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Energy storage is gaining traction in the Ontario electricity market

November 2017

The traditional view in the electricity sector held that electrical demand had to be met in real time. Higher demand meant more power had to be generated. The alternative to generation was reducing end-use demand by load shedding (conservation or demand response).    

Energy storage applications were initially introduced in Ontario in 2012, but only on the transmission level.  In 2014, the Independent Electricity System Operator (IESO) implemented a competitive procurement for 50 MW of different energy storage technologies to test their integration into the Ontario’s electricity market (e.g. providing ancillary services and capacity and congestion management). The technologies procured included ­­­­­­­­­­­­­­flywheels, compressed air, solid-state and flow batteries, hydrogen (power-to-gas), and thermal energy storage.  

As the concept of distributed energy resources (DER) has emerged, some larger utilities such as PowerStream (now Alectra Utilities) have also taken an interest in energy storage on the distribution-level and have integrated battery storage into microgrid demonstration projects, to enable power generated from local solar PV to be shaped to meet demand on the microgrid.  

Advances in lithium-ion battery technology are now enabling individual commercial and industrial end-users to explore batteries as a strategy for addressing the increasing burden of Global Adjustment costs.  Several energy storage vendors have entered the Ontario commercial and industrial markets targeting:  

  • Class A customers that are paying relatively high Global Adjustment costs due to their inability to curtail demand during the Ontario high five peak demand hours; and
  • Class B customers that wish to opt in to the IESO Industrial Conservation Initiative (ICI) and be treated as Class A, but have an average hourly peak demand that is just below the eligibility thresholds for ICI. 

Peak load management is the main cost saving opportunity from installing battery storage systems A battery installed behind the utility meter is dispatched during anticipated peak demand hours and while the customer’s load is being met by the battery, the load appears “off” to the utility.  By reducing its coincident demand on peak demand events, the Class A customer potentially can reduce its Global Adjustment charges resulting in gross savings in the order of $500,000 per year per avoided MW.  Gross savings value is contingent on the total Ontario system-wide Global Adjustment dollars and the behavior of all Class A customers with respect to their load consumption.

An 8 MWh battery notionally would be able to supply a 4 MW load for 2 hours or a 2 MW load for 4 hours. A load would typically need to be off for more than one hour to ensure the peak hour is avoided. Battery systems are modular and cells can be added (or removed) to size the battery to meet the requirements of the load.

Battery storage systems can also create an opportunity for energy arbitrage whereby the battery is charged during hours when the Hourly Ontario Electricity Price (HOEP) is low (or negative) and discharged during periods of high demand when HOEP is high.  However, Ontario’s market characteristics in recent years have led to a narrowing of the on- to off-peak spread in HOEP – so cost savings from price arbitrage may be modest. 

Battery storage systems offer potential revenue streams for customers able to participate in the IESO demand response and ancillary service programs (e.g. Operating Reserve). In addition to the cost saving and revenue opportunities, battery storage systems may provide a source of back-up power, improve power quality and provide power factor correction.

Several vendors have emerged to offer battery systems. These vendors commonly offer a model under which they own and operate the battery, such that they require no capital outlay from the customer, and they take responsibility for the financing, design and construction and managing all operation and maintenance of the energy storage assets.

The vendors recover revenue by sharing in the customer savings and revenue that result from the installed system (i.e., avoided Global Adjustment costs, price arbitrage savings, and demand response and operating reserve revenue). Importantly, different vendors offer different sharing models. Some guarantee a specified revenue stream to the customer, some allocate initial savings to the vendor then share savings once a threshold is met, and others propose a share of savings from the first dollar. The split of savings offered will vary by vendor and by model.

The potential savings for customers are sensitive to what happens to Global Adjustment costs in the future. When selecting between vendors it is important for a customer to have an objective assessment of the magnitude and probability of various Global Adjustment scenarios to be able to compare one vendor's savings model to another's on a common footing. 

Different customers will have different risk appetites so they may select the cost savings model that best meets their risk profile.  For example, a customer that has a low risk tolerance may select a vendor that offers low-risk annuity approach that essentially guarantees savings and revenue streams, but at a lower rate.  However, another customer may select a vendor that doesn’t provide the same level of guarantee, but offers a greater savings upside potential – which could produce greater cost protection if Global Adjustment costs continue to increase.

Savings from reducing coincident peak demand depend on the battery operator’s ability to identify the peak demand hours to know when to dispatch the battery. Changes in the nature of Ontario’s electricity demand may be making this harder to do. Some vendors take this risk away with guaranteed savings to the customer. With other vendors, the customer would be relying on the fact that the vendor, seeking a share of the savings, has a strong motivation to maximize the savings pool by dispatching the battery efficiently.

There are some other key aspects that customers should deliberate when considering a battery storage system. Although there are no up-front costs and the onus lies with the vendor to install, operate and maintain the energy storage system, the term of the vendor agreements is generally for ten (10) years and may contain significant financial penalties for early termination. 

To date, there have been no battery storage systems installed in Ontario for behind-the-meter applications. As a result, there may be some challenges with local distribution companies with respect to the connecting these systems to the distribution grid.  The first project to go live will be setting precedent in Ontario. 

If you are a Class A customer, battery storage may offer a means to reduce electricity costs without having to change internal processes or adjust operations. Aegent can help to explain your battery storage options and provide an objective assessment of the options that best suit your needs.