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The Value of Storage: Today Gas, Tomorrow Electricity?

Fortnightly Magazine - September 15 1996

base-load power plants with low marginal production costs during periods of low demand to provide energy with a low variable cost during periods of high demand. It thus avoids capacity additions and reduces its peak use of expensive fuels like oil and gas.

While an HPS dam or reservoir appears more expensive and capital-intensive to build than a combustion turbine, the additional capital cost can be offset by other HPS system benefits, such as lower average production cost based on arbitrage between low-cost units off peak and high-cost units on peak. In effect, HPS allows utilities to shield customers from the reality of power generation, depending upon the level of coincident demand. End-use pricing has not reflected real-time costs, but new markets will deny utilities that luxury.

As with gas, new storage techniques will emerge to meet the demands of a competitive electric market: compressed air energy storage (CAES), battery energy storage systems (BESS), superconducting magnetic energy storage (SMES), and flywheel energy storage (FES).6 While not actually "storing electricity," these systems store energy to regenerate electricity and to capture the economics and operational benefits that actual electricity storage would provide.

CAES, by far the most well developed, relies on commercially available "off-the-shelf" combustion-turbine technology, modified to allow compression during the time the generator is not operating. Typically, a combustion turbine uses nearly two-thirds of its fuel energy to compress air while it is generating power. The CAES system uses inexpensive offpeak energy from base-load units to compress air in below-ground salt caverns or depleted hydrocarbon fields. During peak-demand periods, the expander turbine takes air from the caverns and gas fields to drive the generator, but uses much less fuel than a combustion turbine does.

"Virtual" electricity storage will arise through the use of financial instruments such as swaps and demand-side processes or products. In a storage swap, two parties would agree to purchase power at a certain time and then sell an equivalent amount at a later date (to each other or a third party). The parties could simply ramp their generation assets up or down at times that differ from those they would normally choose absent the agreement. This strategy allows the parties to exploit efficiency gains from temporal differences in their marginal production costs or supply availability.

Real-time end-use pricing will encourage customers to seek demand-side options to change their patterns of consumption and lower their bills. For example, by melting metal during offpeak periods or turning large industrial freezers off during onpeak periods (those with insulation that can hold temperatures for several hours), businesses can shift their consumption to lower-cost time periods. In effect, such customers can deliver capacity back to utilities when needed.

Electricity hubs and market centers will also evolve to serve the multitude of transactions inherent in a deregulated supply market. CAES and HPS plants might prove ideally situated to function as the physical "swing" for an electricity hub or market center. Hubs geographically situated close to CAES or HPS plants could attract more buyers and sellers than hubs that are unable to offer storage services