Energy Storage in Deregulated Power Markets

By Michael I. Henderson

The large scale development of energy storage presents risks and opportunities. Storage devices can provide more efficient use of the transmission and distribution systems, facilitate the development of variable resources and improve the economic and environmental performance of electric power production resources. But increased reliance on storage will also affect the reliability of the power system and there will be a need for improved modeling of the net load forecasts, resource performance and transmission system performance.

Storage has played a vital role in the development of the electric power industry beginning with Volta’s experiments with batteries around 1800. Battery applications grew with the early evolution of electric grids that were rapidly expanding in the early 20th Century. This period also saw competition among different automotive technologies that included electric cars. Other uses for batteries grew and remain in common use today, such as applications in power system protection and control, appliances and uninterruptable power supplies.

Many resources used in the nascent stages of the electric power industry were variable, such as hydro resources that needed to change output with river flows. One early solution to this problem was the use of pumped hydro facilities. The Rocky River Pumped Hydro Facility, which was the first such facility in the United States, came on line in 1926 to manage river flows and to provide peak shaving service. Thermal and mechanical storage systems were developed over the last century, such as turbo governor controls, which provide ramping and regulation services to this day. Power quality issues have been addressed using other mechanical storage systems, such as flywheels.

Today, advanced storage technologies present many opportunities that include shaving peak demand; providing quick start capability; hedging or reducing energy; reducing capacity and ancillary service costs to customers; improving environmental performance; and facilitating the integration of renewable generation resources. But the increasingly complex economics of storage are key to realization of any and all those applications.

The traditional rate structure, which is still in effect today, includes both demand and energy charges. The demand component pays for the capacity of resource supply, and both transmission and distribution infrastructure. The energy component captures production costs and may be regularly adjusted to account for changes in fuel costs. Separate rates for industrial, commercial and residential loads modify electrical use patterns. For example, industrial rates may be low to encourage 24-hour-a-day baseload electric consumption.

Rates sometimes vary with the season and the time of day to encourage use patterns, including load interruption or use of local storage during periods of high system load. For example, discounts for interruptible loads were and continue to be offered on the retail level, and wholesale electric markets often pay for load reductions.

Planning in deregulated competitive markets is complicated by independent investment decisions and market rules and bid strategies that increase the variability of unit dispatch, unit commitment, ancillary service providers and network flows. Technology and other physical changes affect system development and can create additional changes in the state of the system. This is especially true of the large-scale operation of intermittent resources, such as wind and photovoltaic generation.

The economic performance of storage devices is dependent on many factors that affect their penetration and use: the capital costs and operating costs of the storage device itself; the operating environment and duty cycle, which can influence the overall performance and availability of the storage equipment; and the behavior of wholesale electric markets, which are difficult to predict and are highly variable.

Market behavior is key because adequate differences between the peak and off-peak price for electricity are essential for the application of the storage device to prove economical. Most of the operating costs are captured when the efficiency of the device (defined here as the output energy divided by the input energy) is greater than the purchase price divided by the supply price.

For example, a pumped storage hydro unit that is able to produce 2 MW for every 3 MW purchased would be 67 percent efficient. This type of unit would be economical when the ratio of the off-peak purchase price to the on-peak production price is less than 67 percent. The differences between peak and off-peak prices, however, decrease with increased application of electric storage devices. Also, the incentives for providing ancillary services, such as frequency regulation, must be weighed against the effect these modes of operation have on the physical performance of the storage device.

Many types of energy storage depend on factors that are independent of the electric power system. For example, the operation of thermal storage systems may be a function of industrial processes, weather, desire to increase production and other factors. The primary purpose of electric vehicles is to provide transportation and not support for the electric grid, so they present particular challenges to grid management.

The overall operation and planning of the system is affected by the net load profile, which is influenced by the amounts, locations and operation of electric energy storage applications, which are often behind the meter producing or consuming energy. Some of the effects of storage are as follows.

  • Normal and emergency equipment ratings are dependent upon loading cycles.
  • Resource adequacy requirements are usually most influenced by the system peak.
  • Both the economic capacity mix and economic dispatch of baseload, cycling and peaking resources are dependent on the net load shapes.
  • Emission of pollutants is often highest at the time of system peaks, when less efficient and less environmentally controlled resources are dispatched. Storage devices can reduce overall emissions by utilizing increased production from relatively efficient low emitting units and reducing the run times of higher emitting peaking units.
  • Transmission system performance is affected by the economic placement and dispatch of resources. Storage located near load centers can reduce peak transmission flows to load pockets and improve the load response to electric energy prices.
  • Storage affects system stability, harmonics, transients, and system protection performance.

The dependence of storage locations and use patterns on consumer behavior greatly complicates end-use models that are required in deterministic and stochastic studies because storage introduces additional uncertainties to load levels, characteristics and demand response. Smart meters, however, improve observability and exercise either direct control over charging and discharging cycles or provide indirect control by providing price signals to the storage device. The judicious use of smart meters can positively influence equipment loading cycles and defer the need for system infrastructure improvements. Utilization of smart meters can improve overall system security by improving the projections of net load used by system planners and operators. Cyber security requirements, however, must be taken into account.

Amid all the complexity it is important to not lose sight of what storage has to offer. Besides facilitating the integration of variable generation resources, storage devices can also provide many ancillary services, including balancing and regulation, operating reserves and voltage regulation and support.

Large-scale deployment of storage devices will change the need for their dispatch. This is because storage would make up a more significant portion of the regional fuel mix. For example, there may be few hours when all or most of the storage would be required to supply energy to the system when the system is dominated by one type of generating fuel. But extreme system conditions, perhaps due to severe seasonal temperatures, could considerably increase the reliability and economical need for production by storage devices.

Energy storage has played an important role in the evolution of the electric power system. We can learn from industry experience from over a century ago and from many recent innovative ideas currently under development. Ultimately, however, the amount of energy storage applied will be a function of policies, such as the retail rates and wholesale market structure, as well as the economic performance of both the storage devices and the wholesale electric markets.




Michael I. Henderson, an IEEE senior member, is Director, Regional Planning and Coordination at ISO New England. Previously, he had more than 22 years’ experience at the New York Power Authority, Long Island Lighting Company and American Electric Power. Since July 1999, he has presented technical seminars as well as about six dozen panel and technical papers at IEEE and other forums. A native of Brooklyn, N.Y., he holds master’s degrees in electrical power engineering (1977) and electrical engineering in (1976) from Rensselaer Polytechnic Institute. In 1975, he earned his bachelor’s in electrical engineering at the Polytechnic Institute of New York, where he also served as an adjunct lecturer from 1993 to 1999.