Merchant Electricity Storage

Executive Summary

An especially valuable electricity storage value proposition is the “merchant” business model. It involves what can be described simply as continuous optimization of benefit derived from operation, cost incurred for the operation to generate profit. Owner-operators apply a “real options” mindset to understand and successfully pursue profit. To the extent that the merchant storage facility is technically able and qualified, it participates in the wholesale market for electric energy, capacity (power) and ancillary services. In some cases they may sell some of their services to one or more utilities or even high power end-users directly, under contract. Currently there are GigaWatts of merchant storage capacity in operation or planned – primarily pumped hydroelectric, but interest in compressed air energy storage (CAES) is growing.



Beginning in the mid-1970s, several important drivers lead to an opening up of the electricity supply business (i.e., generation) to independent power producers (IPPs). First, conventionally there was a rationale for maintaining a regulated monopoly for the electric supply. The rationale included, among other elements, the premise that only utilities with a regulated but mostly certain revenue stream could get the best financing and could take advantage of generation plant economies-of-scale. Second, a growing array of modular generation technologies–such as advanced reciprocating engines, microturbines, fuel cells – was expected to erode the financial and thermodynamic advantages associated with economies-of-scale. Third was the growing interest in enabling renewable energy (RE) generation and cogeneration (generating electricity and usable heat concurrently), now known as combined heat and power. Finally, there was growing recognition of the attractiveness of competition – in the electric supply/generation marketplace – to keep costs low.

The key outcome was the Public Utility Regulatory Policy Act (PURPA). PURPA set the stage for today’s ever more competitive and diverse electric supply, including: large utility and IPP-owned generation and electricity storage, RE generation, end-user/onsite “distributed” generation, combined heat and power (CHP), combined heating, cooling and power (CCHP), electricity storage and “demand-side” alternatives such as demand response and dynamic pricing.

Real-time Market and Power Purchase Agreements

There are two complementary variations of the merchant value proposition. In one variation, the merchant plant owner participates in the wholesale market for electric energy, electric supply capacity, ancillary services and in the future transmission-related service.In the second variation, the merchant storage plant owner establishes a contract with a utility or other third party to provide specific services at specific times (generically referred to as a power purchase agreement or PPA). In some cases, merchant storage owners do some combination of both (wholesale market participation and PPAs).

Although circumstances vary among markets, regions, specific locations, day-to-day and year-to-year, benefits derived from operation of a merchant storage plant include: a) electric energy time-shift, b) electric supply capacity (power) and c) most or all of the ancillary services that are needed to maintain a stable and reliable electrical grid. Other potentially significant benefits could includetransmission support and/or transmission congestion relief.

The optimal combination of benefits varies depending on several criteria, including: time-of-day, season, location, the available mix of electric supply resources and longer term electricity demand trends.

For both variations, the merchant storage owner uses a “real options approach” to continuously optimize the benefit derived from operation and cost incurred for the operation, to generate the highest profit possible. The real options approach enables plant owners to better understand and successfully pursue maximum profit from their storage assets.

Merchant Aggregators

Conventionally, merchant generation and storage plants have been large scale – usually dozens or hundreds of MegaWatts (MW). An increasingly viable and attractive alternative is aggregation of distributed energy resources (DERs) including distributed storage, generation and geographically targeted demand response. The storage, generation and demand response capacity is aggregated into a “block” of electric power that is operated like a much larger scale merchant plant.

Such distributed deployment would enable merchant storage owners to derive “locational” benefits plus the benefits that accrue to larger scale merchant plant listed above. Currently aggregation of demand response resources is increasing. And the Smart Grid is expected to enable more aggregation by providing the monitoring, communications and control protocols and infrastructure needed to coordinate and control many diverse and distributed resources.

Conclusions and Observations

The merchant business model is a very important value proposition for storage. It enables owners to take the fullest advantage possible of the combination of: 1) the electricity marketplace, especially the wholesale market for electric energy, capacity (power) and storage’s capabilities and 2) electricity storage’s features and capabilities.