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ELECTRIC ENERGY STORAGE

MARKET ANALYSIS STUDY IN NEW YORK


FINAL REPORT

Prepared for

THE NEW YORK STATE


ENERGY RESEARCH AND DEVELOPMENT AUTHORITY

Joseph Sayer
Project Manager

Prepared by

EPRI SOLUTIONS, INC. CUSTOMIZED ENERGY SOLUTIONS LTD.

Knoxville, TN NY

Dave Crudele Rick Mancini


Project Manager Project Manager

NYSERDA PON: CONTRACT NO. 8722

May 2006
Electric Energy Storage Market Analysis Study

NOTICE

This report was prepared by EPRI Solutions and Customized Energy Solutions in the
course of performing work contracted for and sponsored by the New York State Energy
Research and Development Authority (hereafter the "Sponsor"). The opinions expressed
in this report do not necessarily reflect those of the Sponsor or the State of New York,
and reference to any specific product, service, process, or method does not constitute an
implied or expressed recommendation or endorsement of it. Further, the Sponsor and the
State of New York make no warranties or representations, expressed or implied, as to the
fitness for particular purpose or merchantability of any product, apparatus, or service, or
the usefulness, completeness, or accuracy of any processes, methods, or other
information contained, described, disclosed, or referred to in this report. The Sponsors,
the State of New York, and the contractor make no representation that the use of any
product, apparatus, process, method, or other information will not infringe privately
owned rights and will assume no liability for any loss, injury, or damage resulting from,
or occurring in connection with, the use of information contained, described, disclosed, or
referred to in this report.

DISCLAIMER

The study was conducted using NYISO published Market Data. The Market Data has
been influenced by many factors throughout the startup and operation of the NYISO.
Operation and resulting price information reported in the past may not be reflective of
operation and prices in the future. The data used in this study reflects the situations and
Market rules that were in place during 2001-05. Publication of this report was delayed to
reflect the conditions that were present in 2005. The year 2005 was unique in that the
software for the Real Time Market (SMD 2) was totally revised. In addition the export
fees to ISO-NE were eliminated and the summer was considerably warmer than it had
been in the previous years of NYISO operation. Finally, the fuel costs towards the end of
summer increased drastically. All of these factors impacted the Market in 2005 over the
previous years of operation.
Electric Energy Storage Market Analysis Study

ABSTRACT

Unlike other commodity markets that incorporate storage mechanisms, electricity


markets are unique in their almost complete dependence on the real-time balance of
supply and demand. Although much of the present-day grid operates effectively without
storage, cost-effective ways of storing electrical energy can help make the grid more
efficient and reliable. This market analysis study investigated the economics of 4
emerging Electric Energy Storage (EES) technologies: Sodium Sulfur (NAS) Batteries,
Vanadium Redox Batteries (VRB), Zinc Bromine Batteries (ZBB) and Flywheel Energy
Storage Systems in the NY electricity market.

The study assessed the economic potential of EES in the competitive electricity market
operated by New York Independent Systems Operator (NYISO). Analysis included
revenue potential from services such as energy arbitrage, ancillary services and demand
side response program participation. The analysis indicates that there is a strong case for
supporting EES installations particularly in the New York City (NYC) and Long Island
region for applications such as energy arbitrage, regulation services and demand side
response, whereas opportunities exist in rest of the state for regulation and frequency
support services.

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ACKNOWLEDGEMENT

This research was funded by NYSERDA under the DOE-NYSERDA Joint Energy
Storage Initiative. This research was also supported by the Alfred P. Sloan Foundation
and the Electric Power Research Institute through the Carnegie Mellon Electricity
Industry Center.

The authors would like to thank the following individuals for their valuable inputs in
planning and executing this report.

• Joe Sayer, New York State Energy Research and Development Authority
(NYSERDA)

• Dave Lawrence, New York Independent System Operator (NYISO)

• Patrick Maher, New York State Public Service Commission, Department of


Public Service

• Dr. Jay Apt and Dr. Lester Lave, Carnegie Mellon Electricity Industry Center
(CEIC), Carnegie Mellon University

PROJECT TEAM

Customized Energy Solutions EPRI Solutions Inc.

• Rick Mancini, Project Manager • Dave Crudele, Project Manager

• Rahul Walawalkar, Principal • Haresh Kamath, Principal


Investigator Investigator

• Stephen Fernands • Krish Gomatom

• Raj Chintapalli

• Bhala Mehandale

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Electric Energy Storage Market Analysis Study

Contact Details:

EPRI Solutions Inc.

