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Solar-plus-storage already a compelling economic proposition for coal-retiring Midwestern US states

By Andy Colthorpe
Indiana utility NIPSCO issued a transition plan that included a build-out of solar with battery storage. Image: NIPSCO via Twitter.

There has been growing uptake in battery energy storage in Midwestern US states that have traditionally depended on burning coal for electricity, with some “very big projects planned,” an analyst has said.

Research and analysis firm IHS Markit recently shared with some of the key details of a recent report that includes a 10GW forecast for global energy storage deployment during 2021, more than doubling the 4.5GW that the company believes was installed in 2020.

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Of this 10GW, the company said, around half will be in the US, with a number of factors converging to keep that market a hotbed of activity, such as the Investment Tax Credit (ITC) incentive available for storage systems deployed together with solar, while batteries are beginning to provide energy capacity as well as power services such as frequency regulation. approached IHS Markit for more insight on the US’ regional market variations and dynamics. Sam Huntington, associate director for gas, power and energy futures at the company said that “very strong growth” continues to be seen in markets such as California, Hawaii, Texas and New York, as well as Arizona and Nevada. Every one of those states has well in excess of a gigawatt of projects in development, Huntington said. He also pointed out a willingness of regulators in Puerto Rico to deploy more than 1GW of batteries to shore up their grid over the next few years as a key area to look out for.

Those named states would probably not come as much of a surprise to industry-watchers: California and Hawaii have led the rankings for a number of years and New York and Texas have emerged over the past couple of years as have the latter two. However, there has been some recent discussion in the industry as to which states would be next and asked Huntington if less talked-about markets such as Midwestern and central US states — which have traditionally been coal industry regions — are seeing increased activity and if so, why.

“In the Midwest, Indiana has been the real surprise,” Huntington said, with “several large battery projects being contracted” in the territory of utility NIPSCO, and smaller ones in rural utility cooperative NREMC’s territories and “even a couple of small forays” by Duke Energy.

“Other midwestern states such as Kansas, Oklahoma, and Wisconsin also have some very big projects planned. Coal retirements are certainly part of the story as utilities will need to backfill that lost capacity at some point, but, frankly, the economics of solar-plus-storage are just very compelling right now in light of cost declines, tax credits, and pretty decent midday energy prices.”

However, he said, the Midwestern US is “generally pretty oversupplied” with energy capacity, which means that there is not a strong price signal for “firm” resources — defined by grid operator Midwestern Independent System Operator (MISO) and most regulated utilities as four hours of energy storage. This will change, as more and more coal generation retires and goes offline, but it could be a few years before the market “really heats up,” Sam Huntington said, adding that many of the present investments in batteries are likely being made in anticipation of life after coal.

Texas’ ERCOT market: ‘Unique’

Meanwhile in leading states California and Hawaii, Huntington said that “almost no new solar gets built without a battery”. In California, new energy storage is being connected at solar sites to make use of existing interconnection points and to capture tax credits. IHS Markit spotted only one single power purchase agreement (PPA) signed for solar PV during 2020 that didn’t include battery storage, while Hawaii is “very similar — all projects are hybrids now,” the analyst said. Puerto Rico has similar market fundamentals to Hawaii — an island region with high costs of importing fuel to burn to generate electricity.

In terms of other regional trends to look out for this year, the Electricity Reliability Council of Texas (ERCOT) — very much in the mainstream news at the moment due to the impacts the devastating winter storm had on its networks — creates some “unique business models” due to its market design and the absence of capacity contracts. In other parts of the US, such contracts are vital to securing financing, Huntington said. The fact that “everything is merchant” in ERCOT makes everything “a lot riskier” too, he said.

“The flip side is that there are no duration requirements, so we’re seeing a lot of one or two-hour batteries going in, which are a lot cheaper than a four-hour battery. And the arbitrage margins on a 1-2 hour battery aren’t much worse than a four-hour battery, so despite the extra risk the economics are still pretty compelling due to lower costs and pretty high revenues.”

Batteries alone couldn’t have solved the winter storm energy crisis, where extended periods of extreme weather lead to a variety of failures across the grid, Huntington said. He explained that the current lithium-ion technology most typically used by the industry is “fantastic at stitching together renewable production on an hour-to-hour basis, but don’t help much with multi-day reliability events”.

However, “…greater resource diversity almost always improves reliability, so more grid-scale renewables and batteries will definitely help mitigate, if not solve, the reliability issues,” the analyst said.

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