4.8

ELECTRICITY STORAGE

Better energy storage is the Holy Grail of electrical markets. If it were possible to buy electricity in the spot markets and resell it at a later point, the electrical market would behave a lot differently than it does today. Currently, electricity prices oscillate over time. Prices are often highest sometime during the day and lower at night and on weekends. If it were possible to store energy, then it would be possible to buy electricity during low use periods and resell it when prices were high (Figure 4.8.1). Every night power is cheap. Every day it is more expensive. Buying power during the night and selling it back the next day would be an easy way to make money—if it were possible to store that power.

Figure 4.8.1 Regular daily variations in hourly electrical prices

This sounds like a great idea, but in practice, electrical storage usually is not efficient enough for this type of trading. For example, a storage facility might have 25 percent efficiency. That means that 25 percent of the electricity placed into the facility can be returned after storage. If peak power prices were consistently four times off-peak prices, the system would break even on gross profit—and not even begin to pay the installation and ongoing maintenance costs of the storage system.

However, there are a number of cases where electrical storage does make sense. For example, large nuclear power plants and coal plants don’t like to reduce their operations overnight. They are much more efficient when they run at high temperatures around the clock. If they reduce their output at night, they will have to use a substantial amount of fuel to increase the heat of their system in the morning. In those cases, it is more costly for these plants to reduce their output at night than it is for them to give away free power for several hours. For them, electrical power is free—if they don’t use it, and they can’t sell it, they have to throw it away.

Valuing any electrical storage solution can be fairly complicated. The core of the valuation will depend on how the storage is expected to operate. For example, a system that buys power overnight and then resells it during the following day would be a lot different than a storage facility that gets its power for free and plans on holding on to it for several months.

Batteries

One way to store electricity is through the use of a battery. Although there are a wide variety of battery technologies, conceptually these batteries might be very similar to those found in mobile phones or laptop computers. These are probably most desirable when linked to solar or wind generation. However, even without being attached to a low cost generation, batteries would provide short-term capabilities (ancillary services) that can help the power grid balance short-term variances in voltage.

Historically, battery storage has been extremely expensive. However, the popularity of mobile telephones, tablet computers, and laptops has steadily reduced the price of batteries to the point where it is possible to consider large-scale use of batteries on the electrical grid. Furthermore, as battery storage becomes more common, this is likely to increase economies of scale and lead to further price declines.

Compressed Air

A second way to store electricity is to use it to run an air compressor. The air compressor is run at night or on weekends when power prices are low to force air into a storage vessel. Then, when power is required, air is let out of the storage container (Figure 4.8.2). If the air pressure is high enough, it could be used to run a turbine to produce electricity. It also might be worthwhile to use the compressed air directly—pneumatic air tools are commonly used in a wide variety of industrial jobs. Alternately, since compressed gas is hot and cools rapidly when it expands, it wouldn’t be difficult to create a heating, ventilation, and air conditioning (HVAC) system using compressed air.

Figure 4.8.2 Compressed air storage

Flywheels

Another way to store energy is in a flywheel. A flywheel is a mechanical way of storing energy in a fast-spinning cylinder. A flywheel is a big, heavy wheel that spins extremely fast. The wheel is sped up to store energy, and slowed down to pull energy out of the system (Figure 4.8.3). The key part of the flywheel design is a way to eliminate friction on the spinning wheel.

Figure 4.8.3 Flywheel storage

One advantage of a flywheel is that it can be relatively compact. Another advantage is that getting energy out of a spinning cylinder is relatively straightforward. The wheel can be connected to an electromagnet to create alternating current (AC) power. Or, the flywheel can be connected to a shaft to provide mechanical energy to drive a vehicle.

On the downside, a fast spinning wheel contains a lot of energy. A flywheel can do a lot of damage if an axle breaks. A single flywheel is also going to act like a gyroscope if it is mounted in a vehicle. This will make the vehicle much harder to turn. The gyroscopic effect can be avoided by running two flywheels side by side in opposite directions, but that exposes any shared axle to a lot of torque. However, these problems can all be addressed by engineering solutions.

Pumped Hydropower

A third way of storing power is to pump water high into an elevated storage facility. The basic concept is that water in an elevated location can drive a hydroelectric turbine. Water stored at the bottom of the facility can be pumped into the elevated reservoir during the storage phase. Then, it can be released to get the power back (Figure 4.8.4). This is similar to how a hydroelectric facility operates. Normally hydropower plants are powered by water flowing through a river. However, it would be possible to create a closed system that pumps water below a dam back to the top. With sufficiently large reservoirs at the top and the bottom of the facility, it is possible to store a large quantity of energy for an extended period.

Figure 4.8.4 Pumped hydropower

Trading Example—Compressed Air

The owner of a chemical company needs to keep a large warehouse at a constant temperature. This is one of the major costs of doing business, and he is looking at alternatives to paying peak electrical prices.

