Incidental and Other Benefits

Executive Summary

There are several benefits accruing from use of energy storage for which there is no price and/or market. Many benefits are not well recognized or well understood by important stakeholders and/or they are diffuse, shared among stakeholders. While estimating these benefits may be challenging, they are nonetheless valuable and should be seriously considered when developing and assessing energy storage value propositions.

Discussion

Generation Dynamic Operating Benefits

Dynamic operating benefits (DOBs) are those which are related to more optimal generation fleet operation via the use of energy storage use. More specifically, a dynamic operating benefit is a generation operating cost which is reduced or avoided if generation equipment:

  1. Is needed and operated less frequently (i.e., fewer startups) , and/or
  2. Operates at a more constant output level (i.e., part load operation is avoided), and/or
  3. Operates at its rated output level most/all of the time when in use.

DOBs reflect expenses that utilities would incur without storage, thus they reflect actual cost reductions for:

  1. Reduced generation equipment wear,
  2. Reduced fuel use, and
  3. Reduced emissions.

Reducing equipment wear reduces maintenance costs and/or extends equipment service life. Fuel use and emissions are reduced because storage use allows for:

  1. Fewer generation start-ups, and/or
  2. Very constant generation output, and/or
  3. Generation that operates at or near its rated output.

Note that generation DOBs are specific to the fuel, generation and end-user mix and the market structure in a given region.

Increased Asset Utilization

Energy storage can increase the amount of electricity generated and/or transmitted and/or distributed using other utility assets – this is commonly referred to as increased asset utilization. 

Two important financial implications of increased asset utilization include:

  1. Cost to own the equipment is amortized across more (units of) energy reducing the capacity-related portion of unit cost for that energy, and
  2. The payback from the investment (in the respective utility capacity asset) occurs sooner, which reduces investment risk and increases capital efficiency.

Consider an example. A utility installs distributed storage to address local electric service reliability needs and to defer an expensive transmission and distribution (T&D) equipment upgrade. If the storage is charged using generation that would otherwise be unused during times when demand is low, that leads to increased generation asset utilization. Furthermore, T&D asset utilization increases if the equipment is used to transmit energy to the storage for charging, presumably during times when T&D asset utilization is normally low.

Reduced T&D “I2R” Energy Losses

As with any process involving conversion or transfer of energy, energy losses occur during electric energy transmission and distribution. T&D energy losses increase as the amount of current flow in T&D equipment increases and as the ambient temperature increases. Therefore, T&D energy losses (also called I2R energy losses) tend to be:

  1. Lower at night and when T&D loading is light and when ambient temperature is relatively low, and
  2. Higher during the day and when loading is heavy and ambient temperature is relatively high. 

If storage is charged with grid energy, then the benefit is based on the difference between the cost for losses incurred to deliver energy for charging (off-peak) and the loss-related cost that would have been incurred if the energy was delivered in real-time (on-peak). If storage is charged with energy generated locally, then the losses avoided (and benefit) may be even higher because no/limited losses are incurred to get the energy to the storage for charging.

Notably, reducing T&D energy losses also reduces the amount of electric supply and T&D capacity needed to deliver a given amount of energy. That is because additional capacity is needed to generate, transmit and distribute “make-up” (i.e., extra) energy needed to offset losses incurred along the way. Consider a simple example: On-peak T&D energy losses are 8%– meaning that 8% of the energy that is generated is lost as that energy is transmitted and distributed. So, if electricity-using equipment uses100 kiloWatt-hours. However, because of the T&D losses, the generation capacity (power) needed to serve that 100 kiloWatt demand must be 108 kiloWatts so that the 8% extra energy needed to make-up for the T&D losses is generated.

Reduced Generation Fossil Fuel Use and Air Emissions

Including a significant amount of storage in the electric supply can reduce fossil fuel use by and air emissions from generation in five ways. First, energy used to charge storage tends to be from the most efficient fossil fueled generation and/or from renewables, reducing need for and use of less efficient intermediate duty or peaking generation. Second, fuel use and emissions may also be reduced due to dynamic operating benefits (described above). Third, the fuel efficiency of thermal generation tends to be higher when ambient temperatures are low. Fourth, energy transmission at night – when storage is charged and when ambient temperatures and T&D loading are relatively low – reduces (net) T&D energy losses (addressed below). Finally, storage use may enable deployment of more renewable generation than could otherwise be accommodated by the grid.

The degree to which fuel use is reduced or increased (due to use of storage) depends on three key criteria:

  1. The age and type of generation equipment and fuel used to generate electricity for charging storage,
  2. The age and type of generation equipment and fuel that would have been used if storage were not deployed, and
  3. Storage efficiency (i.e., energy storage losses reduce the net benefit).

Depending on circumstances, energy losses associated with storage – typically 10% to 30% -- may actually lead to an increase in total fuel use for and/or emissions from generation. The benefit associated with any increase or reduction depends on several criteria, especially the type and price of fuel(s) and generation involved and the electricity market structure, tariffs and rules. 

Avoided Transmission Access Charges

Many electric utilities and all non-utility independent power producers (IPPs) transmit electricity across transmission infrastructure that is owned by another entity. Similarly, utility customers must pay the cost incurred by the utility to own and to operate transmission needed to deliver the electricity as part of the utility’s retail charges. Related charges are often called transmission access charges.

