Deploying Storage for Power Systems in Developing Countries Policy and Regulatory Considerations An Energy Storage Partnership Report Deploying Storage for Power Systems in Developing Countries Policy and Regulatory Considerations This report of the Energy Storage Partnership is prepared by the Energy Sector Management Assistance Program (ESMAP) with contributions from the International Energy Agency, the International Council on Large Electric Systems, the China Energy Storage Alliance, the European Association for Storage of Energy, the United States National Renewable Energy Laboratory, and the South Africa Energy Storage Association. The Energy Storage Program is a global partnership convened by the World Bank Group through ESMAP to foster international cooperation to develop sustainable energy storage solutions for developing countries. For more information visit: https://www.esmap.org/energystorage ABOUT ESMAP The Energy Sector Management Assistance Program (ESMAP) is a partnership between the World Bank and 18 partners to help low and middle-income countries reduce poverty and boost growth through sustainable energy solutions. ESMAP’s analytical and advisory services are fully integrated within the World Bank’s country financing and policy dialogue in the energy sector. Through the World Bank Group (WBG), ESMAP works to accelerate the energy transition required to achieve Sustainable Development Goal 7 (SDG7) to ensure access to affordable, reliable, sustainable, and modern energy for all. It helps to shape WBG strategies and programs to achieve the WBG Climate Change Action Plan targets. https://esmap.org © 2020 August | International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved. 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TABLE OF CONTENTS ABBREVIATIONS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v EXECUTIVE SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 CURRENT CONTEXT IN POWER SYSTEMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Main Trends in Power Systems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Power System Contexts: Focus on Weak Grids. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2 ENERGY STORAGE AND ITS ROLE AS A FLEXIBLE RESOURCE.. . . . . . . . . . . . . 10 Different Energy Storage Technologies.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Electricity Storage as a Flexible Resource. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Defining Use Cases and Application Cases.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 General Use Cases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Use Cases in Weak Grids.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 From Use Case to Application Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3 UNDERSTANDING PROJECT AND SYSTEM VALUE. . . . . . . . . . . . . . . . . . . . . . . . . . 21 Assessing Techno-Economic System Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Assessing Financial Project Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 4 POLICY, MARKET, AND REGULATORY CONSIDERATIONS. . . . . . . . . . . . . . . . . . . 26 Remuneration Options.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Ownership and Operation: Different Possible Setups and Remuneration Structures. . . . . . . . . . . . . . . . . . . . . . . . . 29 Overview of Remuneration Options for Different Use Cases.. . . . . . . . . . . . . . . . . . . . . 32 Requirements for Appropriate Remuneration Structures and Procurement. . . . . . . . 32 Other Options to Ensure Sufficient Project Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Tackling Non-Economic Barriers.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Who and How to Engage in the Roll-Out of Energy Storage Technologies? . . . . . . . 35 5 NEXT STEPS FOR POLICYMAKERS AND REGULATORS IN DEVELOPING COUNTRIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 REFERENCES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 TABLE OF CONTENTS CTD. BOXES 1.1 Solar PV and Batteries Providing Energy Access in the Central African Republic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.1 The Role of Hydropower as an Energy Storage Resource. . . . . . . . . . . . . . . . . . . . . . . 11 2.2 Measuring the Cost of Battery Storage Use Cases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.3 Snapshot of Regulatory and Policy Review for Battery Storage in India. . . . . . . . . . 15 2.4 South Korea’s Battery Storage Development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.1 Jordan’s Analysis of Different Energy Storage Technologies to Add Flexibility to the System. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 4.1 Who Can Own and Operate Storage Assets? Experiences from the European Union. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 4.2 Australia—Energy Storage Roadmap Preparation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 FIGURES 1.1 Summary of Main Challenges and Solutions at Different Phases of VRE Integration.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.2 Estimated Installed Capacity of Backup Fossil Fuelled Generator, 2016. . . . . . . . . . . 