Energy Storage Poses a Growing Threat to Peaker Plants

Natural gas peaker plants have met surges in power demand for years, but now they face a challenger that could push them out of business: batteries.

The US power industry has traditionally used peaker plants to meet peak demand on the grid. Power companies turn on the plants for several hours at a time when baseload capacity, or the minimum demand on a grid, is surpassed, such as when a heatwave drives up air conditioning use. The brunt of peaking capacity is currently generated with natural gas, but an increase in storage projects may be a sign that change is on the horizon.

A Challenging Path for Peakers

"I can't see a reason why we should ever build a gas peaker again in the US after, say, 2025," Shayle Kann, a senior adviser to the energy research firms GTM Research and Wood Mackenzie, said at Greentech Media's Energy Storage Summit in December. "If you think about how energy storage starts to take over the world, peaking is kind of your first big market."

In the US alone, batteries could overtake peaking plants in as little as four years, a recent study by GTM Research and Wood Mackenzie suggested.

Batteries are already competitive with gas peakers in select cases, and they'll gain more of an edge over the next decade, allowing them to capture a growing need for peaking capacity, the study found.

Peaking Capacity as a Priority

The US needs to add 20 GW of peaking capacity to its grid over the next 10 years, led by California, Texas, and Arizona, according to GTM and Wood Mackenzie.

Of that, about 60 percent must be installed between 2023 and 2027, meaning the energy storage industry has "more time to build an economic advantage" by lowering costs and improving performance to compete with gas peakers, the report said.

Even before that, in 2022, energy storage will compete head-on with new gas peaking plants—and by 2027, new gas peakers "may become a rare sight," or not get built at all, according to the report.

Operational Advantages of Batteries

"Peakers are expensive," Kann said. "Energy storage is starting to get very close to the point where it can just beat a gas peaker, head-to-head, purely on an economic basis."

While peakers operate only at times of peak demand, they fetch a far higher price per kilowatt hour than baseload power plants. But as they're used infrequently and only for a few hours per year—sometimes as little as 100 to 300—it's hard to justify the investment in building a new one.

Hence, the attraction of batteries: They're both cleaner than a gas plant and can be installed in racks closer to areas of demand, such as in a city center, helping to reduce transmission costs on the discharge side.

On the input side, a battery absorbs power from whatever source is available, be it gas, nuclear, or wind, and discharges when needed, either at peak demand or during the night when a solar power plant is down.

Challenges to Battery Adoption

There are, however, challenges that could slow the shift to batteries. Regulations such as fire codes and tariffs still need to accommodate batteries in parts of the country, and this could delay projects. In markets like California that provide regulatory support, "energy storage is more likely to be adopted than in those that do not," according to McKinsey, a management consulting firm.

Another challenge is that while battery projects may have lower average construction costs than gas peakers, they aren't standalone generation sources. That means they must buy electricity from generators, which can lead to "round-trip efficiency losses" during charging and discharging, according to the EIA.

But if batteries are installed at plants, they work as a complement by storing surplus energy and releasing it as needed—when the sun goes down, for example. This decreases the round-trip efficiency losses.

That said, as batteries provide more power, the spinning reserves that generators keep to compensate for outages could grow slim. This has led to calls for more flywheels, which generate and store energy to quickly balance the grid, according to Energy Storage Networks.

Storage Projects Grow in Scale

Regardless of these challenges, companies are increasing storage capacity. Fluence Energy, for example, is building the world's largest lithium-ion storage capacity project in Long Beach, California, a 100-MW, 400-MWh facility with a four-hour duration, according to Business Wire.

The US Energy Information Administration estimates that 69 MW of US battery installations are planned for 2018, building on the 700-plus MW already in place and making up about 0.06 percent of the country's generating capacity. Most of the capacity is in California, Texas, and the Midwest, with one large storage system in Alaska.

More states are implementing mandates for energy storage capacity, with California targeting 1.3 GW by 2020, according to The Mercury News. Arizona may pursue a 3 GW storage mandate by 2030, according to RenewEconomy.

Battery Costs Expected to Fall

That demand should drive battery makers to improve technology and cut costs, helping to increase sales as the batteries become more economical.

Ravi Manghani, GTM's director of energy storage, said in a recent webinar that batteries with four-hour durations will start to become economical in high-cost power markets like California and the Northeast in the next five years, and in the next 10 years they "will almost always win" against peakers.

That competitive edge may come even sooner.

"Never underestimate how quickly the industry can bring the costs down," Manghani said.

If costs come down faster, he said the four-hour duration systems will win in all circumstances by 2026 against new peaker capacity.