Dave Crudele
Corporate Office
942 Corridor Park Blvd
Knoxville, TN 37932
Phone (865) 218-8088
Fax (865) 218-8001
hkamath@epri-peac.com

Customized Energy Solutions Ltd.

Stephen R. Fernands Rick A. Mancini, P.E.


100 N. 17th Street, 14th Floor 601 Milan Avenue
Philadelphia, PA 19103 Endicott, New York 13760
Phone (215) 875-9440 Phone (607) 785-7142
sfernands@ces-ltd.com rmancini@ces-ltd.com

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Electric Energy Storage Market Analysis Study

Table of Contents
Chapter Page
ACRONYMS.................................................................................................................... vii

EXECUTIVE SUMMARY .............................................................................................S-1

1 INTRODUCTION ........................................................................................................ 1-1

2 NYISO MARKETS ...................................................................................................... 2-1

Energy Market .......................................................................................................... 2-2


Installed Capacity (ICAP) Market ............................................................................ 2-2
Ancillary Services Market ........................................................................................ 2-3
3 TECHNICAL BENEFITS OF ENERGY STORAGE ................................................. 3-1

Grid Stabilization...................................................................................................... 3-1


Grid Operational Support ......................................................................................... 3-2
Power Quality and Reliability .................................................................................. 3-4
Load Shifting ............................................................................................................ 3-5
Applications to Renewable Power Sources .............................................................. 3-8
Transmission Curtailment Reduction .................................................................. 3-9
Time Shifting ....................................................................................................... 3-9
Forecast Hedging ................................................................................................. 3-9
Frequency Support ............................................................................................. 3-10
Fluctuation Mitigation ....................................................................................... 3-10
EES Sizing, Costing, and Operation....................................................................... 3-11
Power Rating and Energy Capacity ................................................................... 3-11
Round-Trip Efficiency ....................................................................................... 3-12
Service Life........................................................................................................ 3-12
System Cost ....................................................................................................... 3-13
Energy Storage Technologies ................................................................................. 3-14
Comparing Energy Storage Technologies and Systems .................................... 3-14
Descriptions of Energy Storage Technologies................................................... 3-16
Pumped Hydro Storage .................................................................................. 3-16
Lead-Acid Batteries........................................................................................ 3-16
Nickel-Cadmium Batteries ............................................................................. 3-17
Flow Batteries ................................................................................................ 3-18
Vanadium Redox Batteries .......................................................................... 3-18
Zinc-bromine Flow Batteries ......................................................................... 3-19
Other Flow Battery Technologies .................................................................. 3-20

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Electric Energy Storage Market Analysis Study

Sodium-Sulfur Batteries............................................................................... 3-21


Other Electrochemical Batteries..................................................................... 3-22
Flywheel Energy Storage............................................................................. 3-22
Compressed Air Energy Storage.................................................................. 3-23
Evaluating Energy Storage Technology Options ................................................... 3-25
4 ECONOMIC ANALYSIS ............................................................................................ 4-1

Sources of Revenue for EES Resources ................................................................... 4-1


Energy Arbitrage Revenues ................................................................................. 4-2
Ancillary Services................................................................................................... 4-16
Regulation and Frequency Response ................................................................. 4-17
Operating Reserves ............................................................................................ 4-18
Ancillary Services Revenue............................................................................... 4-19
Installed Capacity Market (ICAP) .......................................................................... 4-21
Demand Side Response .......................................................................................... 4-23
Day-Ahead Demand Response Program (DADRP)....................................... 4-23
Special Case Resources (SCR)....................................................................... 4-23
Emergency Demand Response Program (EDRP) .......................................... 4-24
Demand Side Response (DSR) Potential........................................................... 4-24
EES Application Revenue ...................................................................................... 4-29
Additional Benefits ............................................................................................ 4-30
Net Present Value analysis................................................................................. 4-30
5 ENVIRONMENTAL IMPACT.................................................................................. 5-35

6 CONCLUSION............................................................................................................. 6-1

7 REFERENCES ............................................................................................................. 7-1

A REGIONAL DISTRIBUTION OF ENERGY PRICES ............................................. A-1

INDEX ............................................................................................................................ A-4

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Electric Energy Storage Market Analysis Study