7 2.1 Overview of Different Energy Storage Technologies and Applications.. . . . . . . . . . . 12 2.2 Different Flexible Resources Differentiated by Deployment Phase. . . . . . . . . . . . . . . 12 2.3 Relationship Between System Need, Use Case and Application Case. . . . . . . . . . . 16 3.1 Modelling the Techno-Economic System Value of Power System Assets. . . . . . . . . 23 4.1 Illustration of Remuneration Models. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 4.2 Sample PPA Structure Using a Time of Use Based Multiplier for Two Selected Months. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 TABLES 1.1 The Timescales of Issues Addressed by Power System Flexibility. . . . . . . . . . . . . . . . 6 2.1 Use Cases as a Function of Flexibility Timescale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 4.1 Possible Combinations of Use Cases and Remuneration Options. . . . . . . . . . . . . . . 33 ABBREVIATIONS BESS battery energy storage system CAPEX capital expenditure CAR Central African Republic CCGT combined cycle gas turbine plant CEM capacity expansion model CSIRO Commonwealth Scientific and Industrial Research Organisation CSP concentrating solar power DER distributed energy resource DSO Distribution System Operator DSR demand side response ESS energy storage system EU European Union HFO heavy fuel oil IFC International Finance Corporation IPP independent power producer kWh kilowatt hour LCOS levelized cost of storage Li-ion lithium-ion (battery) MW megawatt MWh megawatt hour MWp megawatt peak NPV net present value NRA National Regulatory Authority OPEX operating expenditure PCM production cost model PHS pumped hydro storage PPA power purchase agreement PV solar photovoltaic REC Renewable Energy Certificate T&D transmission and distribution TSO transmission system operator UPS uninterruptible power supply VRE variable renewable energy All currency is United States dollar (US$ or USD), unless otherwise noted. EXECUTIVE SUMMARY • Energy storage deployment is increasing rapidly and this trend is bound to continue: While storage is not new in power systems – pumped hydro storage and thermal energy storage were deployed globally decades ago – battery storage use in power systems is accelerating rapidly against the backdrop of significant cost reductions (85% over the period from 2010 to 2018). This trend marks the beginning of a new phase in storage deployment, where especially battery storage is seeing widespread use. • Energy storage can make a substantial contribution towards cleaner and more resilient power systems: Storage can support the grid integration of variable renewable energy (VRE), namely, wind and solar photovoltaics. This can help to maximize the use of low-cost VRE while meeting climate and other environmental goals. Storage technologies can be deployed modularly. This can help catalyze the use of distributed energy resources (DER) and increase the resilience of power systems. • Energy storage is particularly well suited to developing countries’ power system needs: Developing countries frequently feature weak grids. These are characterized by poor security of supply, driven by a combination of insufficient, unreliable and inflexible generation capacity, underdeveloped or nonexistent grid infrastructure, a lack of adequate monitoring and control equipment, and a lack of skilled human resources and adequate maintenance. In this context, energy storage can help enhance reliability. Deployed together with VRE, it can help displace costly and polluting generation based on liquid fuels while increasing security of supply. Storage can also help defer and/or avoid the construction of new grid infrastructure. • Establishing enabling frameworks for storage requires an understanding of the costs and system benefits of energy storage: Storage can meet a wide range of system needs, so called use cases. As detailed in this report, computer-based modelling tools allow the identification of use cases with higher benefits than costs (i.e., those with a high system value). Policy, market, and regulatory frameworks then need to ensure that those use cases are also attractive from a business perspective. • Energy storage is usually not the only option to meet a certain power system need: The option to invest in energy storage should always be considered alongside alternatives. These include generation capacity, enabling a more flexible demand side, and building grid infrastructure. Energy storage can involve a diverse suite of technologies (such as thermal, pumped storage hydro, or batteries). Identifying the most suitable storage technology, thus, is only possible on the basis of a concrete use case. • Policy, market, and regulatory frameworks often lack specific provisions for storage: Depending on how it is used, storage can act as a generator, a flexible load, and/or substitute grid infrastructure (by improving the utilization of existing networks). This versatility challenges existing legal setups, often leading to incomplete and inconsistent frameworks that can hamper deployment. • Policymakers and regulators need to establish