1. The Opportunity. When a chemical company is building a new warehouse, one of the HVAC systems it is considering has the ability to run on compressed air. The air doesn’t have to be compressed at run time. It is possible to compress the air overnight. Since the company buys its power wholesale, it can arrange a contract with its power supplier to buy off-peak rather than peak power.

2. The Intuition. Because most of the electricity used by the system can be purchased overnight, the price of operating this system is much cheaper than running the compressor during the day.

3. The Strategy. If peak power prices rise after the system is installed, it will become a better investment. In a similar manner, the company is obligating itself to buy off-peak power. The cheaper the price of that power, the better the investment becomes. Installing this system is equivalent to a long peak power, short off-peak power spread position. Subsequently arranging to buy off-peak power from a supplier will cancel the off-peak exposure of the unit, and leave the owner with just a long exposure to peak power. If peak prices rise, the system will become more valuable. If prices fall, it will have been a less beneficial investment.

4. The Risks. This is a piece of physical hardware and not just a financial investment. However, from a financial perspective, installing an energy storage system allows the chemical company to time shift its energy purchases.

Expected Profitability

Electricity storage can be valued several ways. For example, if the owner of the system is going to buy power overnight every night, there is not really a daily operating decision since the decision will always occur. Because of this, it might be possible to value this investment as a purchase of futures. This will require forecasting forward prices into the future, but limited mathematics.

Another way to estimate the value of an investment is to examine the typical relationship of overnight power to daytime power. In many regions, overnight power is about 50 percent the price of peak power, but this ratio varies by month (Figure 4.8.5). In the summer, power prices tend to spike in the afternoon due to the demand for air conditioning on hot days. Nighttime prices tend to be more stable. As a result, a smaller percentage of summer energy is used at night. This relationship could be used as the basis of a model to estimate peak prices based on marginal fuels, and then estimate off-peak prices from those estimates.

Figure 4.8.5 A typical off-peak to peak price ratio

The complication to either approach is that adding electricity storage to a region can change expectations about future prices. If a sufficient amount of storage was available, there would be no intraday swings in power prices. The reason would be that storage units would be able to supply power during periods of peak demand. This would displace the peaking generators that created the high prices and made building the storage profitable. As a result, some care is needed to avoid over-optimistic assumptions of future profits.

Trading Example—Pumped Hydropower

Polluted coal ponds in upstate New York are located by large hydropower plants. During the spring snowmelt, these hydroplants run around the clock at maximum capacity. For a period of several weeks, the price of power plummets dramatically. By the summer, these hydroplants sell power into the high-cost New York City market. Using the polluted coal ponds to store the low-cost electricity generated during the snowmelt for sale later in the year seems like a possible investment.

1. The Opportunity. Pumped hydropower storage is a way to buy power during the spring and hold it until it can be sold into the high-priced August peak power market. Upstate New York is filled with toxic coal ponds. These are large lakes left over from a time when coal mining was less environmentally friendly. These lakes are conveniently located near mountain ranges, providing easy access to both a supply of water and vertical cliffs that can be used for building dams. The coal mining company is willing to offer this land for free to anyone willing to assume full responsibility for the toxic mess that was created.

2. The Intuition. Along with the spring/summer trade, there will probably be reasonably frequent opportunities for buying power when it is temporarily cheap and selling it when prices spike. For example, if a heat wave is coming, power prices can be expected to rise with a fairly high degree of certainty. Because most people can’t store power, a pumped hydropower plant is one of the few market participants that might take advantage of this trade.

3. Strategy. The general strategy is to identify periods when prices are unusually high or low and either buy or sell power during those periods. Normally this is relatively easy since electricity prices are cyclical. Unless the reservoirs are at capacity, owning a pumped hydropower plant makes it possible to both buy and sell electricity on short notice.

4. The Risks. The cyclical nature of power prices makes buying, storing, and selling power a low-risk investment. However, that nearly guaranteed profit still might not be enough to take on the environmental liability of this investment. Assuming the legal liability for someone else’s toxic cleanup is a potential nightmare. Additionally, building a pumped hydropower plant means building physical property and hiring an operational team to maintain that property. Maintenance costs are probably going to be high because polluted water is often highly corrosive. Overall, this is a complex trade with a lot of liability and operational complexity.

5. Executing the Trade. Once the facility is built, this is a physical trade that will involve arranging the purchase and sale of actual power. As a result, there is also a lot of paperwork involved. There will need to be a second team of people that coordinates the purchase and sale of power for this facility every day.

6. The Results. Taking on the responsibility for toxic cleanup is a huge risk. That risk alone will be enough to scare off nearly all of the potential investors. The physical complexity of the job is a second deal killer. Building a dam to pump water up and down a mountain isn’t simple under any circumstances. That complexity, combined with the need to run highly acidic water, makes this a complex trade even if there were no liability concerns. Most investors will pass on this investment.