Wholesale Power Generators to Get Hurt by Grid Batteries

A utility in Texas takes first steps. Incumbents not amused. 

By Leonard Hyman and Bill Tilles, Oilprice.com

Last month, one of the largest and most significant electric utilities in the Midwest, American Electric Power (AEP), made a quiet announcement. We believe it portends more disruption for the U.S.’s electric power business. AEP, a virtual icon among U.S. coal-fired power generators, has proposed building battery storage projects to improve reliability in its Texas distribution network.

These batteries and associated distribution network improvements would be part of the utility’s regulated rate base. Innocuous, right? Not if you’re in the competitive power generation business in Texas.

Electricity is a commodity. When any commodity becomes relatively scarce what happens? Prices rise. As a result, owners of power plants that are outside the jurisdiction of state and federal regulators, who can raise their prices at will unlike their regulated brethren, stand to make a lot of money during periods of power scarcity that might occur for whatever reason.

Unregulated power plants make far more money when grid reliability is a problem. Typically a large power generating station experiences operating problems and goes off line. Other power generators in the region with excess generating capacity are typically only too willing to fill the neighbor’s sudden power deficit but only at a premium price. They get a premium price for stepping into the breach.

But there’s always something. If the distribution network can resolve their temporary power shortage problem at a cheaper price with storage batteries, that’s bad for business if you’re an unregulated power wholesaler.

Not surprisingly, intervenors (lawyer/lobbyists who do much of the talking at these soirees) claimed the proposed battery project would hurt the competitive market. Here’s we’re reminded of the old saw that patriotism (like reference to mythological concepts of pure capitalism) is the last refuge of scoundrels. Or at least those with weak economic arguments. Since regulators in Texas are supposed to genuflect at the mere mention of competition, not surprisingly, regulators in Austin decided to marinate on the AEP proposal.

AEP argues that its storage projects only involve the distribution system. But that argument seems disingenuous. And it’s very similar to claims made years ago. Back then, regulators attempted to differentiate between proposed transmission projects for purely non-regulated, commercial purposes (to be paid for by shareholders) as opposed to those transmission projects that would primarily enhance reliability of the distribution network and thus be the obligation of the utility’s ratepayers.

The latter projects would receive adequate regulated recompense. The former transmission projects would have to subsist on whatever returns the regional wholesale power market offered. But there wasn’t then and isn’t now any clear bright line between non-regulated wholesale and regulated retail in the electric power business.

As if both types of projects weren’t connected to each other and part of an integrated network and the provision of wholesale power could be separated from the reliable provision of electricity to end users. (Only high voltage DC lines were separable from other regulated assets.) In the end, transmission builders were able to finance few projects and just about everything was built on a regulated basis.

Non-regulated power providers realize AEP’s proposal is just the beginning. The idea of storage batteries for grid support is likely to spread. A power distribution system incorporating lots of batteries spread over the grid, all for ostensibly distribution purposes, will end up squeezing margins for wholesale electric power generators, especially those hoping for lucrative capacity contracts.

This is one question regulators will soon have to consider: Are consumers better served by regulated, relatively local storage batteries or unregulated power supplied, often at great distances, by wholesale generators? This also raises the question whether the existence of a supposed “competitive” power market in electricity has any long term value — apart from the low prices it was supposed to produce.

There should be little doubt. AEP’s battery proposal represents the efforts of a regulated ‘camel’ to get its nose further into the so-called tent. They are, we suspect, intentionally blurring the line between retail (regulated) and wholesale (non-regulated). Our question is: is that bad? Or will state regulators simply protect the incumbents, in this case the unregulated generators, as they do so often.

Years ago, economist and regulator Alfred E. Kahn — rightly considered the father of deregulation in the U.S. — wrote presciently that regulated and deregulated markets could not coexist for long. One of the two sides would inevitably triumph unless a “conjunction” of forces impeded the momentum.

In a recent book, “Energy Acts,” we argued that the introduction of renewables may have halted the movement toward more vigorously competitive power generation markets. Government imposed renewables mandates, intentionally or not, have shrunk the portion of the wholesale power market available to conventional competitive generators.

