AES and Beacon Power revisited: Positive returns within reach for grid-scale energy storage

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Coverage of the U.S. Department of Energy loans for grid-scale storage elicited responses from both of the loan recipients, AES and Beacon Power. 

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John Zahurancik, Vice President of AES Energy Storage, claimed that the company is confident that it will receive a positive internal rate of return, citing a report from Sandia National Laboratories which calculates that a power storage facility can realize a lifecycle value of $2,010 per kW for frequency regulation services. This suggests that the $16 million, 20 MW plant will have a lifecycle value of over $40 million, while my firm placed the value at approximately $5 million.

The discrepancy is that the Sandia report assumes that the battery system will operate nearly continuously for 10 years, translating into fewer than two complete charge/discharge cycles per day, while our research assumed eight cycles per day. John explained that the level of usage is determined by the system operator, and therefore the life of a battery system can vary considerably. He stated that the New York Independent System Operator (NYISO) will utilize the batteries under shallow depth-of-discharge (DOD) cycles so that the system can function for five to seven years without considerable cell replacement costs. If the battery system can operate for seven years, the plant will receive a simple payback within two years and reach a net present value of $38 million based on the current value of frequency regulation services. In order to reach a positive net present value, the battery system must operate for three full calendar years.

Chet Lyons, Director of Marketing and Sales at Beacon Power, explained that changing policy in the ancillary market will improve the economics of his company's flywheel systems. He stated that FERC is moving towards adopting premium pricing based on how rapidly a power provider can respond to frequency shifts. If premium pricing is implemented, companies employing fast response technologies including flywheels, and potentially lithium ion batteries, may see a 50% to 100% increase in rates for their services, thereby decreasing Beacon's payback period to five years. Finally, he stated that the company is expecting its flywheels to operate for 20 years - nearly double the cycle life assumed in our analysis.

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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