robust remuneration mechanisms for energy storage that accurately reflect its value to the system: Where new investments in storage are targeted, sufficient long-term revenue certainty is crucial. There are three basic patterns according to which storage can be remunerated. For developing countries, the non- market and single-buyer market models are particularly relevant: 1 2 DEPLOYING STORAGE FOR POWER SYSTEMS IN DEVELOPING COUNTRIES: POLICY AND REGULATORY CONSIDERATIONS • Non-market: Under this model, a regulated monopoly receives regulatory approval to recover the cost of a flexibility asset from its customers. A prime example of such an arrangement is a transmission system operator allowed to invest in the electricity network collecting a guaranteed return from all grid users. • Single-buyer market: Under this model, multiple suppliers compete, but there is only one buyer. For flexibility, a common example is a system operator that procures frequency control services competitively from private companies via an auction. • Multiple buyers and sellers, full market: Under this model, there is competition on both sides of the market. The most relevant use of this model are wholesale markets where there are liberalized customers/retail competition. In each power system, a combination of these remuneration models is generally present. For example, even in power systems with a full wholesale market for energy, system operators procure system services on markets where they act as the single buyer. Hence, storage can be remunerated under different models within the same power system, depending on what type of service it provides. • Removing non-economic barriers to storage deployment must also be a priority for policymakers and regulators: Establishing and enabling environment critically depends on the following factors: • Definitions and standards: As a resource type in its own right, energy storage must be considered as its own legal and regulatory category and legal definitions should not arbitrarily place storage into existing categories such as generators. • Permitting, commissioning, and grid codes: As a new type of power system asset, electricity storage may not yet be subject to established rules for permitting and existing technical codes may be poorly adapted for energy storage. Under such circumstances it is important that permitting agencies and system operators do not impose excessive requirements on developers. • Taxes, surcharges, and levies: Storage can both consume electricity and function as a generator. This can lead to a problematic situation where storage assets are either obliged to pay taxes, levies, and surcharges twice or where storage has a positive business case for its owner but creates negative externalities for other customers. Policymakers and regulators thus need to review frameworks with a view to establish a level playing field for energy storage projects that reflects the value of storage from a system perspective. • Policymakers and regulators should adopt a proactive approach to stakeholder management: The widespread use of energy storage technologies involves substantial change for power systems. Using them to their full potential can challenge existing regulatory setups and institutional arrangements, and could lead to negative consequences for some stakeholders. In order to maximize benefits, ensure swift progress and a broad consensus, early and comprehensive stakeholder engagement is crucial. • This report provides guidance: on how to determine the value of storage solutions from a system perspective as well as policy, market, and regulatory considerations to facilitate storage deployment, particularly in countries that currently do not have regulatory frameworks unlocking the potential benefits of energy storage. It seeks to highlight relevant issues, provide guidance to policymakers and regulators in this relatively new area, and identify additional analytical requirements. • Future work: Energy storage is a rapidly evolving field in which batteries play a dynamic role. Many power systems are currently experiencing the first wave of storage projects and further work in this area is needed. Such work could include: • Identification of regulatory frameworks and procurement instruments tailored to standard use cases in weak grid contexts: Examples include hybrid VRE plus storage projects with guidelines on how to compare and fairly remunerate projects with different shares of storage. EXECUTIVE SUMMARY 3 • Cataloguing non-economic barriers and solution strategies: As deployment of battery storage becomes more widespread, a more complete picture on the various non-economic barriers can be obtained via surveys with project developers and other relevant stakeholders. This includes regulatory considerations, safety standards (including for manufacturing, installation, and operation), and the granting of permits. Such surveys accelerate learning across countries and catalyze uptake of best-practice solutions. • Financing instruments for battery storage: Battery storage requires low-cost financing to deliver electricity services at least cost. Sharing best practices for financing in developing countries, including conditions and justifications for accessing concessional finance, is key to fast track uptake and reduce costs. Warranties must take into account the operational and environmental conditions of developing countries, as well as promising new battery technologies with a limited track record. 