoltaic system to disconnect from the electricity network in the summer months and be self-sufficient, a storage system with just a few kilowatt hours of capacity would be adequate.  Together with the roof-top solar installation, the costs are in the five-digit euro range, which does not economically pay off, but such systems are nevertheless installed by some wealthy enthusiasts.  If a homeowner wanted to be independent from the electricity network all year round, a storage system with several thousands of kilowatt hours in capacity would be necessary, pricing itself out of range for most of the population: the necessary storage budget to implement such an ‚autarchy dream‘ would equate to the value of a villa in a desirable residential area.  Fact is that the cost of storage increases exponentially with the desired level of self-sufficiency.  This is an economic challenge that cannot be met, even if storage costed a tenth of its current price.

More general, what holds for homeowners holds for entire grids as well.  Producing 30 percent of power with solar and wind power is relatively easy compared to 80 percent. 30 percent is a level, in our latitudes, that can be ‚harvested‘ from wind and solar power plants within their own production cycles. Increasing that level well above 30 percent requires storage, and the amount of storage required increases drastically with the amount of energy that needs to be buffered.

And since it is so extremely costly to buffer wind and solar energy, the by far more affordable solution is simply to keep the thermal power plants up and running. This is bad news for storage deployment. As long as thermal power plants are needed to bridge the gap in solar and wind power production, it will not be cost-effective to build additional storage systems that compete for the same production hours. In other words, there is no profitable path towards storage deployment in a large grid situation.

Round-trip efficiency often neglected

Thirdly, storage is strongly dependent on its degree of efficiency. Since electricity cannot be stored directly, it is necessary to convert the electrical energy into potential energy (such as with pumped hydro) or chemical energy (batteries and gases), and then back into electrical energy. There is never 100% conversion efficiency, since there are always conversion losses from one form of energy into another form – sometimes more, sometimes less. What counts is the total degree of efficiency, i.e., the useable energy after storage (in kilowatt hours), divided by the total energy used before storage (in kilowatt hours). With good batteries and modern pumped storage, the overall efficiency is above 80 percent, a good value. However, with all the power-to-gas technologies (P2G) I know, the overall efficiency is 10-20 percent, if one calculates honestly.

This demonstrates the tremendous challenge faced by engineers to make P2G technologies economically viable. While it might be technically feasible to implement P2G technologies, economically it is no option, if only a tiny fraction of the initial energy can be used at the very end. It is not a valid option for economies to invest into wind and solar parks six times as big as really needed, only to consume their energy produced at another time or at another location.

Data required, but is it available?

Fourthly, a lot of data on the probable operating conditions would need to be collected prior to technical and economic planning of a storage operation, although this data might not be available. But accurate values are needed to determine whether a storage system is economically viable.

For instance, if storage systems should regulate the imbalances between renewable power generation and consumption, an accurate understanding of the load patterns and the weather-related production profile of wind and solar power facilities should be provided before investing and building. The statistical analysis of weather on a time scale from days to months is currently developing in meteorology, but we are still a long way from a reasonable theoretical understanding of the economics of storage. This applies both to the economic analysis of whole energy networks as well as to individual isolated solutions such as solitary hotel facilities.

For example, on the Canary Island of El Hierro, wind, solar and storage power plants were installed in 2015 in order to make the island widely independent of power generation from diesel engines. The combined power output system was then expected to supply the entire island with electricity, with only few running hours of the diesel engines. The result was nowhere near the goal. After one year, two-thirds of the electricity was generated from diesel units and the kilowatt hour on El Hierro cost on average more than one US dollar. This grandiose failure is likely due to the fact that long periods with little or no wind and clouds in the Canaries were not taken into consideration during the planning phase.

A similar observation was made on the German island of Pellworm, situated in the Baltic Sea. Pellworm is considered as the German region with a maximum in solar and wind energy. Substantial investments have been made into wind power, solar power, and storage, but still the island cannot abandon its power line to the mainland, and probably will never be able to.

