Merchant Electricity Storage

Executive Summary

An especially valuable electricity storage value propositionOne or more individual benefits associated with a specific use. A value proposition is said to be attractive if the total value of all benefits exceeds all costs, including required return on investment, if any. is the “merchant” business model. It involves what can be described simply as continuous optimization of benefit derived from operation, cost incurred for the operation to generate profit. Owner-operators apply a “real options” mindset to understand and successfully pursue profit. To the extent that the merchant storage facility is technically able and qualified, it participates in the wholesale market for electricAn adjective meaning “needing electricity to operate” such as electric motor or wire. IEEE: Containing, producing , arising from, actuated by or carrying electricity. energy1. Energy is the potential of a physical system to perform work. (A common unit of work is foot-pound—the amount of energy needed to lift one pound up a distance of one foot.) Energy exists in several forms such as electromagnetic radiation ..., capacityThe rate at which equipment can either generate, convert or transfer energy. (power) and ancillary services. In some cases they may sell some of their services to one or more utilities or even high powerThe rate at which energy is generated, converted, transmitted, distributed or delivered. end-users directly, under contract. Currently there are GigaWatts of merchant storage capacity in operation or planned – primarily pumped hydroelectric, but interest in compressed air energy storage (CAES) is growing.



Beginning in the mid-1970s, several important drivers lead to an opening up of the electricity supply business (i.e., generation) to independent power producers (IPPs). First, conventionally there was a rationale for maintaining a regulated monopoly for the electric supplyA source of electric energy and/or capacity, possibly including generationThe manner in which electricity is generated. The electricity that flows through California facilities and purchases.. The rationale included, among other elements, the premise that only utilities with a regulated but mostly certain revenue stream could get the best financing and could take advantage of generation plant economies-of-scale. Second, a growing array of modular generation technologies–such as advanced reciprocating engines, microturbines, fuel cells – was expected to erode the financial and thermodynamic advantages associated with economies-of-scale. Third was the growing interest in enabling renewable energy (RE) generation and cogenerationGeneration of useful electric and heat energy using the same conversion system (e.g. internal combustion engine, combustion turbine or fuel cell). (generating electricity and usable heat concurrently), now known as combined heat and power. Finally, there was growing recognition of the attractiveness of competition – in the electric supply/generation marketplace – to keep costs low. 

The key outcome was the Public Utility Regulatory Policy Act (PURPA). PURPA set the stage for today’s ever more competitive and diverse electric supply, including: large utility and IPP-owned generation and electricity storage, RE generation, end-user/onsite “distributed” generation, combined heat and power (CHP), combined heating, cooling and power (CCHP), electricity storage and “demand-side” alternatives such as demand1. The rate at which electric energy is delivered to or by a system or part of a system, generally expressed in kilowatts or megawatts, at a given instant or averaged over any designated interval of time. 2. The rate at which energy is being used by... response and dynamic pricing.

Real-timePresent time as opposed to future time. (From Interconnection ReliabilityThe degree of performance of the elements of the bulk electric system that results in electricity being delivered to customers within accepted standards and in the amount desired. May be measured by the frequency, duration and magnitude of adverse... Operating Limits standard.) Market and Power Purchase Agreements

There are two complementary variations of the merchant value proposition. In one variation, the merchant plant owner participates in the wholesale market for electric energy, electric supply capacity, ancillary services and in the future transmission-related service.In the second variation, the merchant storage plant owner establishes a contract with a utility or other third party to provide specific services at specific times (generically referred to as a power purchase agreement or PPA). In some cases, merchant storage owners do some combination of both (wholesale market participation and PPAs). 

Although circumstances vary among markets, regions, specific locations, day-to-day and year-to-year, benefits derived from operation of a merchant storage plant include: a) electric energy time-shiftStorage of energy during times when cost or price is low, for use or sale when the energy’s value is high., b) electric supply capacity (power) and c) most or all of the ancillary services that are needed to maintain a stable and reliable electrical1. An adjective meaning “pertaining to electricity”. Electrical Engineer. 2. Related to, pertaining to or associated with electricity but not having its properties or characteristics. grid. Other potentially significant benefits could include transmissionAn interconnected group of lines and associated equipment for the movement or transfer of electric energy between points of supply and points at which it is transformed for delivery to customers or is delivered to other electric systems. support and/or transmission congestion relief. 

The optimal combination of benefits varies depending on several criteria, including: time-of-day, season, location, the available mix of electric supply resourcesAll generation, power purchases and loadAn end-use device or an end-use customer receiving electric power and using electric energy from the electrical system (grid). Note: The term load is sometimes treated as a synonym for demand, which is the measure of power that a load receives or... management resources that can be called upon to provide electricity to the grid. and longer term electricity demand trends. 

For both variations, the merchant storage owner uses a “real options approach” to continuously optimize the benefit derived from operation and cost incurred for the operation, to generate the highest profit possible. The real options approach enables plant owners to better understand and successfully pursue maximum profit from their storage assets.

Merchant Aggregators

Conventionally, merchant generation and storage plants have been large scale – usually dozens or hundreds of MegaWatts (MW). An increasingly viable and attractive alternative is aggregation of distributed energy resources (DERs) including distributed storage, generation and geographically targeted demand responseReductionA chemical process that results in the acceptance of electrons by an electrode’s active material. The opposite of oxidation. of retail electricity end-users’ electric load (power draw) in response to control or price signals. DR resources are deployed and used in lieu of installing/operating peaking generation capacity.. The storage, generation and demand response capacity is aggregated into a “block” of electric power that is operated like a much larger scale merchant plant. 

Such distributed deployment would enable merchant storage owners to derive “locational” benefits plus the benefits that accrue to larger scale merchant plant listed above. Currently aggregation of demand response resources is increasing. And the Smart GridCollectively; devices, practices and protocols that enable rich monitoring and situational awareness and flexible and robust control of various parts of or entire power systems under varying conditions. Among other objectives, Smart Grid is expected to... is expected to enable more aggregation by providing the monitoring, communications and control protocols and infrastructure needed to coordinate and control many diverse and distributed resources.

Conclusions and Observations

The merchant business model is a very important value proposition for storage. It enables owners to take the fullest advantage possible of the combination of: 1) the electricity marketplace, especially the wholesale market for electric energy, capacity (power) and storage’s capabilities and 2) electricity storage’s features and capabilities.