California Is the Epicenter of Energy Storage Activity in the US

The Energy Storage North America (ESNA) conference was held last week (August 8-10) in San Diego.   The conference was well attended – at least 500 people or so attended. Attendees and exhibitors represented utilities, energy project developers, and major electrical conglomerates.  EPC firms, software firms, trade organizations, and consultants were also represented.  

Front and center at the conference were California’s extensive programs around energy storage. Regulators, utilities, the grid operator, and project developers in California have worked collaboratively and with a sense of urgency to achieve success – because the reliability of the grid depends on it.  

In 2010, California passed a law (Assembly Bill 2514) that charged (no pun intended) the California Public Utilities Commission (CPUC) to develop a mandate for energy storage.  The result was CPUC’s September 2013 Order in Rulemaking 10-12-007 mandating that 1,325 MW of energy storage be installed in the state by 2020.   Various panels and speakers at the conference discussed examples of California projects that have been procured by the State’s investor-owned utilities. 

California has a number of characteristics that made the energy storage mandate work.  With an abundance of variable renewable generation (wind and solar PV), California certainly has energy to “put” to energy storage.   But the real value of energy storage is its ability to serve load with the stored energy.  California has relatively pronounced peak demands especially during heat waves (the top 10% of load on the system occurs during less than 100 hours of the year – translating into a daily peaking need that is very short in duration).  This means that storage with as little as 2 to 3 hours of output can be an effective substitute for fossil fueled peaking plants. Another factor is that California’s traditional power supply mix consists of relatively cheap (in terms of variable energy costs) baseload plants and expensive peaking plants.   This creates a financial arbitrage opportunity that contributes to the economic feasibility of storage (even for end-users, many of whom are on time-of-use rates).  Finally, California has a robust wholesale power market with price discovery for several ancillary services.  This is an other opportunity to “monetize” energy storage.  As icing on he cake, with the Aliso Canyon natural gas storage leak shutting down some peaking plants and with the shutdown of the San Onefre nuclear station, there is also a capacity need in the California market that storage can serve.

It would be a mistake however to assume that what works in California will work elsewhere.  Every market is different.  In Hawaii for example, there are several key differences compared to California.  First, Hawaii tends not experience “needle peaks” that are prevalent in California (this might change in the future if the penetration of residential air conditioning increases in response to a warming climate). Therefore in order for storage to have full capacity value in Hawaii, it must be able to deliver its stored energy over a longer period of time (e.g. 5-6 hours instead of 2-3 hours).   “Long duration” energy storage has less of a track record so far than does shorter duration storage technologies. Longer duration storage is more expensive to build and to maintain.  The result is that energy storage in Hawaii has a steeper curve to climb in terms of its feasibility for displacing peaking resources.  

Second, Hawaii’s power supply mix today includes a number of oil-fired generation units with relatively similar efficiencies and fuel costs.  This means that the marginal cost of a kilowatt-hour in the daytime is not all that different from the marginal cost of a kilowatt-hour in the overnight and early morning hours.   This will change as Hawaii utilities and IPPs install more renewables and reduce the number of “must-run” generating units, but as of today, the “on-peak, off-peak” arbitrage opportunity is less compelling in Hawaii than it is in California. 

Finally, Hawaii does not (yet at least) have an ancillary services “market.”   Ancillary services in Hawaii are provided by existing generators (including some renewables), but the cost of those ancillary services are “baked in” to the price the utility pays for the capacity and energy.   Today, in general, there is plenty of capacity in the Hawaii systems to provide ancillary services – you would not go out an build a plant exclusively to provide ancillary services because its marginal capacity value would be close to zero and thus it would be difficult to recover the initial cost.  That said, Hawaiian Electric’s efforts to launch new demand response programs to provide ancillary services will provide some price discovery to storage developers and behind-the-meter distributed storage providers.  The question is whether or not the prices will support energy storage project feasibility.

As an aside, one of the results of Hawaiian Electric’s recent Power Supply Improvement Plan (PSIP) studies is that the “optimization” models that the Hawaii PUC was so adamant that Hawaiian Electric use, did not create resource plans that included a lot of energy storage.  Rather, the models determined that paying renewable energy projects to curtail their energy production in response to a system operator command (under take-or-pay contracts) is actually less expensive than installing energy storage devices.  This was the case, even with a fairly aggressive declining price curve for lithium ion batteries.

As Hawaii’s legislators, regulators and stakeholders consider things like energy storage tax credits or energy storage mandates, those initiatives must be tailored to fit the Hawaii situation rather than blindly following the California example (or any other market).  Careful analysis of the role for energy storage is still necessary before any energy storage mandate makes sense for Hawaii.  

The opinions expressed here are exclusively those of HDBaker & Company and do not represent the positions of our clients or our partners.