The widespread introduction of storage batteries integrated into the regulated distribution would reinforce the trend away from reliance on wholesale, competitive power generation. This would also reduce some of the price volatility that is the key to generators’ profits. The worm may have turned. Whether state regulatory authorities in Texas approve of batteries to enhance the reliability of the local distribution grid or not, the idea will emerge elsewhere with the same negative implications for power wholesalers. By Leonard Hyman and Bill Tilles, Oilprice.com

So who is taking the risks, and who is getting paid to take them? Read…  When Profits at Utilities are Privatized and Losses Socialized, Do We Still Need Public Shareholders? 
 

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  46 comments for “Wholesale Power Generators to Get Hurt by Grid Batteries

  1. Joan of Arc
    Feb 13, 2018 at 10:29 am

    Are they buying their batteries from Tesla or the energizer bunny?

  2. raxadian
    Feb 13, 2018 at 11:10 am

    Well the shell life if those batteries is not that long, and once they can no longer be used, then you run into the new laws about toxic materials disposal.

    But then again power outages cost lives.

    So yeah opposing the batteries is the jerkass thing to do.

    An information campaign based on all the lives cost every time a hospital is out of power for example, would be a way to fight back.

    • Feb 13, 2018 at 11:22 am

      Utilities don’t do this to be green. They do it to maximize their profits. They would invest in batteries to prevent getting ripped off during the short but frequent periods of shortages when they have to buy power from others at extortionate prices.

      • 2banana
        Feb 13, 2018 at 11:48 am

        So will this make AEP more profitable? Is it a good investment for them? Is it a good investment for stockholders? Will other utilities follow their lead?

        +++++

        Utilities don’t do this to be green. They do it to maximize their profits.

        • TheDona
          Feb 13, 2018 at 12:16 pm

          AEP’s proposal was 2 years ago and it was mainly to keep the grid smooth for a couple of minuscule towns. A small upfront investment in batteries VS many millions on transmission line upgrades. Current regs prevent being a generator and a supplier. So AEP could not be both.

          However, Hurricane Harvey which was a severe flooding event (flooding substations and knocking out power) and not a wind event (taking down the transmission line) put battery storage back on the table. It would also be a huge plus for all the wind and solar farms.

          Texas Utility Commission rewriting the regulations now. It will happen.

          Since this is the wave of the future with cars….I imagine there are already companies looking into recycling opportunities. Life expectancy for car battery is 10 now. I imagine it will improve and of course the cost is going down tremendously.

        • Kent
          Feb 13, 2018 at 1:02 pm

          @TheDona,

          There are a number of companies getting into recycling lithium ion batteries. A big chunk of the batteries is cobalt and there is question as to whether there is enough cobalt on the planet for everything to go electric (at least with lithium technology). So being able to recycle the cobalt is mission critical.

        • BTilles
          Feb 14, 2018 at 7:44 am

          Hi 2banana,
          Yes to all four questions, esp. will others follow their lead.

    • MurdoMc Sponge
      Feb 13, 2018 at 11:25 am

      Take a look at RedT (RED.L) Energy’s batteries – limitless number of charges and discharges. Just what the article is about!

      • Feb 13, 2018 at 3:14 pm

        There are many new (and revamped old) technologies coming into play. Sodium sulphur, magnesium, the vanadium redox batteries from RedT and others.

        Lithium and rare metals are drivers to explore other options, and they’re being found.

        Imagine where we’d be if Reagan had never been elected.

        • fajensen
          Feb 14, 2018 at 6:33 am

          It’s Carters fault for sucking down those Brzezinski vapours and getting too involved with Afghanistan and the middle east.

          He was doing OK up till then.

    • Prairies
      Feb 13, 2018 at 11:31 am

      Hospitals already run on back up generators during an outage. A battery pack will have one draw back, if cut off from a power supply the battery can’t charge up and keep going after the storage is depleted. Where diesel is a separate energy source, that can be brought in from a location with diesel supply. You can’t load up a battery pack as easily as a tank of diesel.

      • BTilles
        Feb 14, 2018 at 7:49 am

        Hi Prairies,
        If you going to argue for diesel, which is fine, add its attractive energy density.

        As for batteries, the whole point is storage. There are many ways to produce electricity. But storing it economically remains tricky.

