BOSTON, May 1, 2024 /PRNewswire/ -- As the volume of
variable renewable energy (VRE) sources penetrating electricity
grids increases globally, so does the need to manage the increasing
uncertainty and variability in electricity supply. Long duration
energy storage (LDES) technologies will be key in supporting
electricity grids with greater penetrations of VRE over the coming
decades. However, while many of the LDES technologies are likely to
be cheaper than Li-ion batteries, on a US$/kWh basis at longer
durations of storage, they will need to generate revenues from
multiple sources in order to be profitable. Multiple opportunities
to generate revenues from LDES assets do exist, though to improve
investor confidence and to strengthen the economic case for these
technologies, longer and larger electricity price arbitrage
opportunities and changes to remuneration mechanisms for other
services will be needed. This article draws insights from
IDTechEx's market report, "Long Duration Energy Storage Market
2024-2044: Technologies, Players, Forecasts."
How can LDES technologies generate revenues?
There are three key sources of revenues that can be generated
from owning and using LDES technologies, stemming from price
arbitrage, capacity market (CM) (or resource adequacy (RA))
contracts, and ancillary service provision.
These technologies will be used at grid-scale to store and
dispatch energy from VRE over longer timeframes. Therefore firstly,
asset owners will look to charge these systems when electricity
prices are higher, and discharge when they are lower, taking
advantage of price arbitrage.
Secondly, asset owners can win capacity market contracts. The
capacity market is a mechanism used to ensure that there is a
reliable and secure supply of electricity generation capacity
available to meet electricity demand. It is designed to address the
intermittency and unpredictability of VRE power generation, and
times when the electricity system is stressed, e.g., by cold snaps.
The capacity market provides a financial incentive for power
generators to maintain or increase their capacity, thus ensuring
grid reliability. The capacity market allows existing and new-build
generators to compete for contracts at auction, which (at least in
the UK) can vary from 1 to 15 years. Payments are made to
generators not for the electricity they deliver but for the
availability to provide capacity at times of peak demand. New build
generators can win 15-year contracts in the T-4 Auction in the UK,
which provides longer-term revenue and investment security.
Therefore, the capacity market is a key driver for investment into
new LDES assets that can provide dispatchable power.
Thirdly, LDES technologies could be used to provide ancillary
services for the grid, e.g., voltage support, frequency restoration
and reserve, black start, etc, to maintain grid reliability. Asset
owners are remunerated by transmission system operators (TSO) for
the provision of these services. Energy storage systems could also
provide multiple services while taking advantage of price
arbitrage, allowing asset owners to stack revenues and maximize
profitability.
What are the challenges with revenue generation from
LDES?
As suggested in IDTechEx's market report, while there are
multiple opportunities for LDES asset owners to generate revenues,
there are some challenges that weaken the economic case for these
systems. Firstly, price arbitrage opportunities are currently not
frequent, long, or large enough to make a strong economic case
alone for LDES technologies. Therefore, generating greater revenues
from price arbitrage is dependent on the growing penetration of
VRE. While CM contracts are likely to be a key source of
high-volume and long-term revenues for owners, they could be
redesigned to not only ensure the security of supply but also to
value the other benefits of storage, such as its contribution to
electricity price reduction, support for renewable growth, and
provision of system services.
Most ancillary services could easily be provided by a 2-hour
duration of storage system, such as existing Li-ion battery energy
storage systems (BESS). Therefore, LDES asset owners will be in
direct competition with owners of these shorter-duration Li-ion
systems for the provision of many ancillary services. Moreover, the
current market structure does not always fully remunerate the range
of services certain ES technologies can provide. For example, a
mechanical ES system could be scheduled to provide voltage support
but will also provide grid inertia as a consequence of heavy
spinning masses in the system. If this project had won a contract
for providing voltage support but not grid inertia, and these
services cannot be separated, the ES asset owner would not be fully
remunerated for the provision of both services. Moreover, these
contracts are typically provided over day-to-month timeframes.
Therefore, it is difficult for an asset owner to assess, early on
in project development, which ancillary services they will be
remunerated for. Further challenges related to generating revenues
from LDES technologies can be found in more detail in IDTechEx's
new market report.
Outlook for revenue generation from LDES
Ultimately, there is generally a need for long duration energy
storage systems to have longer-term revenue visibility, which is
important for making investments in new systems, while also
proposing to reduce the payback period for these assets, thus
strengthening the economic case for LDES systems. As LDES systems
could be deployed at scales from 100 MWh to multiple GWh, the value
of these systems will be in the range of US$100M-1B+ and require several years to develop.
Providing large volumes of funding over a long development time
increases the risk of investment, which could spur an increase in
the cost of capital and thus re-emphasizes the need for longer-term
revenue visibility.
Players in interviews with IDTechEx have generally called for
regulators to make reforms to long-term CM or RA contracts and
re-design remuneration mechanisms for the provision of multiple
ancillary services to provide asset owners with greater volumes of
revenue from these services. Positively, however, price arbitrage
opportunities will less-so be driven by electricity market
regulation. As the volume of VRE penetration increases, this will
create greater swings in electricity supply and thus create greater
volatility in electricity prices, as well as more frequent and
longer arbitrage opportunities. Therefore, price arbitrage is
likely to be a growing contributor to revenue generation from LDES
in the long term.
For more information on LDES technologies, players,
applications, revenue streams, electricity markets, variable
renewable energy (VRE) penetration, grid stability and flexibility,
and granular 20-year market forecasts, please refer to IDTechEx's
market report, "Long Duration Energy Storage Market 2024-2044:
Technologies, Players, Forecasts."
To find out more about this report, including downloadable
sample pages, please visit www.IDTechEx.com/LDES.
About IDTechEx:
IDTechEx provides trusted independent research on emerging
technologies and their markets. Since 1999, we have been
helping our clients to understand new technologies, their supply
chains, market requirements, opportunities and forecasts. For more
information, contact research@IDTechEx.com or
visit www.IDTechEx.com.
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