1 CURRENT CONTEXT IN POWER SYSTEMS T his report provides a brief overview of the role of energy storage against the background of current trends in power systems with a particular emphasis on developing countries. It introduces the different ways in which storage can help meet policy objectives and over- come technical challenges in the power sector, it provides guidance on how to determine the value of storage solutions from a system perspective, and discusses relevant aspects of policy, market, and regulatory frameworks to facilitate storage deployment. The document is intended to highlight relevant issues, provide guidance to policymakers, and regulators in this relatively new area and identify additional analytical requirements. This report was created by the Energy Storage Partnership (ESP). The ESP aims to acceler- ate the availability and deployment of innovative storage solutions tailored to the needs of power grids in developing countries. As a long-term outcome, the ESP targets substantial CO2 emissions reductions by enabling an accelerated uptake of variable renewable energy (VRE), while simulta- neously increasing energy access and resilience for all. The document was prepared by the World Bank’s Energy Sector Management Assistance Program (ESMAP) with contributions from the International Energy Agency (IEA), the International Council on Large Electric Systems (CIGRE), the China Energy Storage Alliance (CNESA), the European Association for Storage of Energy (EASE), the United States National Renewable Energy Laboratory (NREL), and the South Africa Energy Storage Association (SAESA). MAIN TRENDS IN POWER SYSTEMS Globally, power systems are undergoing a period of unprecedented change. Key drivers include: the rise of low-cost renewable electricity, a growing need to increase power system resilience, and enhanced digitalization of the power system, including small-scale resources. Mitigation and adap- tation to climate change is increasing the relevance and speed of these drivers. Arguably, one of the most significant drivers of this change is the recent availability of low-cost renewable electricity, in particular wind and solar power (IEA, 2019a/b). Over the past two decades these technologies have seen dramatic cost reductions and, today, they are the cheapest source of new electricity generation in the majority of countries around the world (IEA, 2019b). These developments bring a number of opportunities for achieving energy policy objectives across a wide range of country contexts. Notably, they hold the promise of largely overcoming the classical energy trilemma that policymakers still face: the trade-off between affordability, environmental sus- tainability, and security of supply. At the time of writing in mid-2020, the COVID-19 (coronavirus) pandemic has caused fossil fuel prices to decline steeply. In April 2020, the price of WTI crude oil (West Texas Intermediate, a key benchmark) fell into negative territory, albeit briefly, for the first time in history (meaning a quanti- fiable absence of demand such that a buyer is in effect paid to remove and store the commodity; FT, 2020). It is currently unclear how long such very low prices will persist. A continued very low price level for oil and other fossil fuels could undercut the recently achieved competitiveness of renewable energy solutions. However, historically, low oil price periods have only been temporary. Indeed, once the pandemic and its economic impacts are overcome, prices are likely to rebound to pre-crisis levels or above. It is highly likely that this rebound will occur on a timescale that is short compared to the asset lifetime of energy infrastructure. Hence, the current price environment does not fundamentally challenge the economic case for renewable energy in the medium to long term. Indeed, there is an expectation that post-crisis government stimulus packages will emphasize 4 CURRENT CONTEXT IN POWER SYSTEMS 5 low-carbon solutions and mechanisms to support of the system to reliably and cost-effectively manage ­ developing countries: deployment of renewable energy increased uncertainty and variability in the demand and in developing countries would be an ideal combination supply balance of electricity, including at high shares of to achieve both, while also reducing reliance on poten- non-­ synchronous generation (IEA, 2018a). Energy stor- tially vulnerable external supply chains. age is one of four basic options to provide such ­ flexibility; But even now that renewable energy is cost effective the other three are flexible generation, demand-side and has a comparably low environmental footprint response (DSR) / load shaping, and transmission and compared to fossil alternatives, concurrently achieving