        • Prairies
          Feb 14, 2018 at 9:36 am

          It may be considered as an argument for diesel, but what I am trying to point out is the factual flaw of battery back ups in large scale systems like hospitals or hotels. The charge they take in will likely be cut off if the power to the building has been cut off. They can charge from multiple points of power supply, wind, solar, water, etc. but they won’t be enough for high usage areas. For one small family home, they are sustainable but for emergency services they don’t have the capacity from a roof top solar or wind system. They would have to run a boiler or generator supply system.

    • curly
      Feb 13, 2018 at 11:31 am

      Can’t argue that power outages put lives at risks.

      But do you really have hospitals in the US that don’t have standby generators (diesel, nat gas, whatever…) for emergency backup power?

      I may be wrong but I don’t think batteries have sufficient power storage to keep things going for more than 10s of minutes or maybe a couple hours. So for short-term power outages, maybe.

      And what’s the real efficiency and energy lost in charging and discharging the batteries? (not the nameplate ratings — i.e. not the “marketing-not-to-exceed” performance)

      Will be interesting to watch/see how effective grid battery storage is and how it will be deployed, and mostly the cost/benefit tradeoffs.

      The Texas oil bidness survived the introduction and use of wind power.

      As long as there’s a government subsidy, they’ll be happy to oblige.

    • Javert Chip
      Feb 13, 2018 at 8:50 pm

      One would hope managers responsible for critical services (hospitals in your comment) would have battery/diesel back-up already. Are their really significant numbers of hospitals without this capacity?

      I highly doubt my local 7-Eleven or McDonalds needs this generic infrastructure support.

      • Gibbon1
        Feb 13, 2018 at 10:28 pm

        Guy I worked for years ago mentioned friend of his doing maintenance on a diesel generator for the local hospital. Guy tried starting it before performing PM and did not start… That’s a impossible to get rid of bad feeling right there.

        • d
          Feb 13, 2018 at 10:43 pm

          Somebody clearly had not been doing their daily weekly safety inspection’s.

          $ 10.00 says that the paperwork was all signed off as Safe and working.

          I have seen this so many times it’s boring and expected.

          Bit like Fire sprinklers that have been painted so many times that there is no way water could ever get out of them again. Signed off, as safe and working, all the time (Navy is actually the worst for that).

    • d
      Feb 13, 2018 at 9:09 pm

      “Well the shell life if those batteries is not that long, and once they can no longer be used, then you run into the new laws about toxic materials disposal.”

      Depends which Battery’s you use.

      Nickel iron Battery’s the production of which EXIDE KILLED in the US are perfectly suited to these applications. Have a life of in some cases of over 100 years and have no toxic wastes or issues in recycling.

      In some ways with stationary Electricity storage people are still trying to reinvent the wheel.

      The new tech is in the aCharge Controllers, which make the old tech Nickel Iron battery’s, highly efficient, Green, and very safe.

    • roddy6667
      Feb 13, 2018 at 9:55 pm

      Li-Ion batteries have a life of X number of charges. Then they must be recycled, a costly process. Tesla’s Powerwall uses Li-Ion batteries because they make them, not because they are the best choice of batteries. Cars need small, light batteries. Homes and neighborhood battery facilities don’t. Most solar homes use lead-acid batteries which are cheap and easily recycled. Anybody can undercut Tesla on price by using a 150 year old technology that is cheaper and greener-the lead-acid battery.

    • BTilles
      Feb 14, 2018 at 7:42 am

      Hi Raxadian
      You raise a good point. Battery life is a big variable. And it depends on how one uses it. The key is depth of discharge. However, in the few studies I’ve seen, we’re still talking about 5-10 year operating lives.

    • JohnM
      Feb 19, 2018 at 2:33 pm

      There are more, and better, storage means than LiIo batteries or lead/acid…flow batteries offer high storage, fast release and are cheaper…

      • d
        Feb 19, 2018 at 3:37 pm

        Why do you peopel keep trying to reinvent the wheel and also push Lead/Acid which has health HAZARD, and recycling issues.

        The answer to BIG stationary storage Battery’s, is Nickle Iron.

  3. Hirsute
    Feb 13, 2018 at 12:10 pm

    I’ve worked in the utility industry and I fully understand the need for system load balancing and the differences between base load, intermediate and peakers. This is one of the reasons that I supported the recent ruling on net neutrality. Transmission operators/network operators (who should be independent of other functions) should be allowed to efficiently manage the network.

