Historic Procurement Showcases Energy Storage as Alternative to Gas

Jin Noh, Policy Manager

July 6, 2018

There is a fascination among countries with racing to build the tallest building in the world. It has become a universal symbol of wealth, prestige, and sophistication and becomes a monument to past wonders of the world.

Energy storage projects are not quite the beautiful visual wonder that tall skyscrapers are but they can provide wonders for the electric grid by providing fast-ramping capabilities and by serving as a viable alternative to gas generation. California set itself apart last week in energy storage leadership, firmly establishing itself at the epicenter of the energy storage revolution.  California cemented its status by announcing the largest single (non-pumped-hydro) energy storage procurement by any single utility and by procuring what will become the two largest modern-day storage projects when they come online.  

The Procurement

On June 29, Pacific Gas and Electric (PG&E) announced the execution of contracts for four energy storage projects totaling 567.5 MW (2,270 MWh) coming online in late 2019 or 2020 as part of its 2018 Local Sub-Area Energy Storage RFO. With 29 offers received totaling 100 variations, PG&E selected two third-party-owned projects (Dynegy, esVolta) under Energy Storage Resource Adequacy Agreements (ESRAA), one third-party-owned project (Micronoc) under a Behind-the-Meter (BTM) Capacity Storage Agreement (CSA), and one utility-owned and operated project (Tesla) under an Engineering, Procurement, and Construction (EPC) agreement. Notably, if approved by the California Public Utilities Commission (CPUC), the 300-MW Dynegy project and 182.5-MW Tesla project are expected to become the two largest energy storage projects proposed to date for construction in the world.

Why Procurement Was Needed

Launched in February 2018, this solicitation arose out of Resolution E-4909 due to the CPUC intent to avoid “backstop procurement” of several gas plants across tricky-to-serve “local sub-areas” in PG&E’s territory. “Backstop procurement” by the California Independent System Operator (CAISO) arises in part out of capacity deficiencies from the normal bilateral Resource Adequacy (RA) planning processes, which contracts for resources for identified System, Local, and Flexible capacity needs. However, gas generators have faced a tough economic environment to recover their costs due to the increasing levels of deployment of renewables, as well as a buyer market in flux with the growth of community choice aggregators (CCAs), leading to CAISO backstop procurement of these plants needed to maintain grid reliability in local sub-areas.  In some cases, augmentations to the transmission system can also address local area needs.  Such solutions are also being explored.

Due to concerns of the higher cost of short-term, cost-of-service backstop procurement agreements (known as “Reliability Must-Run” or “RMR” agreements), the CPUC directed PG&E to seek replacement procurement from cost-effective energy storage resources to meet local capacity and voltage needs and/or to identify transmission solutions to reduce their local capacity requirements (LCR) that combine to obviate some or all of the need for the RMR agreements for the three gas plants. Replacement resources would come  online in 2019 or 2020 and be contracted for 10- to 20-year terms, limiting the need to keep these gas plants online under costly RMR agreements to a short-term, 1- to 2-year measure.

How Energy Storage Got Here

To understand the success of this energy storage solicitation, it is important to remember the policy mechanisms and experiences that made this all feasible. Assembly Bill (AB) 2514 established energy storage targets for each of the investor-owned utilities (IOUs) to procure energy storage resources in order to transform the market for energy storage while gaining procurement and operational experience with understanding then-nascent energy storage systems. Each of the IOUs have made significant progress against these targets, including a major procurement of energy storage systems by Southern California Edison (SCE) to provide local capacity in response to the retirement of the San Onofre Nuclear Generating Station (SONGS). Over 260 MW of energy storage was procured by SCE in 2013, including a novel case of procuring over 100 MW of customer-sited energy storage systems to deliver local capacity. This proved to be a valuable learning experience for SCE to procure and contract for energy storage and demonstrated how energy storage systems could be operated to reliably provide local capacity. 

Several years later, almost 100 MW of energy storage projects were procured by SCE and San Diego Gas and Electric (SDG&E) in response to a methane leak of the Aliso Canyon gas storage facility. A moratorium on withdrawals from the facility, which fed gas to 17 gas peakers in the Los Angeles Basin, presented potential grid reliability issues, but energy storage projects were procured within eight months via emergency solicitations to alleviate these concerns, including an innovative hybrid gas plant and energy storage system that would drastically reduce the gas supply requirements as well as the GHG emissions profile of an otherwise standalone gas plant. This expedited procurement was made possible due to learnings from previous solicitations by the IOUs and the energy storage industry and demonstrated the capabilities of deploying energy storage to meet urgent short-term needs. 

This brings us to June 29. Previous solicitations for energy storage not only led to the demonstration of innovative use cases and configurations but also created a sense of comfort and familiarity with energy storage in providing local capacity and in providing that capacity in an expedited manner, if needed, which likely led to the CPUC in believing that energy storage could deliver once again in the South Bay-Moss Landing local sub-area. Resolution E-4909 was thus born and it looks like the energy storage industry once again delivered. 

What It Means

  1. Energy storage is a viable reliability alternative

The execution of 567.5 MW of energy storage projects to replace natural gas plants signals to policymakers, regulators, and grid planners/operators around the world that energy storage is a viable local capacity alternative to traditional generation solutions. Furthermore, these energy storage projects were selected as a useful hedge against forecasted future local capacity deficiencies in 2023.

  1. Energy storage is a viable economic alternative 

Unlike the Aliso Canyon procurement in 2016, where expedited procurement was obligatory to mitigate short-term reliability concerns, PG&E’s South Bay-Moss Landing local capacity need was a deliberate economic consideration, given that the fallback solution is to keep the ‘backstopped’ gas plants online at above-market costs to ratepayers. Through this procurement, energy storage was found to be a cost-effective alternative to backstop procurement of gas generation.

  1. Energy storage is a bridge to decarbonization

Energy storage resources serve as an alternative to gas generation and can charge from the abundance of solar and wind on the grid, amplifying greenhouse gas (GHG) emissions savings. This energy storage procurement signals how energy storage can help advance the state’s decarbonization goals. Given the state’s GHG emissions reduction and renewable goals, the state will need to develop a comprehensive strategy to leverage and further operate the grid using renewables as the major sources of power generation. The CAISO Board has identified this as a major tasks in their and the CPUC is already modeling and planning for this future in their . However, the state is currently facing a transition period from its existing portfolio where the gas fleet is still widely used in grid operations. With this procurement, energy storage is positioned as facilitating a further transition from our existing gas-heavy fleet to one more supported by renewables.

Closing Thoughts

Energy storage projects may not look like a wonder of the world, but the greatest wonder may be looking up into the sky to see a skyscraper cast against a clean blue sky. When viewed this way, energy storage makes this future wonder possible and this historic solicitation is step in that direction.

California is the fifth largest economy in the world, the home of Silicon Valley, and now the home of the largest energy storage procurement in history. Things are looking sunny in the Golden State!