Monday, December 12, 2016


Battery technology is becoming a hot topic for larger commercial consumers, and may soon become a viable option for domestic consumers too. And National Grid is contracting for battery storage as a back-up resource. But how batteries are best deployed in today’s power networks is a complicated question. Today’s wholesale markets and tariff structures are very imperfect and may be quite dysfunctional in the world of fast moving technical change that includes communications and control in power networks. Consumers investing in batteries to make or save money are therefore advised to look carefully at the options, and the small print in tariffs and contracts. There are opportunities, particularly in exploiting anomalies, but wholesale markets and utility tariffs can change very quickly, and maintaining flexible options is likely to be the wisest strategy for business consumers.

What led to this comment was a request to talk on the subject of commercial opportunities at a recent energy management exhibition (EMEX) held in partnership with the Energy Managers Association. There is strong current interest among commercial consumers, such as supermarket chains, in the installation of banks of batteries. These can help to enhance security of supply, but this is not a primary motive for a significant investment outlay.

Batteries are now proving to be a valuable option for power systems, with several potentially useful functions. These can include spreading national or aggregate system loads over the day, providing emergency back-up and other ancillary services, and managing thermal and voltage constraints in local distribution networks. A two year trial of the largest grid-scale battery in Britain has proved it can potentially transform the energy grid and play a major role in the transition towards a low-carbon economy. The latest auction round for back-up capacity is reported to involve procurement of 500 megawatts of new storage projects.

The fact that batteries also have significant value at the lower voltage levels of local distribution networks, as well as in contributing to the management of aggregate demand and supply, is very relevant since it means that the battery owner may want or need to have a commercial relationship with both the National Grid and the local network operator. It also suggests that, in relation to local networks, there may be a premium on mobile batteries since load constraints on the network may occur in different locations at different times.

Some new loads, such as electric vehicles, are likely to further increase the need for batteries within the control of the system operators, again both at national or system wide levels and at key nodes within local networks. A good example is described in the Norwegian experience described in an earlier comment.

Will commercial scale batteries operate in front of or behind the meter?

From a commercial consumer perspective, the investment case for battery purchase and installation rests on three possible sources of revenue or cost saving, arbitrage in the wholesale market where there is regular opportunity to “buy cheap and sell dear”, responding to use of network tariffs that are strongly differentiated by time of day, and contracting directly with the network system operators.

Arbitraging wholesale markets.  The risk in relying on trading in wholesale markets is the volatility in prices from year to year. Wholesale prices are expected to be high this winter, in early 2017, but this expectation is critically dependent on capacity margins. Additional capacity or less than expected demand growth can dramatically reduce prices and the opportunities for arbitrage. In the medium term, it is increasingly likely that conventional wholesale market structures and assumptions will be overturned in progress to a low carbon economy, possibly reducing the importance of wholesale “spot” prices. Basing an investment on the ability to exploit arbitrage opportunities needs to take account not just of immediate market risk but also future structural change.

Exploiting distribution use of system (DUoS) tariffs. Some published network tariffs are highly differentiated by time of day, enabling consumers on these tariffs to make very large savings if they are able to move their usage away from peak loading on the local network, for example by using their own battery storage. In the case of supermarkets this may also be possible by using a store of “cold” to reduce their refrigeration load.

But the key factor here is that these structures are often extremely imperfect economic signals and are very crude devices to influence the shape of consumer loads. Exploiting anomalies in the tariff structure is ultimately a zero sum game. Ultimately the network operator is a utility that will be allowed to earn a regulated rate of return. Its costs are composed mainly of the fixed costs of the network, so the network utility will be forced either to recover more revenue from other customers, (highly unpopular and subject to regulatory intervention), or to rebalance the tariff to remove what may actually be a distorting incentive. Again this is a commercial risk if this is the prime motive for investment in batteries.

Contracting directly with the network operator. This is a novel development for network operators but, as shown in the recent auctions, it is a trend that is now under way. It raises the more general question of whether it is more effective to have the system operator managing batteries as facilities contracted from the battery owner, or to try to manage the system through complex tariff structures which try to second guess consumer behaviour. In the first case we might describe the battery as “in front of the meter”, and in the second case “behind the meter”.

A wise decision for the commercial consumer considering battery purchase, which of course can also provide a small amount of extra security, would be to make this investment as flexible as possible, to allow for direct contracting as well as managing its own demand. In dealing with local networks, there might also be a case for making the batteries trailer mounted, to allow further geographic mobility and to meet changing local network needs.  

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