Valuing Energy Storage as a Flexible Resource. Final Phase 1 Report for Consideration in CPUC A

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1 Valuing Energy Storage as a Flexible Resource Final Phase 1 Report for Consideration in CPUC A June 19, 2014

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3 Valuing Energy Storage as a Flexible Resource Final Phase 1 Report for Consideration in CPUC A June 19, Copyright. All Rights Reserved. Energy and Environmental Economics, Inc. 101 Montgomery Street, Suite 1600 San Francisco, CA

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5 Table of Contents 1 Introduction Overgeneration is a key challenge Flexibility challenges How soon will overgeneration occur? Magnitude of overgeneration Increase in overgeneration under high RPS scenarios Frequency of overgeneration (under 40% RPS) Duration of overgeneration Renewable Curtailment Managing overgeneration has significant value Energy storage can reduce renewable curtailment Overgeneration requires long-duration solutions System level cost-benefit analysis is crucial Comparing value of short- and long-duration Small market for frequency regulation Serial dispatch of short-duration Production simulation understates flexibility need and value Benefits of a diverse portfolio Conclusions Appendix A: Cost of Renewable Curtailment Avoided RPS Costs... 27

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7 Interim Report Introduction 1 Introduction Energy and Environmental Economics (E3) produced this report to briefly summarize key issues that are critical to consider when analyzing the potential benefits of energy storage. E3 is pleased to provide this report for parties to consider in the California Public Utilities Commission (CPUC) preceding considering the applications of PG&E, SCE and SDG&E (A ) for approval their respective energy storage procurement framework and programs as required by D This document, dated June 19, 2014, contains some revisions and added material to the interim report filed on June 12 th. The overall conclusions remain unchanged. The impetus for this report grew out of discussions between E3 and several parties to the CPUC proceeding after the June 2, 2014 Workshop on IOU Energy Storage Procurement Applications and during the 2014 Annual Energy Storage Association Conference in Washington D.C. June 3-6, We discussed the methods described for utility evaluation of energy storage project proposals and for the Common Evaluation Protocols. Throughout the week we shared our thoughts about how those methods may not fully capture the value of energy storage with the higher penetrations of renewable generation anticipated and planned for in California. In January 2014 E3 published the report Investigating a Higher Renewables Portfolio Standard in California on behalf of PG&E, SCE, SDG&E, SMUD and LADWP (Utility High RPS Report). 1 Using E3 s stochastic production simulation model REFLEX, E3 quantified the flexibility needs of the California grid under 40 and 50% RPS scenarios. 2 REFLEX is specifically designed to investigate flexible capacity needs and value with variable renewable resources (VER). REFLEX performs random draws of weather-correlated 1 Investigating a Higher Renewables Portfolio Standard in California, Energy and Environmental Economics, January See Energy and Environmental Economics, Inc. P a g e 1

8 Valuing Energy Storage as a Flexible Resource Interim Report for Consideration in CPUC A load, wind, solar and hydro conditions taken from a very large sample of historical and simulated data. It characterizes the need for system ramping capability through stochastic treatment of load, wind and solar generation, hydropower conditions, dispatchable generator outages and other random variables on multiple time scales: annual, monthly, diurnal, hourly and sub-hourly. The model uses optimal unit commitment and economic dispatch to model the ability of the system s dispatchable resources to respond to a full range of conditions. Flexibility violations such as shortages in upward or downward ramping capability are characterized according to their likelihood, duration and depth, using metrics that are analogous to conventional reliability metrics such as LOLP, Loss of Load Probability Expectation (LOLE), and Expected Unserved Energy (EUE). REFLEX employs an economic framework to evaluate the costs and benefits of investments in flexible resources. In order to determine whether investments in new flexible resources are cost-effective, flexibility violations are assigned cost penalties based on their economic value. New resources are then tested for their ability to prevent flexibility violations and avoid the associated cost penalties. The capital and operating costs of new flexible resources are compared to the value of flexibility violations they avoid, ultimately identifying a least-cost portfolio of new resources. This framework can be used to evaluate flexible resources such as combustion turbines, reciprocating engines, energy storage, or demand response, as well as changes in operating procedures such as improved forecasting, participation in a regional market, or renewable curtailment. The Utility High RPS Report and subsequent work using the REFLEX model have produced results demonstrating how specific costs, benefits and input assumptions can dramatically impact the valuation of energy storage as a flexible resource. This report presents several of the more important findings for your consideration as the CPUC P a g e 2

