Utilities are facing waves of disruptive technologies. First it was wind power. Then it was regional transmission organizations. Then solar power. Next it was microgrids. Now it is large-scale and grid-connected batteries.
From a grid management perspective, batteries are wonderful tools. The do something no other technology can match. They can instantly deliver reserve energy.
Let me explain. In large grids that cover thousands of square miles, customers' collective need for power fluctuates by the nanosecond. Typically, utilities keep power plant capacity on spinning reserve to meet fluctuating demand. There are four problems with that spinning reserve.
First, there is a real time delay between the moment the incremental load appears on the grid and when the power plant can respond. Second, the plant is wasting fuel waiting for that new load. Third, the plant is pumping unnecessary air pollution and waste heat into the atmosphere. Finally, spinning reserves can damage power plants and increase their maintenance costs.
Batteries eliminate all those challenges. They are passive, non-polluting, quiet and instantly responsive. They are also expensive.
A typical utility-scale battery has a capital cost of about $2.5 million per megawatt -- about five times more costly than a simple cycle gas turbine. It is seven times more costly than what NRG Energy (NRG) will pay for its new Edison Mission subsidiary. It is about on par with a new combined cycle gas turbine. It is about half the price of a new coal or nuclear unity.
When utilities invest, their first priority is to make sure they can recover their capital costs. One recovery method is through capacity payment programs offered by some but not all regional transmission organizations. Unfortunately, many of those programs, if they exist, are weak and inadequate. Some of the better capacity programs migrate toward $500,000 a megawatt for 30-year assets.
Batteries are usually 10-year assets. To break even, a $2.5-million-per-megawatt battery needs to earn a $685 per megawatt-day capacity payment. Today, power markets offer much lower payments. Even if ancillary service payments are added, most power markets fall short.
States will create new policies to encourage investment in grid-connected batteries. California just did. Others will follow. Batteries are low effort, and they solve so many problems.
States need to lower emissions and fix environmental non-attainment areas. They want lower energy costs for their citizens. They want to eliminate large central power stations (or at least limit new ones). They prefer distributed energy. They also want higher-quality power. Batteries do it all.
Capital costs are only part of the consideration. While batteries do not create energy, they do incur production costs and operating expenses. Like power plants, batteries need fuel. The difference is their fuel is power.
Once they buy their power, utilities need to convert it from alternating current to direct current. They need to store the energy. Then they need to pull the energy out of the battery and convert it back to alternating current.
The round-trip energy conversion and storage process costs battery owners about 25% of the power sold. In addition, owners have to buy the power at a deep enough discount to cover overhead costs. Therefore, to make 10 megawatts work economically, battery owners have to sell their power at at least twice their purchase price.
Of course, there are other revenue sources. AES (AES), Duke Energy (DUK) and American Electric Power (AEP) found enough to invest in several grid-connected batteries. All are small. None are larger than a standby generator used by hospitals.
For the battery industry, this is just the beginning. There will be almost unlimited opportunities as more states mimic California and encourage battery deployments.
Companies specializing in large batteries are just forming. Most are too small to mention. Some others are privately owned.
For those interested in private equity, consider the list of companies collected by GigaOM. Last year, it listed "13 battery startups to watch in 2013." In that list, it named promising companies funded by Bill Gates, Total (TOT) and General Motors (GM).
For those who have an appetite for Japanese stocks, the dominant player in grid-connected batteries is NGK Insulators. NGK is the utility-preferred technology for massively large batteries. NGK Insulators is known worldwide for sodium-sulfur batteries. NGK's NaS battery systems range from 1.5 to 34 megawatts. They are used primarily in Japan and the U.S.
The era of the battery is just beginning. Like wind power, solar power and demand response, batteries are the next tool for policymakers. Better, most utility distribution companies such as Consolidated Edison (ED) and Northeast Utilities (NU) should not find batteries to be a threat to their core business.
At the time of publication, Glenn Williams had no position in any of the stocks mentioned.