    AEP is creating a *problem* that does not exist. Reserve capacity is not a transmission issue – it is a generating issue. As reserve power, it should be the responsibility of the generator and market forces should be allowed to determine if reserve power via batteries is worthwhile.

    • BTilles
      Feb 14, 2018 at 7:55 am

      Hi Hirsute,

      You see AEP creating a “problem” and we see them exploring a comnercial “opportunity”.

      • TheDona
        Feb 14, 2018 at 2:27 pm

        Mr. Tilles – Do you see this as a test case, so to speak, of blurring the line between generating and transmission?

  4. ksw
    Feb 13, 2018 at 12:35 pm
    • TheDona
      Feb 13, 2018 at 1:42 pm

      ksw – It has taken so long because of capitalists like this: https://thinkprogress.org/buffett-says-he-loves-renewables-so-why-is-his-company-trying-to-kill-solar-energy-77a6941bafc1/

      Good (but old) article regarding utility fighting tooth and nail against solar: https://www.washingtonpost.com/national/health-science/utilities-sensing-threat-put-squeeze-on-booming-solar-roof-industry/2015/03/07/2d916f88-c1c9-11e4-ad5c-3b8ce89f1b89_story.html?utm_term=.e4740f712db1

      The takeaway is – traditional utilities could soon face serious problems, from “declining retail sales” and a “loss of customers” to “potential obsolescence,”

      Guess they didn’t get the memo about telephone companies and their landlines.

      • BTilles
        Feb 14, 2018 at 8:19 am

        Hi TheDona,

        One thought about the future of the grid. A combination of batteries plus solar, for example, renders the entire power generation and transmission complex irrelevant. Distribution it seems will remain key.

    • Jim Graham
      Feb 13, 2018 at 2:23 pm

      Thanks for that link.

    • Get the units straight
      Feb 13, 2018 at 4:04 pm

      The article confuses power (watts=J/s) with energy . (Watt x seconds)

      “APS officials say the First Solar deal is part of a larger 15-year plan that will involve more than 500 megawatts of battery-stored energy.”

      Energy is power x Time… they should have “Watt hours as the units for storage of energy better kwhrs”…

      They should state how many megawatt hours it holds. For all we know it might be able to deliver 500 megawatts for just one second. ;)

      • MarkB
        Feb 13, 2018 at 7:14 pm

        Not a trivial point.
        This article about the Tesla battery in Australia talks about the pack being “100 MW / 129MWh”. I don’t know why the two numbers, unless the 100MW is the maximum instantaneous output and the 129MWh is the total power output.

        https://electrek.co/2018/01/23/tesla-giant-battery-australia-1-million/

        • Gibbon1
          Feb 13, 2018 at 10:37 pm

          Two numbers would be, the amount of power it can supply. And the second how much energy it can store.

          Battery storage systems are all about arbitrage. Buy cheap power now, sell dear later.

          Kickers is, thermal peeking power is I think several times more expensive than base load power.

          What’s probably happened is batteries got cheap enough that they can beat standard peeking plants on price. Which is why GE and whatnots gas turbine division is in trouble. Because their customers know the gig is up.

  5. mean chicken
    Feb 13, 2018 at 12:39 pm

    Yeah right, our electric bills will be reduced, sure.

  6. RagnarD
    Feb 13, 2018 at 1:05 pm

    I work as a power trader.
    Utilities use “reliability” as a entree to getting paid their X% return on investment. Free market players don’t get to play this hand.

    Most people don’t know this, but the wholesale electric grid has thousands of pricing nodes, prices which change every 5 minutes. Some locations are well balanced between generation and demand, some are not. But one thing is for certain with electric generation/the grid, it is not a static situation.

    Sudden weather changes, unit trips, line outages, unit derates, fuel supply problems, etc. etc. can cause instantaneous disruptions, which depending on the situation, can take minutes / hours / days for the grid regulator to ameliorate. In the interim the price of power which was (for example) $30/MWhr can spike to $1,000MWhr, causing a huge loss for a market player on the wrong side of the situation. Math: 1,000MWh for 1,000MW for one hour is $1,000,000. Many nuke units are ~ 1,000MWs, many coal units are 500MWs. “Plants” are aggregates of units.