9 Interim Report Overgeneration is a key challenge reviews the IOU energy storage applications in A The overarching themes of this report are that a cost-effectiveness framework for energy storage must: Include not just existing markets and avoided costs, but also the future benefits of reducing renewable curtailment under higher RPS levels. Describe how the relative costs, benefits and tradeoffs of short- vs. longduration solutions will be quantified and evaluated. Include system level and portfolio costs and benefits. 2 Overgeneration is a key challenge 2.1 Flexibility challenges The Utility High RPS Report models CAISO system flexibility needs under 33%, 40% and 50% RPS levels The report describes five distinct types of flexibility challenges that the system will face under high renewable penetration and shows a sample operating day in January that illustrates these five challenges: 1. Downward ramp: as solar generation increases in the morning, flexible resources will be needed to ramp generation down (or ramp load up). 2. Minimum generation: to accommodate solar generation during the day, fossil generation will need to turn off, or operate at minimum levels, but still be ready to increase generation in the late afternoon and early evening. 3. Upward Ramp: in the evening, as solar generation declines, other generating resources will need to ramp up (or load ramp down). 4. Peaking Capacity: sufficient resources will be needed to meet peak loads with sufficient reserve margins. 5. Sub-hourly Flexibility: flexible resources will be required to provide both existing and new types of ancillary services including frequency regulation, flexiramp and load following Energy and Environmental Economics, Inc. P a g e 3

10 Valuing Energy Storage as a Flexible Resource Interim Report for Consideration in CPUC A Figure 1: Renewable Integration Challenges The Utility High RPS study models flexibility needs in high RPS scenarios in 2022 and finds that the largest renewable integration challenge is overgeneration. Overgeneration occurs when must-run generation non-dispatchable renewables, combined-heat-and-power (CHP), nuclear generation, run-of-river hydro and thermal generation that is needed for grid stability is greater than loads plus exports. Overgeneration can occur even in a highly flexible power system if there is simply not enough load to absorb the available quantity of renewable energy during a given hour. However, additional overgeneration or curtailment of renewable output may occur due to lack of power system flexibility. As an example of this, consider a situation where limited upward ramping capability would prevent the system operator from meeting the steep upward ramp that occurs after sundown on the day depicted above. One strategy for addressing this situation is to curtail renewable resource output during the middle of the day, thus reducing the magnitude of the upward ramp to a manageable level and avoiding firm load curtailment. P a g e 4

11 Interim Report Overgeneration is a key challenge 2.2 How soon will overgeneration occur? While there is currently no legislated RPS requirement above 33%, there are several reasons overgeneration is likely to occur at significant levels before 2020: Renewable procurement is on a trajectory to hit 40% levels: Even absent a legislative requirement, procurement is on track to exceed 33% in Project failure in recent solicitations has been much lower than anticipated based on prior experience. Large declines in PV prices have also accelerated procurement outside of IOU RPS solicitations. Statewide model without transmission constraints: The production simulation case modeled in REFLEX did not include transmission and associated constraints that would increase overgeneration challenges. Solar development is concentrated in Southern California: Solar project development is heavily weighted to Southern California. The South of Path 15 (SP15) zone will reach 40% RPS generation levels and experience overgeneration much sooner than the state as a whole. Investment Tax Credit: Most of the solar projects planned are endeavoring to begin operation before the end of 2016 to ensure their eligibility for the Federal Investment Tax Credit. Production simulation tends to overstate system flexibility: The specific ways in which flexibility can be overstated are described below. E3 took steps to constrain hydro generation and imports to realistic levels. However, the model does assume all fossil generation can be dispatched by the CAISO within operating constraints. In reality, self-scheduled generation may not be readily available for flexible dispatch by the CAISO. Indeed, negative prices due to overgeneration have already occurred in California, in advance of even 33% RPS. Figures 2-4 show total generation, renewable generation and SP-15 prices for March 6, Figure 2 shows that the thermal units are ramped down 2010 Energy and Environmental Economics, Inc. P a g e 5

12 Valuing Energy Storage as a Flexible Resource Interim Report for Consideration in CPUC A in the middle of the day to accommodate ~3,000 MW of solar generation (Figure 3). This leads to several intervals with negative prices between HE 11 and HE 17 (Figure 4). Figure 2: CAISO March 6, 2014 Generation by resource type Figure 3: CAISO March 6, 2014 Renewable generation P a g e 6

