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How Tesla, Utility Battery Rivals Are Transforming Electric Grid

What could the rise of battery energy storage systems by the likes of Tesla Motors do for utilities? To hear CEO Elon Musk put it recently when talking about his new Tesla Energy division, batteries could let the world turn off half its power plants just by tweaking how and when the rest run, not factoring in solar or wind energy.

Utilities are turning on to batteries, already saving a lot of money on key projects. And battery storage stands ready to usher in potentially far more wind and solar to the power grid, smoothing out their on-again, off-again transmission patterns and serving as a cost-effective alternative to massive excess-generating capacity otherwise needed to cope with the spikes.

"The grid is changing so much," said Pat Hayes, a business development manager in energy storage with global power and automation company ABB (ABB). "If you think about how the grid used to be, utilities used to have the transmission down to the load. If you add these renewables on board, and distributed-generation power sources can be coming from all over the place — now it leaves utilities in a different type of world.

Utility engineers have to be more creative to balance out power.

Utilities are using batteries to grow without building new substations and costly peaker plants, and to make up for retired facilities. They can do this as an energy storage supply industry forms and standardizes around commoditized lithium-ion batteries.

Tesla Powerpacks Changing Grid Storage

Tesla (TSLA) is hardly the first energy storage supplier. But with the Powerpacks it now sells to utilities and others, Tesla is changing grid storage to look "more like a product coming off an assembly line," Hayes said. "There's a good lesson for all of us to do that, too.

ABB has worked in energy storage since the 1990s, tailoring big systems such as the Golden Valley project, circa 2003 and billed as the world's largest of its era, designed to improve reliability and curb the cost of backup electricity for 90,000 remote Alaska residents during grid outages.

"Every time the transmission line went down, this village would basically go dark," Hayes said. "The village would have to keep on a spinning-reserve diesel or gas plant to always be available in case the transmission line went down.

In this case and others, using batteries meant not having to run that costly extra plant. The storage system provides 27 megawatts of power for a 15-minute stretch, and back then they used nickel-cadmium batteries from Saft.

Tesla could end up being both a supplier and rival to integrators such as ABB.

With a good reputation for the battery packs in its electric cars, Tesla now has a fistful of contracts for its utility-scale Powerpacks.

In May, Ireland's Gaelectric Group said it will deploy Tesla's first battery power utility-scale project there next year — a 1 megawatt demonstration project. Georgia-based Southern Co. (SO), which serves more than 4.5 million customers in the Southeast, has an agreement with Tesla to test commercial-scale battery storage. Tesla already had a pact with Edison International, implementing storage projects with Tesla Powerpacks. It also has deals with Advanced Microgrid Solutions, OnCor and AES (AES).

Several other energy storage companies that have been in the power game much longer than Tesla also are inking contracts as the industry ramps up.

Over the next 10 years, $160 billion will be spent worldwide on utility-scale storage and "behind the meter" on-site energy storage for commercial, industrial and residential customers, projects Navigant Research analyst Anissa Dehamna.

Does it make financial sense for utilities to consider lithium-ion batteries today? In certain applications, for sure.

Batteries Cheaper For Utilities Than Excess Capacity

In New York, Consolidated Edison (ED) is spending up to $200 million for about 50 MW of "demand management" assets that include energy storage, notes Dean Frankel, a research associate at Lux Research.

That "is expected to defer up to $1 billion in transmission and distribution costs that the utility would otherwise have to incur," he told IBD by email. "At that T&D (transmission and distribution) deferral rate, energy storage quickly earns the utility a payback as the cost of 50 MW of energy storage can be lower than $50 million.

The PJM Interconnection coordinates wholesale electricity across more than a dozen states, and Frankel adds that "the PJM marketplace for frequency regulation has seen nearly 200 MW of operating and proposed storage projects.

In the highly volatile market for frequency regulation, he says, "some energy storage systems made their entire projected revenue for the year in 2014 during the weeklong polar vortex," when the grid was extremely stressed.

Commoditized lithium-ion batteries have caught on with large-scale utility projects partly due to lower prices, Dehamna says. The batteries' wider use and increased number of suppliers also make it easier to attract financing.

"Investors want to see five other suppliers you could use at a comparable price," she said. Also, these battery systems provide "some of the rigor that investor community demands — investors want to look at things like construction risk.

But beyond the actual batteries, right now "the real value is in these other layers that go on top," Dehamna said. Systems integrators tailor battery packs with controls and power conversion software for end customers such as utilities.

AES Energy Storage leads this market, Dehamna says, followed by NEC Energy Solutions and RES Americas. She cites ABB and S&C Electric among other big names in the industry.

Edison International's (EIX) Southern California Edison is opting for 250 MW of energy storage as part of its plan to supplant electricity lost with the closure of the San Onofre nuclear power station. It chose AES to build a 100 MW battery system in the West Los Angeles Basin, along with 85 MW by startup Stem and 50 MW by startup Advanced Microgrid Solutions.

And ABB is part of Southern California Edison's Tehachapi Wind Energy Storage Project. At 32 MW hours, Hayes says, it's North America's largest lithium-ion storage project. ABB provided power electronics controls and some of the balance plant work, he says.

Batteries Key To Solar, Wind Energy

The more solar and wind energy is used on the grid, the more use for battery systems to store their intermittent output.

Hayes notes that many solar plants' power purchase agreements — complex legal/regulatory arrangements — won't let the projects generate more than the specified amount of energy, even if they are capable of it, in part due to concerns about reliability.

"That's lost revenue when it comes to developers," Hayes said.

"If you use the tools and principals of energy storage, it may enable or highlight some things that may make a better PPA (power purchase agreement), a more structured one — maybe you can negotiate different rates with utilities if there's worry about reliability in certain areas," he said. "This is something the industry is just now starting to think of."