How profitable is energy storage?

Energy storage – why is it needed and how will it make money?

Debates on the future of energy tend to focus on the extent to which renewable energy will replace coal, oil and natural gas. Historically, the debate has looked at how much renewable sources can produce, and how much they cost.

The problem with this debate is that it is not sensible to compare a unit of renewable energy directly with a unit of energy from coal, oil or gas. The reason is that whereas renewable electricity is a source of power, coal, oil and gas are stores of power. That storage function – the ability to produce energy when required – is absolutely crucial to the value of coal, oil and gas. If they are to be replaced, something else needs to provide this function. This is why storage is suddenly more important than it was.

Of course, there are already ways to store electricity. Batteries come to mind immediately, but there are also other methods. For instance, hydro dams can pump water uphill to store the potential energy of water, and flywheels can store energy in rapidly spinning masses.

Various surveys have explored the technical pros and cons of each method and the associated costs. But in order for storage to happen at scale, it needs investors to step forward with money for real projects. And these investors need to know whether those projects are likely to make money.

The short answer to that is “possibly, but it depends on what is being done with the storage, and who is paying for it”. A longer answer is that storage can make money from several different things:

  • making the power grid more stable
  • buying power at cheap off-peak times and selling it at expensive peak times
  • reducing the need for new power lines or other electricity systems
  • providing a back-up in case the main power supply fails
  • helping to store renewable electricity that would otherwise be constrained off
  • capacity payments or markets

Which sources would provide revenue, and how much, depends on the project’s location and how it was set up.

The easiest way to weigh up the different revenue streams is to use a financial model, and we’ve been developing one at Lambda. We’ll publish it in a few weeks as a free download, but the draft already suggests that making the power grid stable is of particular value.

If you’d like to be notified when the model is published, please tell us your email address and we’ll contact you as soon as it is ready.

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