13 Interim Report Overgeneration is a key challenge Figure 4: CAISO March 6, 2014 SP-15 locational marginal price (LMP) 2.3 Magnitude of overgeneration E3 s Higher RPS Study finds that overgeneration is pervasive at RPS levels above 33%, particularly when the renewable portfolio is dominated by solar resources. This occurs even after thermal generation is reduced to the minimum levels necessary to maintain reliable operations. Overgeneration is most pronounced in the spring, when loads are relatively low, hydro generation is peaking and solar generation is substantial. Figure 5 shows an April day in 2030 under the 33% RPS, 40% RPS, and the 50% RPS Large Solar Scenarios on which the system experiences both low load conditions and high solar output. A very small amount of overgeneration is observed at 33% RPS. The 40% RPS Scenario experiences over 5,000 MW of overgeneration, while the 50% RPS Large Solar Scenario experiences over 20,000 MW of overgeneration Energy and Environmental Economics, Inc. P a g e 7

14 Valuing Energy Storage as a Flexible Resource Interim Report for Consideration in CPUC A Figure 5: Generation mix calculated for an April day in 2030 with the (a) 33% RPS, (b) 40% RPS, and (c) 50% RPS Large Solar portfolios showing overgeneration P a g e 8

15 Interim Report Overgeneration is a key challenge 2.4 Increase in overgeneration under high RPS scenarios Table 1 and Figure 6 show overgeneration statistics for the 33%, 40% and 50% RPS Large Solar Scenarios. In the 33% RPS scenario, overgeneration occurs during 1.6% of all hours, amounting to 0.2% of available RPS energy. 3 In the 50% RPS Large Solar case, overgeneration must be mitigated in over 20% of all hours, amounting to 9% of available RPS energy, and reaches 25,000 MW in the highest hour. Table 1: 2030 Overgeneration statistics for the 33%, 40% and 50% RPS Large Solar Scenarios Overgeneration Statistics 33% RPS 40% RPS Total Overgeneration 50% RPS Large Solar GWh/yr ,000 12,000 % of available RPS energy 0.2% 1.8% 8.9% Overgeneration frequency Hours/yr ,000 Percent of hours 1.6% 8.6% 23% Extreme Overgeneration Events 99th Percentile (MW) 610 5,600 15,000 Maximum Observed (MW) 6,300 14,000 25,000 3 Curtailment as a percentage of available RPS energy is calculated as: overgeneration divided by the amount of renewable energy that is needed to meet a given RPS target Energy and Environmental Economics, Inc. P a g e 9

16 Valuing Energy Storage as a Flexible Resource Interim Report for Consideration in CPUC A Figure 6: Increase in overgeneration with increasing renewables penetration 2.5 Frequency of overgeneration (under 40% RPS) E3 analysis performed since the Utility High RPS Report was published shows that overgeneration is persistent throughout the year under 40% RPS scenarios. Figure 7 shows an illustrative dispatch of resources, including ~1,500 MWs of storage, on a flexibility constrained spring day in the REFLEX model. The model dispatches all available resources within their defined operating parameters to meet load at the lowest possible cost. In this example day, the storage is charging to reduce overgeneration during the day and discharging in the early evening to reduce the dispatch of a combustion turbine or demand response (DR) to meet peak needs. Fossil resources (Steam Turbine (ST), Gas Turbine (GT) and combined cycle gas turbines (CCGT)) are reduced to minimum load during the day, but must be online to meet the evening ramp and peak net load. 4 Other resources, including hydro and imports are also reduced to minimum loads during the day. Combined heat and power (CHP) and nuclear are assumed to be non-dispatchable base load resources. 4 Net load is the total system load minus the non-dispatchable variable energy resources, including wind and solar generation. P a g e 10

17 Interim Report Overgeneration is a key challenge Figure 7: Illustrative dispatch energy storage on flexibility constrained day Figure 8 shows that overgeneration occurs throughout the year. As described above, overgeneration is most prevalent in the spring, with average overgeneration of over 4,000 MW near solar noon in March. Overgeneration occurs in significant quantities in the fall and winter as well. Only when loads peak in the summer is overgeneration minimal. Peak net loads occur in the evening and either DR or combustion turbines (CTs) are dispatched during peak net load hours in the early evening. These resources are dispatched not to meet peak loads, but to respond to the substantial ramp in net load that occurs between HE 15 and HE Energy and Environmental Economics, Inc. P a g e 11

18 Valuing Energy Storage as a Flexible Resource Interim Report for Consideration in CPUC A Figure 8: Average renewable curtailment and demand response/ct dispatch throughout the year 2.6 Duration of overgeneration Many prior studies have focused on the hourly and sub-hourly variability in renewable generation to quantify operational renewable integration needs. The Utility High RPS Study examines the integration challenge from both a long-term planning and shortterm operational perspective. With this approach, overgeneration emerges as a primary challenge requiring longer-duration solutions. Referring back to Figure 5, on the particular spring day presented, overgeneration occurs from hour ending (HE) 09 to 17 under 40% RPS and HE 08 to 18 under 50% RPS durations of 8 and 10 hours respectively. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avg. Renewable Curtailment (MW) ,963 1,860 1, ,272 2,846 2,154 1, , ,124 1,471 4,168 3,493 2,618 1, ,264 1,358 1, ,465 1,750 4,298 3,533 2,667 1, ,050 1,395 1, ,333 1,567 3,914 3,035 2,245 1, , ,726 2,074 1, , Avg. DispatchedDemand Response (MW) Figure 8 shows that significant quantities of overgeneration occur from hour ending (HE) 9 to 16 throughout the spring, a duration of 7 hours. P a g e 12

