Poor economics has held residential and commercial battery penetration low

The clean energy industry had its annual All Energy conference in Melbourne recently with over 15,000 people in attendance. By attending the conference sessions and walking the aisles of the exhibition hall, it was possible to get a pulse of an energy industry in transition to net zero carbon emissions. There was a dominant presence of battery and inverter vendors presenting their wares. This was a surprise to me as poor battery economics in the residential and commercial sectors has resulted in low penetration of batteries bundled with solar installations over recent years. However, given the strength of their presence in the exhibition hall, I suspect that something has changed to herald the age of the battery.

The daily energy price ‘duck’ curve is getting steeper

To understand the economics of batteries, it is helpful to identify the underlying drivers of energy pricing and then how this pricing is experienced by a consumer. Elementary economics suggests that pricing is the balance between supply and demand, and in the energy markets, these dynamics are changing – particularly in relation to energy supply with the increased penetration of variable renewable energy generation. With the increase in solar energy generation (rooftop and utility scale), the energy price during the day when demand is also the weakest, is low and increasingly negative. However, when solar supply declines as the sun falls over the horizon and the energy demand goes up as households congregate around the dinner table, the price rises in response. Increasingly, this peak morning and evening demand is supplied by higher cost gas or hydro generation leading to a larger pricing spread between daytime off peak and evening peak power pricing – often referred to in the industry as the daily ‘duck curve’ (due to the pricing chart showing some resemblance to the shape of a ducks’ back).

Consumers are not exposed to the daily price variability that occurs at the network level

At its simplest level, an increasing price spread (i.e.  a steeper duck curve), should be positive for the economics of batteries for both residential and commercial consumers with an ability to charge the battery when prices are low during the day, and discharging the battery during the morning and/or evening peak on a daily basis. However, pricing signals at the network level are not flowing through to the consumer, and in fact, consumers are further than ever from seeing this high degree of variability in per kWh usage cost to serve. If you were to pick up your energy bill today and compare it to 3 years ago, you would find that a higher percentage of your energy bill is being made up of fixed connection charges, while a lower portion of your bill is from the variable per kWh energy usage charge. Equally the spread between peak and off-peak charges will have narrowed. So, counter to intuition, the economics of batteries is little improved by these changes.

So why are energy retailers not passing through the variabilities in energy pricing to consumers?

The changing energy network is leading to significant increases in distribution costs

The energy network is in transition from a market dominated by large-scale, high-energy density, carbon emitting generation located close to major demand centers (cities), to a network dominated by smaller-scale, lower energy-density, renewable generation that is frequently located further from the major demand centers. AEMO’s Integrated System Plan (ISP2022) describes the implications of this change on the distribution network  as immense with the need to expand some 10,000 km of high voltage energy distribution lines over the coming decades. This is capital intensive and expensive. At the same time, an increase in ‘behind the meter’ renewable energy generation is reducing demand from the network. This begs the question – who pays for this increase in energy generation and distribution costs? The solution is higher connection charges which effectively is increasing the cost of energy reliability and continuity insurance that comes from being connected to the network regardless of the amount of behind-the-meter generation.

This still isn’t explaining why there were so many battery vendors in the exhibition hall. The answer seems to be buried in the interface between a changing energy landscape and emerging technology.

FCAS is a critical capability for managing network stability

Due to the increasing penetration of variable and distributed renewable energy, the challenge to maintain network stability is increasing. The power system requires that both generation and load are in balance to operate safely. If there is a variation in generation without a corresponding variation in load, then the frequency of the power system will deviate, leading to instability, or at extreme levels, cascading failure and blackouts. Frequency Control Ancillary Services, more commonly known as FCAS, is a mechanism used by the energy market operator (AEMO) to maintain the frequency of the system within the normal operating band. Put simply, FCAS provides a fast injection of energy, or fast reduction of energy, to match supply and demand. Traditionally provided by generators such as coal and gas plants, these services are purchased by AEMO to maintain frequency and ensure the stability and reliability of the grid. A more vibrant FCAS market is creating a new path to monetising battery energy storage.

VPP have the flexibility to present energy back to the network in multiple configurations

Emerging technology also needs to play a role and this is coming in the form of what is known as a Virtual Power Plant, colloquially referred to as a VPP. Digital technology can now connect many distributed small-scale batteries and consolidate the energy to form a much larger and more flexible virtual battery. The VPP aggregator (increasing your energy retailer) can consolidate and sell back to the network a virtual battery capacity to meet FCAS services. The VPP has the flexibility to provide high power for a short period of time by providing all batteries to the network at once, and it can provide lower power for progressively longer period of times by providing the connected battery capacity to the network in sequence.

EV’s will be central to the VPP market

Imagine a world where most households will park an electric vehicle (EV) plugged into a recharger. To provide acceptable driving range of circa 250-300km, your average EV will be equipped with a battery of circa 40-60 kWh. Given the average daily driving distance is around 10% of this level, there will be a lot of battery storage sitting around in the average home available for alternative uses. Equally, sitting behind every EV fast charging station will be an industrial battery acting as a buffer or stockpile of energy to protect the stability of the network. The importance of the VPP is reinforced in the latest Integrated System Plan (ISP2022), where VPP’s will constitute more than 30 GWh of storage or 50% of the networks overall energy storage needs in 2050. We are moving into the age of batteries, and the battery vendors know it!

The economic incentive to disconnect from the network is incentivising long duration energy storage solutions

While FCAS is a monetising mechanism for short duration (largely Lithium based) batteries, there is no equivalent pricing mechanism for long duration batteries – yet. In effect, the coal fired baseload generation is still playing the role of the long duration battery, and until they fall from the network, the economic case for long duration batteries on the surface seems weaker. However, there is a market. As outlined above, the cost of the energy continuity insurance policy from connecting to the network is becoming more and more expensive. Therefore, the economic prize for detaching from the network is also getting stronger. Lithium batteries will not play a part in long duration storage, but new technology like flow batteries, will be required to fill this need.

The age of the battery is upon us

The exhibition hall at the recent energy conference was the canary in the transitioning energy market heralding the age of the battery. Today the market is dominated by short duration lithium-based batteries either stand alone or tucked neatly under the bonnet of your EV. The VPP market is consolidating this capacity to play an important role in the energy transition. But increasing pressure on network distribution costs and the way energy retailers are passing this onto consumers in higher fixed connection charges, is increasing the prize for detaching from the network and becoming energy self-sufficient. I won’t be surprised when attending the energy conference in coming years to see the exhibition hall dominated by battery vendors selling their wares, albeit with a much broader array of technologies and energy storage capability.