This is quite a typical situation: Without a very long time series on weather data, spanning at least ten years, no-one should invest in storage, if its purpose is to balance wind and solar power.

No free lunch

Fifth and last, storage is often believed to be fuelled by something called “excess” power, hence at no extra cost. This is quite an important fallacy, as there is no such thing as a free lunch, as the proverb says, and in anaolgy, there is no ‚excess energy‘. When business cases for solar and wind power plants are set up, every hour of power production is required to make it a profitable investment. The fact that in the best production hours of ‚my‘ power plant, all other wind / solar power plants in the same region than ‚my‘ power plant, are operating at maximum capacity as well, leads in those hours usually to a decline in power exchange prices, sometimes down to zero or further below.  However, this does not mean that the production cost of that power is anywhere near its market value of zero. In ‚my‘ calculation, it is the total annual cost that I divide by the total energy produced to get the average production cost. In a world with feed-in-tariffs, I just need to make sure that my average production cost is below the feed-in-tariff. In the absence of feed-in-tariffs, I still need to make sure that in average, the price I am getting is above production cost. There is definitely no energy that I can give away for free.

Typical storage use cases

If one thinks about the use of energy storage today, these five fallacies should be taken better into account. But what does this mean for the six typical use cases of storage?

The use of storage in small mobile appliances, from mobile phones to robotic lawn mowers, is technically well understood, less cost-critical, works well and will not be further considered here. A new application for storage is decentralized power grid stabilization which utilizes battery storage. This application, which did not exist a few years ago, needs some technical explanation on its influence on the current power grid.

In order to operate a power supply in a stable manner, one must also control the frequency and the phase as well as the voltage. The electrical engineers speak of providing „reactive current“.  Because generators of large power plants have large rotating masses, small instabilities in phase and frequency can be balanced by the inertia of the rotating masses, so a power grid with large power plants is self-regulating. Replacing large power plants by small, decentralized electricity generation facilities, e.g. those from wind and solar, has made it necessary to stabilize the electricity grid by other technical means, and mostly at the expense of power customers. For example, the decommissioned nuclear power plant Biblis (Germany) was converted into a large inertia mass to supply reactive current: The gigawatt-sized electric generator simply keeps rotating; the energy stored in the rotation is sufficient to balance out short supply-demand imbalances at a scale well below a second.

The short-term load balancing over 2-8 hours with pumped storage is the only proven large-scale storage technology. Pumped hydro storage is delivering today by far the largest amounts of stored energy, and they operate in the gigawatt/gigawatt hours range with reaction times of less than one second and efficiency levels of 80 to almost 90 percent. However, they are becoming increasingly uneconomical, as sufficient solar energy is available almost every midday for covering the lunchtime power demand peak. As a result, the hourly rates on the electricity exchange has leveled out between day and night. Pumped storage, which previously profited from good returns on the price difference can no longer generate profits, so today no new ones are being built in Central Europe.

And the current pumped hydro technologies will not solve any problem: In the scenario of an exclusively renewable-energy supply, the long-term load balancing of intermittent wind and solar power in, e.g.,  Germany requires storage capacities to cover week-long doldrums, mainly in the winter, where demand is highest.  When considering for the longest possible doldrum and the need to have at least a 90-day power reserve available, the requirements on storage capacity can be calculated (using long-enough weather data series) to enormous 2,700,000 GWh, i.e., ca. 6000 times the installed storage capacity of today (45 GWh in Germany). Furthermore, they should be available for several weeks in a row for either negative or positive load. These enormous capacities will never be built.  Unfortunately, there are no technologies out there that ever could possibly realize such capacities.  More precisely, technologies would be required whose installation costs less than five USD per kilowatt hour, and whose efficiency improves to well over 80%. There are no technologies on the horizon for this. To my knowledge, the most cost-effective research projects for large-scale storage will be able to undercut the costs of today’s pumped-storage power plants (about 150 USD / kWh) to a maximum of 50 USD/kwh, even in the next decades.