19 Interim Report Renewable Curtailment If curtailment of renewable generation at such high levels is to be avoided, new strategies, resources and market designs must be developed to provide flexibility and absorb overgeneration. These potential solutions must be available for periods lasting up to 10 hours, during large portions of the year and must comprise a large total capacity. 3 Renewable Curtailment One solution to overgeneration is to curtail renewable generation. However, curtailment may be an expensive strategy. The immediate cost of curtailment is that the utility cannot use zero emission and marginal cost generation that has already been contracted and paid for. Curtailing renewable generation can also make it more difficult for utilities to achieve RPS and GHG emission reduction goals, which can impose additional costs on the utility. If utilities have procured resources to meet the RPS with the expectation that a certain level of renewable energy will be delivered from these resources, frequent renewable curtailment may increase the risk of being out of compliance in a given year. There are two strategies for minimizing this risk: 1) the utility can procure additional renewable resources to comply meet RPS targets; or 2) the utility can procure resources that provide enough flexibility to ensure that energy from their renewable resources can be delivered (such as energy storage). For a utility, the choice between these two options will depend on the cost of procuring additional renewables versus the cost of procuring flexible resources, as well as the incremental fuel and operating costs associated with each option. E3 has developed a low and high avoided curtailment value scenario to illustrate the impact of curtailment on system costs and flexible resource value (using methods further described in Appendix A). The low case reflects a scenario where utilities have 2010 Energy and Environmental Economics, Inc. P a g e 13

20 Valuing Energy Storage as a Flexible Resource Interim Report for Consideration in CPUC A procured sufficient renewable generation to meet RPS targets even with anticipated curtailment levels and do not need to procure additional renewables. Hence there is no cost to the utility for replacement renewable generation. The high case presumes that utilities must procure additional renewables to meet required RPS targets when curtailment occurs. In the high case, the replacement cost for renewable generation is $125/MWh, reflecting a higher levelized cost for PV that has a lower capacity factor due to its being curtailed on a regular basis. A high cost of curtailment leads to negative values for energy when overgeneration occurs (Figure 9). We refer here to energy value rather than prices because the wholesale market prices for energy will not necessarily reflect the cost of curtailment to the utility. Figure 9: Average hourly energy value in April under 40% RPS scenario with low and high cost of curtailment 3.1 Managing overgeneration has significant value Avoiding curtailment of renewable generation with flexible resources can provide significant system value. Here we consider the same 40% RPS scenario as above. Without any additional flexible resources the default strategy to prevent overgeneration is curtailing renewable generation. Recall that the REFLEX model dispatches available resources to meet system load with the minimal cost of energy production. Figure 10 P a g e 14

21 Interim Report Renewable Curtailment shows the relative cost of two specific strategies to meet system needs - renewable curtailment to avoid overgeneration and dispatching flexible resources such as DR or CTs to meet peak net loads in the evening. Reducing peak load is often considered one of the highest potential values for energy storage. In this case the total annual value of DR or CT capacity costs that could be avoided with a flexible resource such as energy storage is just under $100 million. 5 In comparison, the cost of curtailment that can be avoided with flexible resources is over $300 million, more than three times the capacity value. This illustrates that avoiding renewable curtailment is a potentially large and quantifiable value that should be included in the cost-effectiveness evaluation of flexible resources. Figure 10: Relative value of avoided curtailment, avoided DR/CT dispatch with high curtailment value for a 40% RPS scenario 5 With the assumptions used in this analysis, using DR or CT s to meet peak net loads resulted in similar total annual costs Energy and Environmental Economics, Inc. P a g e 15

