New Energy Insights: There’s a New Duck in Town – Part II

This article is part of our New Energy Insights series from our New Energy team. Stay tuned for regular updates and commentary on topical issues across the sector.

Part II – The Flat Duck

In Part I (read here) of this series, we saw how the widespread adoption of intermittent renewable generation in the energy system (mainly in the form of rooftop solar) has in recent years created a large disparity in electricity demand vs supply, thus creating the “duck curve” issue.

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Source: The Hub, AGL

In this article, we examine how recent developments in energy storage technology and proposed regulatory changes should see the duck curve move closer towards a flat line by enabling energy demand to be met by dispatchable renewable generation regardless of the time of day.

The Rise of Dispatchable Renewables

Energy storage, particularly in the form of battery storage, is due to play a key role in the context of the duck curve by enabling the market to more readily align consumer energy demand with supply. As we have seen in our New Energy Insights Quarterly (The Rise of Dispatchable Renewables), as a fast energy response technology, batteries have the ability to rapidly respond to changes in electricity demand throughout the day.

Strategies currently being trialled to address grid instabilities caused by intermittent rooftop PV mainly focus on increasing grid stability by limiting and controlling rooftop and utility solar power generation. This includes restricting the output from solar farms, reducing or even eliminating feed-in tariffs, limiting the size of household inverters and employing big batteries1. However, these strategies do not really address the key issue, ie that there is an oversupply of solar generation in the grid. For instance, as recently as last week, Origin Energy announced that it will be bringing forward the closure of its 2,880MW Eraring coal fired power station, seven years ahead of its original schedule. Origin cited the diminishing profitability of the Eraring coal plant as the main reason for the closure, with high levels of solar output during the day pushing prices to such lows that the long-term operation of the coal plant is now unsustainable.

The most direct solution to balance out the duck curve is to add battery storage to household solar systems behind the meter. Nearly all big batteries are used for providing frequency control or buffering against short-term voltage fluctuations. However, these issues are caused by the decrease in operational demand during the day and can be resolved with household battery storage, minimizing household export to the grid as well as household load demand.

While perhaps still a couple of years off, also relevant in this context is the now inevitable electric vehicle (EV) revolution. An EV battery is multiple times the size of a standard battery used on the side of a house and the technology is already there to put rooftop solar PV to good use in the middle of the day. The business case for this will be given a further boost once bidirectional chargers are more affordable and commercially available. As the majority of EV users travel a relatively short distance each day, EV batteries (typically with a range of more than 500km) still have plenty of charge left over which can be exported to the grid in the evening to assist with grid stabilizing.

From a regulatory point of view, the Government has the ability to weigh in further in balancing out the demand curve through the introduction of tariffs which incentivize EV owners to charge from the grid during the middle of the day when demand (and price) is lower.

Looking at in front of the meter energy storage, while frequency control ancillary services (FCAS) remain the dominant revenue stream, batteries also have a key value in energy arbitrage. Simply put, this is the purchasing and storing of energy at low price times only to generate and sell into the market at high priced times. The potential investment opportunity in this service (backed up by regulatory reform, see below on 5-minute settlements) is now becoming more and more apparent.

Taming Rooftop Solar through Regulatory Reform

The Integrated Resource Provider

The regulatory framework has for some time been in need of reform to facilitate the shift to combining renewable generation technologies with energy storage. The Australian Energy Market Commission (AEMC) has recently made a final determination and rule as a step to achieving this goal. Key to this is the creation of a new market participant category – the integrated resource provider (IRP).

IRPs are intended to capture market participants with bi-directional energy flows that can choose when to export (discharge) and import (charge) energy and thus have the capacity to offer grid stability services (FCAS). This includes energy storage, hybrids (renewable generation combined with battery storage) and virtual power plants (VPPs) that are aggregators of small generation and storage units (usually rooftop solar).

Controlling rooftop solar to balance the electricity system has and continues to be a significant challenge for the Australian Energy Market Operator (AEMO). The IRP rule change will be particularly relevant for existing and future small scale aggregation businesses (less than 5MW) because registration as an IRP will provide access to the energy and ancillary services markets (and resulting revenues). The development of a strong aggregation market will assist AEMO to control this disparate, widely distributed, increasingly dispatchable generation in the context of a market designed for centralised one-way generation.

5-minute settlements

On 1 October 2021, the NEM shifted from 30-minute settlements with the dispatch price averaged over six separate 5-minute intervals to 5 minute-settlements (5MS) with the dispatch price calculated on each 5-minute interval. As we have seen in our New Energy Expert Insights series (read Part I and Part II), this switch has promised to spur investment in large scale battery storage by removing market conditions that previously allowed the large incumbents to game the system and fix the price of electricity.

The switch to 5MS should in time result in a much truer price signalling, reflective of actual supply and demand conditions which will favour energy storage technologies due to their ability to take energy from the grid when the price is low (or get paid to do so during negative pricing) and dispatch it rapidly when the price is high.

Early indicators are showing that this prediction is already ringing true and that batteries are benefitting from the effects of 5MS. AEMO has reported in its Quarterly Energy Dynamics Report for Q4 20212 that “South Australian batteries also benefitted from their ability to respond quickly to price spikes under 5MS this quarter, with net revenue around $0.4 million higher than what would have been received under 30-minute settlement, assuming the same five-minute price and dispatch outcomes”.

Indeed, further analysis has shown that the batteries that were operational in the last quarter of 2020 and 2021 enjoyed a 26% increase in total market revenue, with 80% of this coming from the arbitrage market3. This shows that the opportunity is already there for batteries to extend their services – and indeed their business case – beyond system services to the arbitrage market. In the long term, this arbitrage should ultimately lead to a duck curve that more resembles a flat line as electricity becomes dispatchable throughout the day to meet peak demand.

The real question then will be: where will the price ultimately rest, ie how high will the duck fly?

Levelized Cost of Storage

The real winners in this race will be the energy storage technologies with the fastest response times, coupled with the lowest Levelized Cost of Storage (LCOS). This is essentially the lowest average revenue per unit of electricity generated that would be required to recover the costs of building and operating the energy storage facility during an assumed financial life cycle.

Other key factors are the rate of energy lost in the storage process, its overall energy storage capacity, and how quickly the storage asset can be recharged. We will be discussing the various types of energy storage technology and how they can be best optimized in an upcoming article.

Ultimately, if we are going to have a carbon neutral energy system, the high penetration of intermittent renewables in the grid will require an effective and fit for purpose regulatory framework to facilitate the ever-increasing uptake of energy storage. In doing so, this will facilitate balancing and frequency control services to ensure system security and affordability for consumers.

The fat duck is about to become a thing of the past, the next version of the NEM will bring about duck curve 2.0.

The Hamilton Locke team advises across the energy project life cycle – from project development, grid connection, financing, and construction, including the buying and selling of development and operating projects. For more information, please contact Matt Baumgurtel.

1Governmental support includes the $100 million competitive funding round for grid scale batteries equipped with advanced inverters by ARENA (read here).