An apparent mass storage application is P2G (power-to-gas) or the like, i.e. the production of mass chemicals such as hydrogen, methane, methanole or possibly other hydrocarbons, by means of intermittent wind and solar power, in dedicated converters. Their proposed use is for either the firing of thermal power plants at other times than the energy was produced, for heating purposes, for electric mobility or directly within chemical processes.

The issue with P2G technologies is their extremely low efficiency rate. Production of hydrogen at regular pressure can be done at an efficiency rate in the order of 70 percent. But the hydrogen produced needs compression and storage, or even better the production of methane by adding carbon dioxide and energy.  Lastly, burning methane to produce electrical energy is required to re-use the initial energy. All these steps have efficiency rates in the range of 50 to 85 percent, and their efficiency rates need to be multiplied with each other.  It is in this long process, at the end of the chain only 10-20 percent of the initial energy can actually be used. In other terms, storage by P2G processes would require 5-10 times the capacity of wind or solar power plants in comparison to direct use. The use of the mass chemicals thus produced as fuel or as starting material in chemical production is therefore favored by many market observers, but does not solve the problem of the intermittent electricity production. The challenge here is not the insufficient storage capacity – today’s natural gas network can store gas for several months – but the land use for the additional wind and solar power plants and the enormous costs for such a supply of energy make absolutely no economic sense.

The last important application is electric mobility. Unfortunately, the current storage technologies are still immature. In particular, the installed Lithium based batteries in cars have an energy density that is lower than that of fuels by a factor of ca. 100. This is the main reason why electric cars have too low a mileage range as compared to customer expectations. In consequence, the demand for electric vehicles, if unsubsidized, is much lower than many governments currently hope for, and electric mobility for long distance trucks and air traffic is completely unattainable with current battery technologies. On the other side, there is certainly a market for cars with low daily range within cities, so we expect some niche market to develop for electric cars acquired, again, by wealthy enthusiasts and government authorities who would like to prove something to someone.

Cautious business case setup required

In conclusion, for the large-scale use of storage with today’s available technologies, these are a factor of 100-1000 away from economic and technical necessities in practically all relevant fields of application. New research approaches may exist and should be pursued, but it will take decades to close the major gaps in energy density, efficiency and costs that would make storage suitable as a replacement for fossil fuels and nuclear power.

Nonetheless, there are many profitable niches where storage can play a viable role today in optimizing power generation systems. To find out, which ones of these niches are really promising, a careful avoiding of the main fallacies in storage business case setup is required.

4 Kommentare zu „Storage Business Cases: Many Pitfalls, Rare Viability

  1. I guess that in the „Typical storage use cases“ section, when you refer that pumped-storage power plants is expected to go down from 150 USD/kWh to a maximum of 50 USD/kWh, you’re meaning USD/MWh:) Overall, thank you very much for the analysis, very good article!

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    1. Unfortunately not. It is 100-200 USD/kWh that you have to pay for pumped storage power plants typically, if they operate in the 4-8 MWh/MW range, which they usually do. In one of my previous lifes, I was a power station financing specialist at a leading asset management firm and all relevant business proposals crossed my desk, hundreds of them, and I had to do the due diligence. Several investment proposals dealt with pumped hydro power.

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      1. Hello Peter, I know where’s the difference: those must be capital costs (actually, it makes sense because you refer installation costs in the text), but I was thinking on LCOE:) Thanks for your reply!

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  2. Hello „RB“, LCOE is tricky in the storage business, and might turn out quite unreliable a number: LCOE for storage includes the number of cycles that a storage plant can run per year, the single most important ingredient of profitability. Before implementing storage, it requires hence a lot of data to assess the future operating conditions.
    Best regards,
    Björn (my first name)

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