COLUMN-Need for energy storage offers hydropower revival: Wynn

Wed May 1, 2013 9:32am EDT

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(The author is a Reuters market analyst. The views expressed are his own.)

By Gerard Wynn

LONDON May 1 (Reuters) - Hydropower offers an effective way to balance grids that increasingly have to cope with variable renewable energy supply, and this may end the long lull in hydroelectric projects caused by economic and planning hurdles in developed countries.

The vast majority of electricity is presently consumed at the instant of generation, putting a premium on electricity storage.

As supply of intermittent renewable power grows, from sources such as wind and solar, storage technologies have additional value to balance variable supply, as well as varying demand.

That grid balancing value includes benefits that are hard to monetise, such as reducing the wear and tear on gas-fired power plants, as these are used increasingly to balance wind and solar power by ramping up and down - a cost that policymakers may have to value explicitly to make pumped storage economic.

Governments are funding the development of chemical battery storage technologies for automated balancing of electricity distribution at the low voltage, household level.

But hydropower remains by far the most mature, economic, grid-scale energy storage option.

Pumped storage has an exceptionally sharp ramp-up time, adding to its grid balancing potential. The operator of Britain's Dinorwig plant for example reports a 0 to 1,320 megawatt "pick-up rate" of 12 seconds.

Pumped storage works like a dam in reverse, where the operator purchases power at cheaper off-peak prices to pump water from a lower to higher altitude reservoir, releasing it to generate electricity at times of peak demand.

Paying for some benefits of grid balancing - such as reducing wear on thermal plants or for an exceptional response time - is difficult through market mechanisms. It may require policymakers to intervene in energy markets, as they are doing increasingly after the roll-out of subsidised renewable power.

RESOURCE

Globally, there are approximately 270 pumped storage plants operating or under construction, with a combined generating capacity of over 127 gigawatts (GW), according to the U.S. National Hydropower Association in its overview, "Challenges and Opportunities For New Pumped Storage Development".

Europe is ahead of North America and China. (See Chart 1)

The United States has 40 existing pumped storage projects with more than 22 GW of storage capacity, according to the NHA.

Most of these were authorised more than 30 years ago.

The U.S. Federal Energy Regulatory Commission (FERC) shows an upsurge in permit applications for projects since 2007, presumably with an eye on the new potential for grid balancing as U.S. wind capacity expands. (See Chart 2)

FERC had issued preliminary permits for total pumped storage capacity of 49.7 GW, as of March. (Chart 3)

A preliminary permit does not authorise construction but maintains a place in a queue should the developer apply for a licence, implying a big gap to realised projects.

Limits on more hydropower include high capital cost and long planning and construction lead times, while the expected impact on water availability of climate change, including more extreme heatwaves and droughts, is a concern.

"Very few financial institutions are willing to finance these types of long-lead projects through the licensing time frame," the NHA said.

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Chart 1: (page 26) goo.gl/0qLHv

Chart 2: goo.gl/jk68I

Chart 3: goo.gl/P70Xw

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VALUE?

At present wind, solar and gas-fired power represent the bulk of added capacity in industrialised economies.

That reflects subsidies including tax credits and a power price premium for intermittent renewables, as well as a short process to obtain permits and relatively low fuel cost for natural gas, which has under-cut pumped storage.

"Pumped storage is the most likely form of large new hydro asset expansions in the U.S., however justifying investments in new pumped storage plants remains very challenging with current electricity market economics," according to the research organisation, Electric Power Research Institute (EPRI).

"Even over a wide range of possible energy futures, up to 2020, no energy future was found to bring quantifiable revenues sufficient to cover estimated costs of plant construction," it said in its report, "Quantifying the Value of Hydropower in the Electric Grid", published in February.

The EPRI study found numerous ways in which existing pumped storage operators could increase revenues, including installing adjustable speed storage pumps to balance better surplus wind power generation, potentially increasing revenues by 85 percent.

It suggested that explicitly valuing grid balancing services could pose an "economic tipping point" for new projects.

DIFFERENT ASSET

Arguments for reforming pumped storage markets include two approaches: first, defining it as a new asset class, where at present it can be treated as electricity generation, transmission or consumption; and second, introducing payments for grid balancing services.

Regarding asset definition, the European electricity industry body Eurelectric, in its report "Europe Needs Hydro Pumped Storage: Five Recommendations", noted last year that operators can be taxed twice, for both power consumption and generation.

The U.S. NHA argues that pumped storage could be treated as a transmission asset, given its grid balancing role.

That would allow it to benefit from predictable, long-term revenues based on transmission charges instead of wholesale power market arbitrage, whose profits may be too unclear for financial backers.

U.S. regulation (Section 219 of the Federal Power Act) allows investors in transmission facilities an attractive return through charges on grid users.

Regarding payments for grid balancing services, wholesale power markets are already evolving to award government-guaranteed revenues for reserve capacity, demand response and energy storage, where pumped storage could be included.

To reform power markets in this way, a philosophical debate must first be resolved about the role of energy storage compared with other ways to deal with the intermittency of renewables, such as building out transmission capacity. (Editing by Anthony Barker)

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