Energy Storage Use of System (ESUoS) Charging and Energy Storage Capacity Market (ESCM)

This page refers specifically to possible support mechanisms for energy storage within the Scottish government draft Energy Policy under consultation until 30th May 2017. ESUoS and ESCM are here proposed as a means of improving the policy so as to specifically design a workable mechanism to support low cost energy storage deployment including pumped hydro energy storage. These suggestions could also apply throughout the UK and in many other countries around the world…

Firstly please consider that there is a major drawback with the cap and floor concept, which has been mentioned as a possible support mechanism for pumped hydro energy storage investors:
The cap and floor pricing which is mentioned without any detail in the draft Energy Strategy may not be so great for pumped hydro and our energy system security because the cap and floor mechanism will end up eliminating price signals. For instance a cap and floor on annual revenue would mean that if the revenue cap is earnt by end of March then there is no incentive for the asset owner to operate any further for the rest of the year. In fact the logical asset owner would keep their machines idle for the rest of the year so as to avoid wear and tear and reduce long term O&M costs. If a revenue floor is set too high then the asset owner may not operate their machines at all. If a revenue cap is too low then it will disincentivise investment. If a revenue floor is too low then it might as well not be there. If a revenue cap is too high then it does not protect the consumer as intended. The setting of appropriate cap and floor levels is an arbitrary and risky approach.

We must support investors but ensure response to market price signals all year round:
Wind Farm Analytics agrees that we need to assist with long term certainty for energy storage investors because the present market is not delivering cost effective large scale energy storage such as pumped hydro which has long construction times before revenue flows as well as uncertainty in future market price conditions. We need a support mechanism which assists competitive investors to deploy large scale energy storage but leaves them free to trade in the market where price signals will encourage the competitive deployment of energy storage. The great thing about energy storage is that it responds very well to market price signals and system need – when price is low then energy storage will store and when price is high then energy storage will deliver.

Competitive auction rounds lowering cost for consumer:
Government wants to deliver value for the consumer and a suggestion of how to achieve this is to employ competitive auction processes and large scale Energy Storage Capacity Market (ESCM). The auction should competitively minimise the required support price per MWh of energy storage capacity. Its also important for renewable energy generator owners and achieving decarbonisation targets that we deploy the cheapest energy storage, otherwise renewable energy generators may suffer reputational damage by being blamed for grid instability and higher costs for the consumer thanks to unnecessarily expensive energy storage (such as large scale lithium batteries, although these may have their place for some specific services such as enhanced frequency response which already had its own auction). Note that a cap and floor system cannot be deployed in a fair auction-style competition because an auction competition requires a single price parameter (such as support price per MWh of energy storage capacity) whereas cap and floor together constitute two prices. A competitive auction should establish who will build the energy storage for the least investment support per MWh of capacity.

Multiple auction rounds allow adjustable strategic planning:
The possibility of multiple auction rounds enables whole system long term strategic planning for energy security and accomodating existing and future renewable generators on the grid, as well as enabling electrification of heat and transport. A first round in 2018 might call for 1000 MW x two days storage duration = 48000 MWh energy storage capacity. A second round in 2019 might call for 3000 MW x 48 hours =144000 MWh. A third round in 2020 might call for 6000 MW x 48 hours = 288000 MWh. In this example we would then be able to handle 2 days without 10 GW of wind capacity. Its just an example and grid strategists could obviously tune it as required. There is certainly a need for large scale bulk energy storage as demonstrated by many of our largest wind farms dumping between 10-30% of their annual energy through curtailment when the grid cannot handle their variability – some of those individual wind farms are dumping many thousands of MWh in a single night which is well beyond the capacity of the world’s largest lithium battery, recently reported as 120 MWh.

No money required up front:
What does this cost? Imagine that the average lower (winning) auction price was £5000 per MWh energy storage capacity. We could imagine the winner(s) might be tried and tested, long life (75-100 year), large scale (such as 1000 – 100000 MWh per single installation) pumped hydro energy storage but the auctions can welcome all energy storage methods – if alternative or innovative energy storage systems can be cheaper for the consumer then let them compete in the auctions. Imagine one or many pumped hydro projects were offered to be built for the first auction of 48000 MWh. This would imply the auction winning competitive investors would get £240 million support toward constructing 48000 MWh capacity. Imagine the actual construction costs were £1200 million for 48000 MWh, then £240 million investor support would amount to a 20% capex reductiion. No money is required up front! I suggest that the money is paid monthly or annually over ten years of operation. If the support for this 48000 MWh is £240 million then this amounts to £24 million per year for ten years, or £500 annually per MWh of energy storage capacity, paid over ten years.

How would investors be paid?
Energy Storage Use of System (ESUoS) charging can be introduced in proportion to annual metered MWh. So all generators attached to the grid will share equally the cost of energy storage in proportion to their annual energy generation. Transmission and Distribution Network Use of System charges (TNUoS/ DNUoS) are shared by all, so why not energy storage? Energy storage is just as important to our energy security as the transmission and distribution network so lets share the cost through an Energy Storage Use of System (ESUoS) charging system. Also, it is argued that energy storage should be exempt from transmission and distribution Use of System charging, although this is a separate issue. The investors would be paid by the relevant ESUoS funds raised at the end of each year/month of operation (for the first ten years I suggest as a reasonable investor timeline). Most importantly the operational asset owner will trade their asset freely (without any constraint except some basic safeguards such as they must be connected only in GB and not France) in the markets responding to price signals as efficiently as possible to determine whether the unit will store or deliver.

What does it cost?
Let us imagine average GB power is 40000 MW through the year – this is a ballpark figure although may have reduced a bit in recent years. There are 8760 hours in a year so this equates to approximately 350 million MWh of generation. Therefore the annual cost of our first auction of 48000 MWh energy storage capacity would be £24 million shared between 350 million MWh of generation, ie £0.06857 per MWh (less than 7 pennies per MWh).

What effect would this have on consumer bills?
EU statistics show that the GB consumer pays around £165 per MWh. Therefore if this cost was passed onto the consumer directly it would only amount to £0.06857/£165 or 0.042% on the electricity bill. Similarly if we increased the energy storage capacity from 1 GW to 10 GW for 48 hours then the cost would still only be a minor fraction of the electricity bill at 0.42%. This is an insignificant cost considering the benefits.

In fact the increased flexibility offered by large scale energy storage and avoidance of curtailment waste, as well as better utilisation of existing grid, would probably end up saving the consumer considerably. For instance, the Carbon Trust and Imperial College London have produced a report indicating that increased flexibility through large scale energy storage such as pumped hydro could save the UK consumer between £2.4 billion per year (equivalent to around £50 savings per average consumer bill) and £7.0 billion per year.