    Having a battery at the right spot at the right time could either make a lot of money for someone, or be just enough generation to solve a supply / demand problem and thus prevent a price spike. Most likely the battery will not be big enough to solve the problem caused by a trip. But no matter, the utility WILL get paid/granted recovery of X% of the cost of this supposed increased grid reliability.
    That’s a problem solved, too. For someone, anyway.

    • BTilles
      Feb 14, 2018 at 8:05 am

      Thanks RagnarD, very helpful

  7. juanfo
    Feb 13, 2018 at 1:37 pm

    Great website. Read it every day. Thank you for sharing your vast technical knowledge.

  8. EThan in NoVA
    Feb 13, 2018 at 2:47 pm

    Eh, I work in a building with over 30MW of diesel generator capacity and battery backup for the load until the generators take over. I don’t think the battery storage is at all like what Tesla uses (18650 cells.) They’re large, and they sacrifice lower maintenance for longer life. The telephone company does the same, large wet cells. I’d imagine the batteries (which are massive) can hold things for 10 minutes at best, and that’s probably without the cooling in the building.

    I can’t imagine using batteries to hold up the full grid outside of covering for switching.

    Some places use kinetic — a giant wheel of mass that spins and during the fail over the flywheel provides energy.

    • fajensen
      Feb 14, 2018 at 6:21 am

      The utilities will eventually go for flow batteries – the energy is stored in liquid electrolytes which react inside the batteries to produce power. The charging is the reverse process – electricity separating the two species of electrolyte. Flow batteries are very robust and scales easily. All one needs is a lot of space for the plant.

      The other use for batteries by the utilities is to provide reactive power to balance the power flows in the grid. This becomes necessary because of solar and wind power feeding into the grid “from the bottom” – which the grid was not designed for, the old grid was always top-down, meaning power flows from a few big generators down to small consumers. Today we have thousands of generators and consumers on the same power level of the electrical grid – in fact making it more like a grid (the old structure was more tree-like). To cope with this structure more control nodes are needed and that is where the batteries are going.

      I am quite optimistic about the whole thing – it’s all engineering and the engineers will get it to work. It is just shameful that the US politicians managed to delay everything so much in the US that Americans, despite US researchers originally inventing and pioneering many of these technologies, will be buying them back from ABB, Siemens and China.

      https://spectrum.ieee.org/green-tech/fuel-cells/its-big-and-longlived-and-it-wont-catch-fire-the-vanadium-redoxflow-battery

    • BTilles
      Feb 14, 2018 at 10:38 am

      Hi Ethan,

      I think you pretty well described what’s called a flow battery which are much bigger. The solid state batteries (like lithium ion) can be compact but heavy.

      Re flywheels: there are seven major energy storage technologies of which flywheels is one. The rest are solid state batteries, flow batteries, compressed air storage, thermal storage, pumped hydro and electrochemical capacitors.

  9. Lars
    Feb 13, 2018 at 4:01 pm

    Batteries seem fine for regulating short time disturbances in frequency and cover short time peak consumption. We are talking minutes and a few hours here.
    But what will happen if they push the wholesale generators out of the market because they are no longer profitable due to less peak power profits and you have a prolonged cold spell for instance combined with little wind and sun? Will there be enough spare capacity?

    • BTilles
      Feb 14, 2018 at 8:10 am

      Hi Lars,

      Good question. I would look at places with lots of non-regulated coal plants that compete with windpower (Texas perhaps) and see how they’re doing. I suspect not well.

  10. WES
    Feb 13, 2018 at 6:27 pm

    Please correct me if I am wrong but regulated AEP is guaranteed a return on any investment it makes no matter what it is. All they have to do is convince the regulator first.

    Whether batteries make any economic sense or not is of no concern to AEP because they will reap a nice return on their investment. So AEP has every incentive in the world to keep gaming the regulators.

    • Javert Chip
      Feb 13, 2018 at 8:59 pm

      WES

      I also share your issue and concern.

      Another name for AEP’s financial arrangement is “cost plus”.

    • BTilles
      Feb 14, 2018 at 8:13 am

      Hi WES,

      What you say regarding earning a guaranteed regulated return on their prudently incurred investment is correct.
      Cynical, but correct.

  11. Smitty
    Feb 15, 2018 at 5:37 pm

    Could Calpers ownership have an influence?

    https://www.calpers.ca.gov/docs/forms-publications/annual-investment-report-2016.pdf

    Buy up the competition, then suicide them

Comments are closed.