The amount of benefit – for avoided transmission access charges – depends on, among other factors, tariff terms and pricing, location, and increasingly, time of year and time of day. Transmission access pricing may be based on:

  1. Energy used ($/kWh delivered), or
  2. Capacity used ($/kW).

In many areas of the United States, the marketplace for transmission capacity is still taking shape. As the marketplace for electricity opens up, transmission access charges will be available from the various regional transmission organizations. The trend toward locational marginal pricing of energy will allow for increasingly precise, location-specific allocation of transmission costs.

Reduced T&D Investment Risk

Risk is a function of uncertainty and cost. As with any investment, there is risk associated with investments in T&D upgrades and capacity expansion. While there is no formalized way to account for that risk, it is an actual cost borne by electricity users. 

Key uncertainties affecting T&D investments include those regarding a) the magnitude and timing of increased demand (customer load) and b) possible T&D project delay(s) that can occur for a variety of reasons. For example, T&D capacity may added to accommodate an expected increase of demand that does not materialize or that is delayed. The added capacity may never be used or it may be underutilized. In such a case, the risk is manifested as higher cost for the same level of electric service.

Consider another example: Utility power engineers identify a need for T&D equipment to serve a large new retail and/or residential development. After the T&D upgrade is completed, the utility receives news that the development project will not proceed as expected – it will be delayed for up to several years. During this delay, there will be no revenue received by the utility to cover the cost incurred for the upgrade. Utility customers at large must pay more to cover that unmet revenue requirement.

Another driver of risk is uncertainty that may lead to T&D upgrade project delays, which in turn may lead to service outages and damage to existing T&D equipment if that equipment becomes overloaded due to delays. Some sources of uncertainty that can cause costly project delays include:

  1. Utility staff or funding shortages,
  2. Institutional delays such as those for permits,
  3. Unforeseen challenges encountered during construction, and
  4. Weather.

Importantly, for most T&D upgrades, the investment risk is low to very low. A low-risk T&D investment tends to involve an upgrade that is routine, low cost and whose cost is likely or very likely to be offset by revenues. Nonetheless, storage – or any other modular resource that can be located downstream (electrically) from the T&D upgrade – can be used to manage the risk that does exist. 

For example, if there is uncertainty about whether an expected block load addition will occur or staffing shortages or permitting delays will affect the upgrade, modular storage could be used to defer the upgrade for one year – enabling the utility to delay a possibly risky T&D upgrade investment until there is less uncertainty.

Power Factor Correction

Reactance is an electrical phenomenon that electricity transmission and distribution designers and operators must address, because it can reduce the performance of the T&D systems. (The degree to which reactance affects AC circuit performance is expressed using a metric called power factor where lower power factor reflects a more significant impact.)

The typical utility response – to offset reactance and to improve equipment performance – is twofold:

  1. Include a (low) power factor charge for commercial electricity end users’ whose loads have an especially low power factor (e.g., below 0.85), and
  2. Use “power factor correcting” capacitors to offset the most common type of reactance (i.e., inductive reactance that causes current to lag voltage, mostly from motors).

Depending on circumstances, the utility solution may also involve other more expensive alternatives such as static synchronous compensators (StatComs) and static VAR compensators. 

Depending on the type and characteristics of storage involved, distributed storage could provide effective power factor correction. Battery or other storage systems whose storage media has direct current (DC) output and which include power conditioning systems to convert between alternating current (AC) and DC power are especially well-suited to power factor correction, in part because they can deliver power with leading or lagging current. Notably, power factor correcting capacitors (the most common approach used by utilities for power factor correction) are very inexpensive relative to storage system cost.

Nonetheless, the benefit from storage may still be attractive if the incremental cost to add power factor correction capability to storage is low enough.

Flexibility

Flexibility can be defined as the degree to which and the rate at which adjustments can be made to accommodate changing circumstances. Among other reasons that flexibility is valuable: a) flexibility may provide the means to adeptly respond to uncertainty and b) flexibility allows decision makers to manage risk and even to take advantage of business opportunities involving risk (i.e., to use ‘real options’ which are introduced below). 

In some circumstances, a significant financial benefit may be associated with flexibility – especially in a changing business environment with significant uncertainty. In those situations, the benefit for flexibility accrues because it enables selection and use of more optimal responses to those changing business-related needs, challenges, and opportunities. As an example: Modular electric resources (including storage) can be used to provide electric supply and/or T&D capacity “on the margin,” when and where needed. In some cases, that alternative could comprise a more optimal response than is possible using conventional “lumpy” capacity additions. Indeed, depending on the circumstances, a more financially optimal solution can involve higher revenue, more profit and/or lower cost per kW of load served and/or kWh delivered.

Real Options

A real option is a potentially attractive business opportunity that is possible because a physical asset is or could be owned. Another common definition is “an alternative or choice that becomes available with a business investment opportunity.” The term “real” is used because a real option actually exists and is an opportunity that an asset owner could actually pursue. 

Real options are different than financial options:financial options exist in the form of a contract which conveys the right – but not an obligation – to purchase or to sell an asset, usually a financial asset like a stock or a commodity.Consider an example: an energy storage plant owner may have various real options such as do nothing, store then sell electric energy on the wholesale market for profit, store then sell the electricity at the retail level, provide ancillary services to the grid, or lease or rent the equipment to another user.

Conclusions and Observations

Energy storage provides numerous benefits:

  1. For which there is no price,
  2. That only seem insignificant because they are spread across many end-users, or
  3. That are challenging to quantify.

Nonetheless, these benefits, in aggregate, are significant and ideally they are considered as part of regulatory, policy and legislative evaluations of the value of energy storage. Similarly, utilities could reduce overall cost-of-service by including the incidental and other benefits described above in assessments of the financial viability of energy storage.