22 Valuing Energy Storage as a Flexible Resource Interim Report for Consideration in CPUC A Energy storage can reduce renewable curtailment The market value for energy storage in capacity, energy and ancillary service markets increases on a $/kw basis with an increase in duration (Figure 11). These values are calculated using production simulation values from REFLEX model in the EPRI Energy Storage Valuation Tool (ESVT) developed by E3. We used the ESVT to co-optimize the dispatch of energy storage across capacity, energy and ancillary service markets and calculate the total value provided, on a $/kw-yr. basis, by each respective system configuration. With high curtailment value there are negative values for energy when overgeneration occurs (Figure 9). Thus the energy used to charge storage doesn t represent a cost (e.g. the marginal cost of generating electricity), but actually provides a positive value to grid in reducing curtailment. This increases the value by the amount shown in the avoided curtailment bars on the right. Figure 11: Illustrative annual revenues for energy storage of increasing duration with low and high values for avoided curtailment for a 40% RPS scenario In this example, the hourly values from production simulation runs are used in ESVT to calculate annual revenues with co-optimized dispatch of energy storage. However, P a g e 16

23 Interim Report Overgeneration requires long-duration solutions evaluating each storage project individually as a price taker using production simulation results provides an incomplete evaluation of cost-effectiveness. This approach alone does not provide a full and accurate comparison of the system level benefits that energy storage of different durations can provide - an issue we explore further in Section 5. Reducing renewable curtailment provides measureable value, but is not incorporated in current market prices. Neither is curtailment value (yet) included in the Distributed Energy Resources (DER) Avoided Cost Framework developed by E3 and adopted by the CPUC for cost-effectiveness evaluation. The value of reducing curtailment can be reflected in production simulation results, but only when explicitly incorporated in the input assumptions and modeling approach. 4 Overgeneration requires long-duration solutions Here we consider the relative ability of short-duration (2 hour) and long-duration (4 hour) storage to avoid renewable curtailment on the same flexibility constrained day shown above. This example, for the sake of illustration, presumes that energy storage is cost-effective when compared to alternative strategies that can reduce curtailment. In the first example, 4,000 MW of 2-hour storage (8,000 MWh) is shown to reduce overgeneration and DR/CT dispatch from the top down for the peak solar generation and net load hours respectively (Figure 12). The storage is charged at full capacity in HE 12 and at partial capacity in HE 11 and HE 13. The storage is discharged during the evening peak to eliminate DR/CT dispatch for peak net loads, and reduce some of the fossil generation that is online to meet the evening ramp. The 2 hour duration is not able to address the shoulders of the overgeneration in the morning and late afternoon. On this spring day, 4,000 MWs of 2-hour storage can absorb ~47% of the excess renewable generation Energy and Environmental Economics, Inc. P a g e 17

24 Valuing Energy Storage as a Flexible Resource Interim Report for Consideration in CPUC A With longer duration, a much larger portion of the overgeneration can be absorbed with energy storage. Here 4,000 MW of 4-hour storage (16,000 MWh) is shown addressing the challenge from the bottom up (Figure 13). The long-duration storage absorbs overgeneration from HE 09 to HE 15, charging over 6 hours, but at the full 4,000 MW nameplate capacity for only 3 hours. The storage discharges and displaces fossil generation over from HE 17 to HE 22 in the evening. The 4-hour storage is able to absorb ~90% of the excess renewable generation. With the longer duration, the storage is also able to displace more of the fossil generation that is needed to provide upward ramping capacity and meet peak net loads in the evening. 2 Hr Storage Figure 12: Illustrative short-duration storage dispatch P a g e 18

25 Interim Report System level cost-benefit analysis is crucial 4 Hr Storage Figure 13: Illustrative long-duration storage dispatch 5 System level cost-benefit analysis is crucial 5.1 Comparing value of short- and long-duration Figure 8 and Figure 13 suggest that long-duration solutions will be needed to address the majority of the overgeneration that occurs under 40% RPS levels. A portfolio level cost-effectiveness framework will describe how the metrics and methods can be used to evaluate the relative costs, benefits and trade-offs between short- and long-duration storage. While short-duration storage does have value under this scenario, our work finds that the dominant flexibility need is for long-duration. Moreover, long-duration storage can provide short-duration services but not vice versa. The flexible resources procured to meet long-duration needs might also fully satisfy the short-term needs at little or no 2010 Energy and Environmental Economics, Inc. P a g e 19

