Energy storage: Why the future relies on regulations, not cost reductions

By Steven Minnihan

The outlook has been skeptical around energy storage for mass adoption on the electric grid due to poor balances of cost and benefits.  While some utilities or regions do require a small quantity of energy storage at the most problematic points on the grid, grid-storage will not reach ubiquitous commercial adoption at its current pricing. Furthermore, the incremental improvements in performance and reductions in cost suggest that commercial adoption is beyond 10 years away. As a result, many stakeholders are rightfully looking toward regulations to alter the market landscape and make room for storage.

Look for regulations along the following lines to stimulate the storage market over the next five years.

1) Ancillary service rate restructuring -  Ancillary service (AS) rates in the North American market fell between 66% and 75% from 2007 to 2010, primarily attributed to the reduction in electricity demand as a result of the global economic downturn. This reduction in demand has left most (but not all) of the transmission operators in the region with an excess of natural gas capacity, thereby driving down the rates for AS and reducing the need for new energy storage capacity. Pending regulations including the Federal Energy Regulatory Commission's pay-for-performance metric will potentially increase the AS rates paid to energy storage units, allowing them to economically compete with traditional generation.

2) Baseload phase-out - As stated above, storage will have a difficult time competing when nuclear and fossil fuel capacity is plentiful. However, a dramatic drop in baseload generation could lead to a constriction of capacity, allowing new technologies to step in and fill peak demand periods or needs for reserve capacity. For example, Germany recently ruled to decommission all of its nuclear generation by 2022, which accounts for nearly 25% of electricity supply today. It is probable that the country will rely on increased coal generation and international electricity supplies to fill this gap. However, if the country begins converting peaker natural gas plants towards baseload operations, then new capacity will be needed to meet peak demand. Energy storage will then compete with renewables, demand response and other technologies to address that peak demand.

Carbon dioxide regulations and renewable portfolio standards have been postponed in much of the global market, and the disjointed nature of the regulations have done little to drive storage adoption. However, the two classes of regulations outlined above provide potential to encourage storage adoption even at current high prices.

Steven Minnihan is an analyst for Lux Research, which provides strategic advice and on-going intelligence for emerging technologies. For more information, visit the Lux Research site.

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