Acronyms
‰ AEP – American Electric Power
‰ AGC – Automatic Generation Control
‰ AVR – Automatic Voltage Regulator
‰ BESS – Battery Energy Storage System
‰ BME – Balancing Market Evaluation
‰ CAES – Compressed Air Energy Storage
‰ CEC – California Energy Commission
‰ DADRP – Day-Ahead Demand Response Program
‰ DAM – Day-Ahead Market
‰ DSR – Demand-Side Response
‰ EDRP – Emergency Demand Response Program
‰ EES – Electric Energy Storage
‰ EIA – Energy Information Administration
‰ ELR – Energy Limited Resource
‰ EPRI – Electric Power Research Institute
‰ FACTS – Flexible AC Transmission System
‰ GVEA – Golden Valley Electrical Association
‰ GW – GigaWatt
‰ ICAP – Installed Capacity
‰ ISO-NE – Independent System Operator – New England
‰ KW – KiloWatt
‰ KWH – KiloWatt-Hour
‰ LBMP – Locational Based Marginal Pricing
‰ LSE – Load Serving Entity
‰ MHW – MegaWatt-Hour
‰ MVAR – Mega VoltAmpere Reactive
‰ MW – MegaWatt
‰ NAS – Sodium-Sulfur
‰ NERC – North American Electric Reliability Council

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Electric Energy Storage Market Analysis Study

‰ NPCC – Northeast Power Coordinating Council


‰ NPV – Net Present Value
‰ NYCA – New York Control Area
‰ NYISO – New York Independent System Operator
‰ NYSRC – New York State Reliability Council
‰ O&M – Operation & Maintenance
‰ PSC – Public Service Commission
‰ PCS – Power Conversion System
‰ PJM – Pennsylvania, New Jersey, Maryland Interconnection
‰ PREPA – Puerto Rico Electric Power Authority
‰ RPS – Renewable Portfolio Standards
‰ RTD – Real-Time Dispatch
‰ RTM – Real-Time Market
‰ SCR – Special Case Resources
‰ SMES – Super Conduction Magnetic Energy Storage
‰ STATCOM – Static Synchronous Compensator
‰ T&D – Transmission & Distribution
‰ TEPCO – Tokyo Electric Power Company
‰ UCAP – Unforced Capacity
‰ UPS – Uninterruptible Power Supply
‰ VAR – VoltAmpere Reactive
‰ VRB – Vanadium Redox Battery
‰ Wh/kg – Watt-Hour per Kilogram
‰ Wh/L – Watt-Hour per Liter
‰ ZBB – Zinc-Bromine Battery

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Electric Energy Storage Market Analysis Study

Executive Summary

This study, funded by the New York State Energy Research Development Authority
(NYSERDA), investigated commercial or near-commercial electric energy storage (EES)
technologies and their revenue potential in the deregulated electricity market of the
NYISO.

Unlike other commodity markets that incorporate storage mechanisms, electricity


markets are unique in their almost complete dependence on the real-time balance of
supply and demand. Advanced energy storage technologies are emerging as an
alternative resource in supporting an efficient electricity market. The terms “electric
energy storage” and “electricity storage” are used to refer specifically to the capability
of storing electrical energy that has already been generated, and controllably releasing it
for use at another time. Despite numerous advances in EES, markets have not yet
adopted energy storage applications on a large scale. The most widespread form of
electricity storage used for such applications is pumped hydroelectric storage, with over
80 GW of installed capacity throughout the world. Utility-scale energy storage projects
based on other electricity storage technologies have been built, though they have not
become widespread.

The restructuring of the utility industry, along with increased requirements for power
reliability and quality, has made utility-scale energy storage more attractive. This has
spurred the research and development of a number of new energy storage technologies,
particularly for application in the transmission and distribution areas. Most
demonstrations of such energy storage technologies have been conducted at the
transmission level, but substantial opportunities exist at the distribution level. This
market study is designed to identify the value streams arising from electric energy

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Electric Energy Storage Market Analysis Study

storage, particularly those benefits that match the characteristics of the technology with
the opportunities available in the new energy markets as demonstrated in New York State
through the New York Independent System Operator (NYISO).

ENERGY STORAGE TECHNOLOGIES

The application of energy storage at the utility scale has been limited largely by the
technical and economic constraints of energy storage technologies. At present there are
several energy storage technologies viable at the utility scale, at varying stages of
maturity. Some representative technologies include flow batteries, sodium-sulfur
batteries, lead-acid batteries, flywheels, pumped hydro storage, and compressed air
energy storage (CAES).

Although any of these technologies might be used in a utility-scale application, some may
be considered to hold more promise than others. Large scale technologies such as CAES
and pumped hydro, while extremely expensive, are the most cost-effective from $/kW
and $/kWh perspectives. These types of storage facilities can only be sited where
specific geographical features are present, however, and most technically suitable sites
are either already developed or are located too far from load centers to be economically
profitable. Traditional lead-acid batteries are mature products, but have historically had
poor acceptance from utilities. This leaves the field to less mature technologies such as
vanadium redox flow batteries, zinc-bromine flow batteries, sodium-sulfur batteries, and
flywheels, which have not been extensively proven but which show promise in several
recent demonstration projects.

