Maximizing Revenue Streams for Storage Projects During the Energy Transition

November 20, 2023

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Ascend Presents

Transitioning from fossil fuels to renewables holds the potential to create cycles of excess and shortages in electricity supply, leading to both depressed and extreme prices. These dynamics lead to opportunities for batteries. At the Ascend Summit 2023, Dr. Brent Nelson, Managing Director of Markets and Strategy for Ascend Analytics, and Santiago Saravia, Renewable Energy Analyst for Ascend Analytics, considered various future revenue streams available to batteries, discussing market outlooks for energy arbitrage opportunities, ancillary services, and capacity markets, as well as tax credit opportunities available through the Inflation Reduction Act.  

Key Takeaways

  • Ancillary services, energy arbitrage and capacity markets serve as primary revenue streams for batteries. Energy arbitrage will become the primary share of the revenue stack for batteries as duration requirements increase and ancillary markets become saturated.
  • Storage economics rely on surplus renewable generation conditions, where high storage revenues will generally correspond to low renewable revenues.
  • A flood of early-stage renewable and storage projects is likely to depress the value for early-stage asset sales. To maintain high valuation, projects will require differentiating attributes such as progression through the interconnection queue, a site in an energy community area, interconnection to a highly volatile node, labor and hardware agreements, etc.
  • Locational tax credit bonuses associated with energy communities change every year, creating instability in the bonuses available to projects. Developers need to consider which locations are likely to be eligible for bonus tax credits in the future rather than just which locations are eligible today.
  • Markets differ in their volatility concentration throughout the year, which illustrates the importance of storage being available at critical high-value times.
Dr. Brent Nelson, Managing Director of Markets & Strategy, Ascend Analytics

Future Opportunities for Battery Storage

Ancillary services, energy arbitrage and capacity markets serve as the primary revenue streams for batteries. As the grid evolves with growing renewable penetration and storage buildout, opportunities for battery participation in each of these markets will evolve, as well.  

 Future storage buildout will likely be several times larger than the size of ancillary markets, which are shallow. Batteries have low opportunity costs and will spend most hours of the day participating in ancillary services when they are not committed in the energy market. Storage will saturate these markets quickly, depressing ancillary prices and reducing battery revenues from ancillary services. Ascend already observes this market saturation occurring in both CAISO and ERCOT.

 Batteries will see changes in capacity revenues, as well. As storage deployment increases, they will shave down peak prices and widen peak periods. Widening peaks will cause a decline in storage capacity value for shorter duration assets, and battery durations will need to increase to receive full capacity accreditation. This effect will take place more quickly in markets that adopt a marginal ELCC (effective load carrying capacity) accreditation. Eventually, critical conditions will occur during periods of low renewable generation and low state-of-charge for batteries. This will necessitate further consideration of state-of-charge and bidding strategies, particularly for shorter-duration resources.  

The declining potential of ancillary and capacity revenue leaves a growing proportion of a battery’s revenue requirement to be served by arbitrage. High and stable arbitrage potential depends on excess renewable production and a switch of the marginal unit from a thermal resource to renewables, which creates price volatility. One stable source of price volatility involves coincident generation of solar resources within a geographic area that depresses daytime prices and creates a net load ramp at sunset, creating a price shape often referred to as the 'duck curve.' The duck curve provides reliable arbitrage potential for storage and reduces wasted energy (i.e. curtailed renewable generation), but only becomes possible with renewables clearing at low to negative prices. Ascend models this long-run push-and-pull equilibrium dynamic in its forecasts, under the expectation that increasing renewable penetration will make arbitrage revenue more attractive for storage, and that the charging load from storage will likewise make generation revenues more attractive for renewables.

From Left to Right: Santiago Saravia, Renewable Energy Analyst, Ascend Analytics & Dr. Brent Nelson, Managing Director of Markets & Strategy, Ascend Anaytics

A more extreme evolution of the duck curve has been observed as well. Labeled the 'SuperDuck,' this curve refers to the concurrent evening drop-off of solar and wind generation that can sometimes occur in markets like ERCOT, which possesses high penetration of both solar and wind resources, thus resulting in an overwhelming net load ramp. The SuperDuck can cause higher price spreads within a day, leading to high arbitrage revenues as a function of the structural variability of renewable-heavy system generation.  

Ascend uses RTB (real-time top bottom) prices as a metric of revenue potential, measuring the levels of concentrated volatility in different markets. The ‘RTB Concentration’ metric measures the minimum number of days required to reach 30% of total arbitrage revenue potential in a given year. In 2022, ERCOT showed the most concentrated volatility, with 30% of annual revenue potential occurring in just six days. SPP had the least concentrated volatility, taking 45 days to reach 30% of annual revenue potential. In markets like where volatility is highly concentrated in just a few days, revenue potential is driven by extreme conditions that vary between seasons and years; the unpredictable nature of this concentrated volatility leads to higher risk and annual revenue uncertainty. In a market with highly concentrated volatility, then, a significant portion of returns for a year might be missed if a battery undergoes maintenance or prematurely dispatches its state of a charge on a single, very volatile day.  

Renewable Energy Credits (RECs) could also be a growing source of future revenue for storage. As states move closer in line with RPS targets and corporations set more aggressive ESG goals, hourly RECs will become more important for meeting clean energy goals. Meeting demand with clean energy across all hours will push focus toward the tightest hours of the day and will require concerted effort to expand clean capacity to cover sundown hours. Storage is well-suited for redistributing clean energy to such hours. Ascend anticipates that the rise of hourly RECs will provide another value stream for storage resources in the near future.

A Coming M&A Surplus

With the high number of projects in interconnection queues and under development, more projects are being developed than can plausibly be built. In this environment of surplus projects, securing project financing and ensuring project success will require differentiating a project from the countless others aiming to secure an interconnection agreement and start construction. Some key attributes that can make a storage project more appealing include a late-stage queue position, a site in an energy community area, interconnection to a highly volatile node, site control, offtake agreements, and secured hardware and construction resources.

Potential Tax Credit Boosts to Project Returns

The Inflation Reduction Act established several new bonus tax credits that have the potential to make or break a project’s viability. The 10% energy community bonus, one of these new tax incentives, broadly includes three categories: brownfields, coal closures, and employment – the largest and most geographically wide-reaching of the IRA credits. However, the qualifications for the employment bonus are complex and present a moving target: an eligible area this year (or one which has historically been eligible), may not be in the future. Site location becomes paramount when planning for tax credits, because the 10% tax credit adder can be critical to project economics. Ascend maps and data offerings detail which areas around the country have historically met eligibility criteria and are likely to gain or lose eligibility in coming years. While uncertainty lingers around the long-term status of some of these areas, historical eligibility can be an indicator for future eligibility.

About Ascend Analytics

Ascend Analytics, an innovative leader at the forefront of the energy transition, offers advanced software and consulting services that capture the evolving and real-time dynamics of energy markets. The company provides its customers with optimized and comprehensive decision analysis that covers everything from long-term planning to real-time operations in the electric power supply industry.

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