Last year, Hive Legal wrote in this publication that 2017 would be an exciting year for innovation and reform in the Australian electricity sector. I don't think anyone, in retrospect, would disagree. One significant development was the building of a much-publicised 100-megawatt battery by Tesla – headed by Elon Musk – and French company Neoen in South Australia following a dramatic state-wide blackout in September 2016.
A more fundamental change has been occurring behind the showmanship of businessmen like Musk and the political headlines. In the past year, Australia has slowly yet steadily started to become a more significant player in large-scale battery storage. There was a significant increase in investment in large-scale batteries and we have seen movement from business, regulators and government to accommodate this transformation. This article considers the case for large-scale battery storage in Australia, and the challenges that may arise in integrating this new technology into our existing electricity system.
Why large-scale batteries?
Generally, electricity must be consumed when it is generated and cannot be stored in its ordinary form. The marked increases in renewable energy generation in Australia in recent times pose challenges for the Australian electricity grid. Renewable energy generation is, by its very nature, intermittent. However, the Australian electricity grid and National Electricity Market were designed in a different time and, primarily, to accommodate synchronous forms of energy generation, such as gas and coal fuelled generation.
Batteries have been proposed as part of the solution. Broadly, this is because batteries can convert electricity into other forms of energy which can be stored and discharged at a later time, such as during periods of peak demand or low supply. The key benefits of large-scale batteries include:
- Bulk energy storage: using large-scale batteries for bulk energy storage allows for "time shifting", by which excess electricity production may be captured and stored for use during periods of higher demand or lower production.
- Smoothing output: integrating large-scale batteries with renewable energy generators can smooth the variable generation output of renewable energy, which variability can be fast and significant. For example, output from a solar PV panel may fall by as much as 90% within seconds if a large cloud blocks the sun.
- Regulation assistance: the frequency of an electricity grid must be carefully maintained at a very specific level. Large-scale batteries can provide frequency regulation services and offer a number of potential advantages over fossil fuel generators, including that they have faster response times and can provide more accurate dispatch levels.
A new world player?
Australia has witnessed a significant increase in investment in energy storage technology in recent years. The Clean Energy Council, an Australian clean energy industry body, reported that approximately 6,750 batteries – with a collective capacity of 52 MWh – were installed in Australia in 2016, compared with just 500 batteries installed in 2015.
The most high profile of these new energy storage projects was the 100 MW lithium-ion battery in South Australia developed by Tesla and Neoen. A government tender process for construction of the battery commenced after Elon Musk, the founder of Tesla, pledged on Twitter to build the battery within 100 days or do it for free. The battery is, for the time being, the largest lithium-ion battery in the world and has the capacity to provide power to approximately 30,000 homes for over an hour.
There are a number of other large-scale battery projects in the pipeline throughout Australia, including the world's second biggest lithium-ion battery, the ESCRI project, which will also be located in South Australia and the proposed 4,000 MWh lithium-ion battery storage facility attached to SolarQ's solar farm at Gympie in Queensland. A battery larger than the Tesla-Neoen battery in South Australia has also this year been proposed for Neoen's site south of Cairns in Queensland.
This significant expansion in investment in large-scale batteries is a clear indication of the potential benefits and opportunities that large-scale batteries offer to an electricity grid and market with increasing renewable penetration. However, there are two other significant developments which have allowed this to occur.
The first is the technology behind large-scale batteries. While technological advancements continue to be made to large-scale batteries, the International Renewable Energy Agency has described current commercially available technology as "mature". Practically, this means that the technology is improving while costs are dropping. For example, the price of lithium-ion batteries is expected to reduce by over 60 percent and flow battery prices by over 40 percent by 2020.
The second is the changes being made by regulators and governments to accommodate large-scale batteries. These changes include making amendments to the National Electricity Rules and other key regulatory instruments. One important example is a recent rule change by which wholesale electricity spot prices will now be determined on the basis of 5 minute trading intervals from 2021. Currently, electricity is dispatched by the Australian Energy Market Operator in 5 minute intervals, but the spot price is determined based on 30 minute intervals.
One of the reasons for this change was to more fully capture the financial benefit that fast-acting technologies, such as large-scale batteries, are delivering to the system. Changes such as these contribute to ensuring that, in the words of the Australian Energy Market Commission, the regulatory scheme does "not inadvertently create artificial barriers for efficient new generation and demand response technologies to enter the market."
Large-scale batteries present significant opportunities, but there remain a number of challenges – financial, legal, political and technological – which will need be overcome before these opportunities can be fully realised. This is why, in its 2015 report on energy storage, the CSIRO said:
Moving beyond the burgeoning enthusiasm associated with energy storage technologies, there is a critical need to understand not just the benefits that energy storage may offer the Australian electricity system, but also the very real economic, regulatory and technical challenges that lay ahead.
A recent report by the Australian Council of Learned Academies highlighted some of these challenges. The report concluded that, although Australia has world class research and development in energy storage and is well placed to participate in global energy storage supply chains, the nation would benefit from adjustments in government policy and increased national and international research collaboration. In particular, the report noted the risk that policy uncertainty poses to the availability of private sector capital and profitable revenue streams for operators of large-scale batteries.
A key issue for whether and how this market will continue to grow is funding. While battery storage's ability to serve a range of different functions is seen as one of this technology's most attractive features, it also has the potential to introduce complexity for financiers due to the fact that it makes it more difficult to determine future revenue streams. As such, while this uncertainty remains, it is likely that many large-scale battery projects in Australia will continue to rely, at least partially, on government sources of funding.
Further, despite the regulatory changes outlined above, there remain regulatory challenges for both large-scale battery operators and governments and regulators in integrating large-scale batteries into the electricity grid. For example, on the operator side, there is still regulatory uncertainty about even the most basic aspects of regulatory compliance.
The Australian Energy Market Operator has, for example, stated that it will "assess the conditions for connection, registration and operation of battery systems on a case-by-case basis." Such uncertainty does not foster an ideal investment environment for this technology. For government and regulators, batteries also pose new risks which have not yet been fully explored. This includes safety risks, as seen in the destruction of a battery storage system by fire in Kahaku, Hawaii in 2012, and potential competition issues where monopoly network business are involved.
Last year, Elon Musk held a party at the location of Tesla and Neoen's battery storage facility in South Australia. While celebrating the completion of half of the project, and the signing of a grid connection agreement with Electranet, Musk envisioned a future Australia which was powered solely by 1,890 square kilometres of solar panels, and seven square kilometres of batteries. He said: "that is what the future will look like and the faster we get there, the better."
Musk is known for dramatic and utopian predictions of this kind. And there may be reasons to hesitate, even if momentarily, before dismissing the vision as a pipe dream. The future of energy storage in Australia is bright. As the ACLA report shows, the combination of Australia's world-class resources of raw materials and expertise in the development of energy storage solutions means that Australia has the potential to become a world leader in battery storage technology in the years to come. However, there are various challenges that will need to be overcome before it is capable of becoming a reality, and many dimensions of the vision that remain uncertain.