TECHNICAL BENEFITS OF ENERGY STORAGE

Energy storage holds several technical benefits to utilities, power system operations, and
users. Some of these benefits include:

• Grid Stabilization: Electricity storage can be used to help the transmission or


distribution grid return to its normal operation after a disturbance.

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Electric Energy Storage Market Analysis Study

• Grid Operational Support: Energy storage can be used to support normal


operations of the grid.

• Power Quality and Reliability: The vast majority of grid-related power quality
events are voltage sags and interruptions with durations of less than 2 seconds,
phenomena that lend themselves to energy storage-based solutions.

• Load shifting: Perhaps the best-known application for electric energy storage is to
supply loads with energy stored at another time of the day – perhaps when energy
is more available or less costly -- effectively shifting the load on the grid from one
time to another. This scheme can be used to allow more efficient use of
generation, transmission, or distribution assets.

• Applications to Renewable Power Sources: Renewable power sources generate


power from prime movers which are often intermittently available. Such
generators can benefit from energy storage by using it to absorb energy when the
generated power exceeds the need on the grid, and covering the shortfall when the
generated power is less than needed.

NYISO MARKETS AND THE ECONOMICS OF ELECTRIC ENERGY STORAGE

The New York Independent System Operator (NYISO) operates the state’s high voltage
electric transmission system and administers the State’s wholesale energy markets. The
NYISO faces a unique challenge in that New York City, one of the world’s largest and
most complex load pockets, is located within its control. The NYISO Electricity Market
includes markets for installed capacity, energy, ancillary services and transmission
congestion contracts. Electric energy storage technologies can provide several ancillary
services, including 10 minute synchronous reserves, 10 minute non-synchronous
reserves, 30 minute reserves and regulation, to supplement revenue from other sources.

The NYISO uses a two-settlement process for energy market and certain ancillary
services based on day-ahead bids as well as a real time system. At present,
approximately 50% of the energy in New York State is traded through bilateral contracts

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Electric Energy Storage Market Analysis Study

outside of the NYISO market. Approximately 45% of the whole is transacted in the
NYISO Day-Ahead Market (DAM), and 5% is transacted in the NYISO Real Time
Market (RTM). An EES device can participate in these markets in a number of ways,
depending on its energy storage and delivery characteristics. According to the NYISO
Market Monitoring Report for 2004, changes to the market rules and the model in 2002
dramatically improved price convergence between the hour-ahead and real-time prices.
Thus for economic analysis, the historical day-ahead Location Based Marginal Price
(LBMP) prices were used as the basis for the analysis.

The project team analyzed and evaluated the economic benefits of energy storage for
several applications in New York State, including:

• Energy Arbitrage : 10 Hr – 4 Hr – 2 Hr

• Regulation and Frequency Support : 24 Hrs

• Combination of Energy Arbitrage and Ancillary Services

• Demand Response Program participation

Energy Market

The NYISO uses location-based marginal pricing (LBMP) to determine the price for
electric service in each of 11 zones. For this economic analysis, these 11 zones were
combined into 3 regions, defined as NY-East, NY-West and NYC-Area, as follows:

NYC = NYC + Long Island

NY-East = Hudson Valley + Capital + Dunwoodie + Millwood

NY-West = West + Genesee + Central + Mohawk Valley + North

These regions were selected because they are distinct in terms of not only the
geographical location, but also in terms of the energy price distribution.

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Electric Energy Storage Market Analysis Study

Generating Capacity of 2 MW or higher can bid directly into the NYISO Markets.
Generators can bid in increments of 0.1 MW and must be available for at least 1 hour.
The NYISO has provided in its market design allowances for special resources that have
limited electric energy output/reduction capability for short time periods and/or require a
recharge period. These Energy Limited Resources (ELRs) are required to demonstrate
the ability to operate for a minimum of 4 consecutive hours each day.

Installed Capacity (ICAP)

The Installed Capacity (ICAP) Market is intended to insure that energy resources are
available for the future. ICAP essentially relates to the reliability of the New York State
system and provides payments to resources to encourage future investments and
expansions in the NY Control Area (NYCA).

• EES installations capable of providing at least 4 hours of energy every day are
eligible to receive ICAP payments as Energy Limited Resources (ELR).

