Anyone who follows news on energy storage will have noticed that the number of articles covering events and companies in California is way out of proportion to California’s share of the US population, GDP, etc. Companies in the space frequently cite their successful experience in California as validation for their business model on a much larger scale. This begs the question; is California a valid proxy for a broad market for energy storage products and services?
At the 50,000 foot level, there are some notable differences between California and the rest of the country that cast doubt on any inferences made about energy markets across the country as a whole. Most notably, California has implemented programs that make construction of new power plants very difficult. A mandatory greenhouse gas emissions reduction program (AB32) caps emissions from the power generation sector at 1990 levels by the year 2020, and this applies at a statewide level. At the local level, permitting any new source of criteria pollutants requires offsetting air emissions permits that are expensive and in some cases completely unavailable. Practically speaking, building new peaking capacity from fossil fuel fired generators to meet peak power needs is not feasible. This creates strong demand for energy storage as a source of peak generating capacity that can be permitted and built.
The state’s investor-owned utilities’ tariffs create large savings opportunities for customers on time-of-use tariffs who are able to switch load from peak periods to off-peak periods. PG&E’s E-20 Option R tariff, available to industrial customers with onsite solar generation, charges 4 times as much for peak summer energy as summer off-peak. This differential, which is not reflective of wholesale energy market price signals, creates a substantial second revenue source for energy storage peak shaving assets that can also shift energy use from peak to off-peak periods.
In jurisdictions where tariffs more closely reflect wholesale market pricing, on-peak energy might be 20% – 30% higher than off-peak energy. With round-trip efficiencies of 75% – 85%, a 30% premium for peak energy does not create meaningful economic value for energy storage as a time-of-use arbitrage mechanism.
But investment decisions are not made based on the view from 50,000 feet up. Companies find strong support for energy storage in surprising places. That support might be a combination of an onsite power quality issue, high distribution demand charges, grants and rebates promoting innovative technology, or transmission charges allocated based on coincident peak load. Which is to say, there will be opportunity across the country. However, extrapolating the experiences of the early adopters in California is likely to over-represent the volume of opportunities in other areas substantially.