26 Valuing Energy Storage as a Flexible Resource Interim Report for Consideration in CPUC A extra cost. Thus, the quantitative work that has been done to date on this topic provides a strong value proposition for long-duration storage. There is an additional question with respect to the impact duration will have on GHG emissions. Flexible resources can enable reliable operation of the grid with fewer fossil plants required to remain online at minimum load to meet evening ramps. Reducing the number of start-ups and minimum load hours of fossil generation helps to reduce GHG emissions from the residual fossil fleet. It is reasonable to hypothesize that longerduration solutions will avoid a larger number of start-ups and minimum fossil generation hours throughout the year (as shown for the example spring day in Figure 13). On days when fossil generation is required over periods of 4-5 hours in the evening to meet peak net loads, it can only be avoided with longer duration storage. The magnitude of this benefit, however, is not yet determined. The benefits of reduced fossil start-ups and minimum operating hours is a crucial factor in evaluating the relative costs and benefits of short- and long-duration solutions. A cost-effectiveness framework for energy storage should specify how it will enable a robust, portfolio level evaluation of the relative benefits and trade-offs between short- and long-duration flexibility solutions. 5.2 Small market for frequency regulation Frequency regulation is currently one of the most remunerative services that energy storage can provide, but is a relatively small market. The CAISO procures on average roughly 350 MW of regulation down and 330 MW of regulation up services. 6 Even if the frequency regulation market doubles in size with increased renewables, a modest amount of energy storage (or flexible loads) would be sufficient to cause market clearing prices to decline. Figure 7 above shows that the size of a 600 MW regulation up and 6 CAISO 2012 Annual Report on Market Issues and Performance, p. 118 P a g e 20

27 Interim Report System level cost-benefit analysis is crucial regulation down market is small relative to overgeneration on a flexibility constrained spring day. Furthermore, if, as the Utility High RPS Report suggests, significant quantities of fossil generation will be operating at minimum load throughout the day to provide ramping in the afternoon, those units could provide frequency regulation with no opportunity cost of lost revenue in the energy market. This would depress frequency regulation prices in the future. This finding runs counter to popular notions that the increased demand for short-duration services such as frequency regulation will lead to significant economic opportunity for storage resources. However, such narratives ignore the supply side of the equation. E3 s (admittedly early) work in this area suggests that there will be plenty of resources available to meet this increased demand, even before considering long-duration storage procured to meet the needs of a diurnal energy cycle. Evaluating projects individually, without accounting for saturation effects, will overvalue the frequency regulation benefits that can be realized with energy storage. The potential for this result is illustrated by the EPRI Cost-Effectiveness of Energy Storage in California Report (EPRI ). The study evaluated 31 energy storage use cases and found most use cases (with several caveats) cost-effective with the storage costs and assumptions used. Of those use-cases, 20 relied on frequency regulation for 40% or more of their total revenue. Attributing frequency regulation benefits to each storage project individually will overstate the total value for the system as a whole. Given the small market size and the potential for competition to reduce market prices, the value that can be realized for the system as a whole will, in this case, be less than the sum of each project evaluated individually. It is therefore important to include a system level quantification of both costs and benefits in the cost-effectiveness analysis of energy storage to account for the effect of market saturation, which begins to significantly affect value at relatively low levels of penetration. A system level approach would either, a) limit the quantity of storage that is assumed to provide frequency regulation, or b) model the impact on market prices of all storage participating Energy and Environmental Economics, Inc. P a g e 21

28 Valuing Energy Storage as a Flexible Resource Interim Report for Consideration in CPUC A Serial dispatch of short-duration It is feasible for three 1 MW, 2-hour batteries be dispatched in serial to effectively provide the same duration as a single 1 MW, 6-hour battery. However, this is unlikely to be the least-cost solution. Storage systems include costs for MW of power delivery (e.g. inverters, power electronics) and for MWh of energy storage capacity (e.g. cells, electrolytes). The three 2-hour systems have 3 MW of power deliver costs as compared to 1 MW for the 6-hour system. An assessment of how the portfolio of energy storage will be dispatched for the system as a whole is therefore crucial. If short-duration batteries are dispatched in series to manage longer duration overgeneration, only 1 MW of power delivery is used in any given hour, while 2 MW sit idle. There will also be associated costs, potentially borne by the utilities and CAISO rather than the storage project developer, to interconnect, integrate and manage the dispatch of multiple systems. This would result in a higher system level cost that is not reflected when evaluating storage projects individually. 5.4 Production simulation understates flexibility need and value When quantifying system level costs and benefits, it is important to bear in mind the limitations of production simulation, which tends to overstate the flexibility of the grid and therefore understate the need for and value of new flexible resources such as energy storage. System level cost and benefit calculations should account for how such limitations will impact the valuation of flexible resources and employ techniques to counteract these biases. WECC wide dispatch: production simulation of the WECC will optimally dispatch all resources to minimize costs for the region as a whole. In reality, the 20+ balancing authorities in the WECC are operated independently, reducing P a g e 22