• EES installations of at least 100 kW (could be aggregate) can also receive ICAP
revenues by participating in the Demand Response Program as Special Case
Resources (ICAP-SCR)

Thus any EES installation capable of providing power for at least 4 hours continuously
can claim these additional revenues in addition to revenues received from energy and
ancillary markets. ICAP revenues can range from $40,000 - $140,000 / MW-Year in the
NYC region, and are crucial for the economic viability of EES.

Ancillary Services

Ancillary services support the transmission of real power and reactive power from
resources to loads, and is used to maintain the reliable operation of the power grid. There
are six types of ancillary services administered by the NYISO.

Operating Reserve Services provide backup generation when there is an unexpected


change in generation or transmission due to reaching a power system contingency and/or

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Electric Energy Storage Market Analysis Study

an equipment failure. The NYISO Reserves are divided into three categories: 10 minute
spinning reserves, 10 minute non-synchronous reserves, and 30 minute reserves, in order
of decreasing value.

10 Minute Spinning Reserve: There is a 2 MW minimum requirement and must be


synchronized with the network. The resource must provide a full response in 10 minutes
and be able to perform at the committed response for 30 minutes.

10 minute Non Spinning reserve: There is a 2 MW minimum requirement and must be


able to synchronize with the network. The resource must provide a full response in 10
minutes and be able to perform at the committed response for 30 minutes.

30 Minute Reserve: There is a 2 MW minimum requirement and must be able to


synchronize with the network. The resource must provide a full response in 30 minutes
and be able to perform at the committed response for at least 1 hour.

Regulation and Frequency Response Services provide for the continuous balancing of
supply resources with the system load requirements, in accordance with the North
American Electric Reliability Council (NERC) criteria. This service is accomplished by
committing online generators whose output is raised or lowered, predominantly through
the use of Automatic Generation Control (AGC), as necessary to follow moment-by-
moment changes in load. Some EES technologies, particularly flywheels, can be used to
offer continuous regulation and frequency response services. Several earlier studies show
that frequency regulation can offer one of the highest value markets for storage.

Based on the operating characteristics of various technologies under consideration, an


estimate was made of the revenue potential for the various combinations of ancillary
services with 2 or 4 hour energy arbitrage.

Regulation and Frequency Support services offer the maximum revenue potential among
the various ancillary services. It should be noted that under current reliability rules, most
of the EES technologies considered are not allowed to provide 10 min spinning reserves.

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Electric Energy Storage Market Analysis Study

EES technologies that can continuously provide regulation service (such as flywheels)
would receive 20-25$/MWh for being available to provide regulation. These units
receive additional revenue for any net energy provided during the day, based on actual
performance and total energy delivered.

Demand Side Response

The NYISO has some of the most effective demand response programs in the country.
There are currently three demand response programs in New York State, including the
Day-Ahead Demand Response Program, the Emergency Demand Response Program and
the ICAP Special Case Resource program. In our analysis we focused on the Day-Ahead
Demand Response Program, an economic incentive program in which participants
receive revenues for reducing demand based on a price signal from NYISO.

We estimated the potential for participation in economic Demand Side Response (DSR)
programs by calculating the number of hours in each region during which the LBMP rose
above $75, the floor price for economic DSR programs. Since the actual revenue
generated by any market participant will depend on the EES capacity, we calculated the
expected revenues that might have been generated by market participants with EES
capable of 2-hour, 4-hour and 10-hour energy discharge capability in each of the 3
regions under consideration. The NYC region has the maximum DSR revenues, with
values between $120,000/MW and $480,000/MW during the 2001-04 period for
capabilities ranging from 2 hours to 10 hours. The anticipated revenues in NY-East
range from $69,000/MW to $200,000/MW for 2 hour to 10 hour discharge capabilities.
In NY-West the revenues would range from only $40,000/MW to $100,000/MW for the
2-hour to 10-hour discharge capabilities.

Economic Analysis

The economic analysis indicates that there is a strong case for supporting EES installation
particularly in the NYC region for applications such as energy arbitrage, regulation and
demand side response, whereas significant opportunities exist in the NY East and NY

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Electric Energy Storage Market Analysis Study

West regions for regulation services. As these technologies mature and get
commercialized, markets will have to modify existing rules or develop new rules, so that
market participants can benefit from the technical capabilities offered by EES devices.
NYISO, PJM and California ISO have already participated in efforts to evaluate
performance of flywheels for regulation services.

On the other hand, manufacturers and developers need to work on reducing costs of these
systems, so that these units can compete with conventional technologies such as gas
turbines. It is important not to sacrifice the efficiency as a means to reduce capital cost.
This research indicates that achieving lower costs by reducing efficiency of EES can have
a significantly adverse effect on the economics of the project.

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