29 Interim Report System level cost-benefit analysis is crucial operational flexibility and efficiency relative to the production simulation model. Unrealistic hourly variations in imports: Production simulation will tend to rely on imports and exports for flexibility to a much greater degree than is typically observed in practice. Unrealistic dispatch of hydro: Similarly, hydro resourced tend to be dispatched with much greater variation that is allowed in practice, given constraints for recreation, environmental and water supply objectives. In addition, production simulation will count the full upward capability of hydro for operating reserves with actual upward ramping capabilities are constrained by other factors. When analyzing the benefits of the Imbalance Energy Market for PacifiCorp, E3 limited hydro contributions to flexibility reserves to 12 25% of nameplate capacity. Full ISO dispatch: Production simulation assumes ISO dispatch of all fossil units. In reality the majority of fossil units are self-scheduled and not fully available or visible to the ISO operators. Single snapshot year of market conditions. Due to data processing and runtime limitations, conventional production simulation models such as GridView and PLEXOS only consider a single year of load and resource conditions. Most analyses of California and the Western Interconnection use 2005 conditions as the test year, since 2005 represents relatively average load and hydro conditions. However, modeling a single, average year does not consider combinations of load and hydro conditions that can result in the highest market prices for energy and capacity (low hydro, high load) or the largest amount of renewable curtailment (high hydro, low load). Taken together, these issues can significantly understate the value of adding flexible resources such as energy storage to the resource portfolio modeled in production simulation Energy and Environmental Economics, Inc. P a g e 23

30 Valuing Energy Storage as a Flexible Resource Interim Report for Consideration in CPUC A Benefits of a diverse portfolio The Utility High RPS Study provides results for a large solar case and a diverse renewable portfolio. The large solar case has the highest levels of renewable curtailment the marginal PV generation will have more than half of its generation curtailed at the 50% RPS level. With a more diverse mix of renewable resources, marginal curtailment levels are reduced (Figure 12). Table 2: Marginal overgeneration of different RPS scenarios Technology 33% RPS 40% RPS 50% RPS Large Solar 50% RPS Diverse Geothermal 2% 9% 23% 15% Wind 2% 10% 22% 15% Solar PV 5% 26% 65% 42% Figure 13: Average overgeneration under 50% RPS scenarios P a g e 24

31 Interim Report Conclusions This finding illustrates how a diverse portfolio provides system level benefits relative to one that is dominated by a single technology. This diversity benefit is also illustrated by the history of renewable procurement. In the early years of RPS procurement, wind was the least cost resource. In subsequent years solar thermal was thought to have the technological cost advantage. Finally, in recent years, the precipitous drop in panel prices has led PV to lead the pack. Procuring all three technologies throughout the procurement process helped spur competition and innovation and positioned California to more quickly pivot to lower cost renewable technologies. In energy efficiency too we have seen the perils of becoming over reliant on a dominant technology, CFLs, for the majority of efficiency program savings. When building codes and legislation phased out incandescent bulbs, energy efficiency program managers had to scramble to find new strategies and technologies to meet efficiency goals. The magnitude of the potential overgeneration under the 40% RPS scenario (5,600 MW at the 99 th percentile) suggests no single strategy or resource type will fully address the challenge. Furthermore, if renewables penetration is to increase to support long-term GHG reductions, even larger quantities and longer durations of curtailment will need to be managed. This suggests that we should cast a wide net in our search for flexibility and energy storage solutions. 7 Conclusions In this report we have summarized the results of prior work, including the Utility High RPS Study to illustrate why it is important to perform a system level evaluation of costs and benefits when analyzing the cost-effectiveness of energy storage as a flexible resource. The primary conclusions of the paper are: Overgeneration will be a significant challenge under expected levels of RPS before Energy and Environmental Economics, Inc. P a g e 25

32 Valuing Energy Storage as a Flexible Resource Interim Report for Consideration in CPUC A Overgeneration will require flexibility solutions with durations of 7-10 hours. Managing overgeneration with flexible resources reduces expected levels of renewable curtailment, providing a significant and quantifiable value to utilities and ratepayers. Long-duration flexibility solutions provide quantifiable benefits that are not reflected in existing markets and DER Avoided Costs. Evaluation protocols that rely predominately on these benefits alone will understate the value of longduration storage. Future and system level costs and benefits, such as reduced renewable curtailment, are essential to fully quantify value storage and to evaluate the relative benefits of both short- and long-duration storage. Evaluating storage projects in an individual basis will, at a system level, overstate the value of short-duration storage and understate the value of longer durations. This holds true even if prices from system-wide production simulation are used. Our experience in RPS procurement and energy efficiency illustrates the importance of procuring a diverse portfolio of resources. Ensuring that the costeffectiveness and procurement frameworks support diverse strategies is crucial to achieve ambitious GHG reduction goals provides a long-term benefit to ratepayers. P a g e 26

33 Interim Report Appendix A: Cost of Renewable Curtailment Appendix A: Cost of Renewable Curtailment In the recent E3 study, Investigating a Higher Renewables Portfolio Standard in California, it was determined that a significant challenge to integrating renewables under a 40% or 50% RPS in California is the avoidance of renewable curtailment. Renewable curtailment was identified as an operational solution to avoid overgeneration events, which are marked by high frequency conditions and negative prices to incentivize generators to shut down. While renewable curtailment may be a valuable tool in maintaining reliability and avoiding volatility in the system under a higher RPS, this renewable curtailment does not come without a cost. If utilities have procured resources to meet the RPS with the expectation that a certain level of renewable energy will be delivered from these resources, frequent renewable curtailment may increase the risk of being out of compliance in a given year. There are two strategies for minimizing this risk: 1) the utility can over procure renewable resources; or 2) the utility can procure resources that provide enough flexibility to ensure that energy from their renewable resources can be delivered. For a utility, the choice between these two options will depend on the cost of procuring additional renewables versus the cost of procuring flexible resources and the cost savings associated with avoided renewable procurement that is afforded by these resources. 7.1 Avoided RPS Costs The incremental cost of RPS compliance for a utility that is anticipated to be short due to curtailment will depend on a number of factors. First and most intuitively, it will depend on technology and installation costs, which are rolled into renewable PPA price forecasts. In addition, the RPS costs will depend on whether utilities are in underprocurement over over-procurement positions with respect to the RPS targets. Consider the following scenarios: 2010 Energy and Environmental Economics, Inc. P a g e 27

34 Valuing Energy Storage as a Flexible Resource Interim Report for Consideration in CPUC A Utilities are generally long on renewables this scenario reflects the situation in California today. When the utilities are long on renewable resource procurement with respect to the RPS, renewable energy in excess of RPS targets. In this scenario, there is no immediate cost for renewable curtailment. A utility is short on renewables in this scenario the utility must procure additional renewable resources. If utilities are generally short on renewables, then curtailed renewable energy must be replaced at or near the cost of new construction for renewable generation. Marginal Curtailment Adjustment When renewable curtailment forces utilities to procure additional resources to ensure RPS compliance, utilities must also account for curtailment of these incremental renewable resources in assessing RPS compliance costs. Consider for example, that a utility requires an additional 5,000GWh/yr. of renewables to meet its RPS requirements. Based on operational simulations, the utility expects that 5% of the energy produced by incremental renewable resources might be curtailed. The utility therefore sets its procurement target at 5,000/(1-0.05) = 5,263MWh. At $70/MWh, the utility must pay $368,000 per year to deliver the 5,000GWh for RPS compliance. The effective new build cost is therefore $73.68/MWh. This logic leads to a PPA price multiplier that depends on the expected curtailment of incremental renewable resources, which will be referred to as the marginal curtailment rate for the remainder of this document. The PPA price multiplier is equal to 1/(1-[marginal curtailment rate]). Renewable-Based Fuel Savings Adjustment There is an additional fuel savings adjustment that must be made when using production simulations to quantify the net costs of new flexible resources. Production cost simulations are typically run with portfolios of renewable resources designed to meet RPS requirements assuming that no renewable curtailment occurs. In scenarios P a g e 28

35 Interim Report Appendix A: Cost of Renewable Curtailment when renewable curtailment occurs we assume that the utilities meet their RPS requirements either through additional renewable procurement or through procurement of flexible resources to ensure the delivery of their renewable resources. This additional renewable generation offsets an equal amount of thermal production to account for the energy value of the additional renewable resources. The cost impact of avoided renewable curtailment therefore includes both the cost of new build and the cost savings of avoided thermal generation. Returning to the example described above, the utility that determined that it would be 5,000MWh short due to expected curtailment in the operational year, could expect to see 5,000MWh of fuel savings if it were to procure the 5,263MWh of renewables to meet its RPS requirements. If these resources offset thermal resources at $30/MWh, then the net cost of meeting its RPS requirements with incremental resources is $ $30 = 43.68/MWh. The full build-up of this cost is shown schematically below for two scenarios. In Scenario 1, utilities have generally over procured renewable resources, leading to low net costs for any incremental purchases or REC s needed by a utility to meet its RPS requirements. With the purchase of additional renewable generation, there is an associated reduction in fuel costs. In Scenario 2, utilities are generally short, so the incremental compliance net costs reflect the full costs of new renewable build Energy and Environmental Economics, Inc. P a g e 29

36 Valuing Energy Storage as a Flexible Resource Interim Report for Consideration in CPUC A Figure 13: Value of avoided curtailment under scenarios when the utilities are long vs. short on renewables P a g e 30