distribution grids (including interconnection to other energy security and grid stability requires a concerted power systems) (IEA, 2014b, Cochran et al, 2014). effort. Wind and solar power are variable renewable Flexibility is relevant across a very wide range energy (VRE) sources; their maximum possible out- of timescales (Table 1.1) and also has an important put fluctuates with varying availability of their primary geographic component. For example, wind and solar resources—wind and sunlight. In addition, they use resources can be far away from load centres and a different type of technology (power electronics) to thus require additional transmission lines to match connect to the grid compared to traditional large-scale supply and demand. Additionally, VRE power plants generators, which use synchronous generators that are often smaller than traditional generators, requir- are electro-mechanically coupled to the grid. VRE are ing new approaches for the design and management referred to as non-synchronous sources of electricity of d ­ istribution grids. If implemented properly, such for this reason. Growing shares of VRE thus lead to strategies can safeguard and, in many cases, even ­ a sequence of new challenges of the system, which enhance energy security and system resilience at can be addressed by an appropriate mix of technical ­ growing shares of VRE. measures; innovations in policy, market, and regulatory Indeed, increasing power system resilience is frameworks; and often changes to the institutional setup another important driver for changes in power systems. of the power sector (Figure 1.1, see Chapter 2 for a Reliable electricity supply is of vital importance for the detailed description of the different phases). functioning of societies and its importance is growing The main goal of these measures is to increase rapidly as digital solutions prevail in a growing number the flexibility of the power system, namely, the ability of sectors of the economy. In addition, accelerating FIGURE 1.1: Summary of Main Challenges and Solutions at Different Phases of VRE Integration VRE electricity is main energy Phase 6 supply, large scale production of green gases & fuels Large scale use of green hydrogen and its Substituting other fuels derivatives across end use sectors, including VRE generation systematically in areas that cannot be electrified directly reconversion to electricity Phase 5 exceeds classical electricity demand for longer periods Electrification of transport, heating; Absorbing large volumes large-scale interconnection The system experiences periods of otherwise surplus VRE generation for continental balancing Phase 4 in which VRE makes up almost all generation Advanced technology to increase stability, Ensuring robust power supply digitalization and smart grid technologies, during periods of high VRE generation VRE generation determines the energy storage, DSR, flexibility from VRE Phase 3 operation pattern of the system Accommodating greater variability of net load Plant retrofits for flexibility, improved grid and changes in power flow patterns infrastructure, interconnections, VRE has a minor to moderate on the grids effective short-term wholesale markets Phase 2 impact on system operation Minor changes to operating patterns of Improve VRE forecasting, existing power systems economic dispatch VRE has no noticeable impact Phase 1 on the system PHASE CHARACTERISTICS KEY TRANSITION CHALLENGES FLEXIBILITY OPTIONS TO ENABLE FROM A SYSTEM PERSPECTIVE TRANSITION Key point: System integration challenges and solutions can be grouped into different phases. Source: Authors adaptation of the IEA’s VRE integration framework. 6 DEPLOYING STORAGE FOR POWER SYSTEMS IN DEVELOPING COUNTRIES: POLICY AND REGULATORY CONSIDERATIONS TABLE 1.1: The Timescales of Issues Addressed by Power System Flexibility Medium-Term Short-Term Flexibility Flexibility Long-Term Flexibility Sub-seconds to Seconds to Minutes to Timescale Hours to days Days to months Months to years seconds minutes hours Issue Address system Address Manage ramps Decide how Manage scheduled Balance seasonal stability, such fluctuations in in the balance many thermal maintenance of and inter-annual as withstanding the balance of of supply and plants should power plants and availability of large demand and demand (e.g., remain larger periods of variable generation disturbance supply, such increasing connected to surplus or deficit (often influenced (e.g., losing a as fluctuations electricity and running of energy, (e.g., by weather) and large power in power demand on the system hydropower electricity demand plant or other demand following sunrise availability during technical or rising net wet/dry season) issues) load at sunset) Source: Authors. climate change is leading to an increased frequency technical solutions to concurrently increase the flexibility and severity of extreme weather events, including heat of the power system. In turn, this can also enhance the waves, droughts, severe storms, and related impacts resilience of the power system, thus, boosting energy such as large-scale wildfires (IPCC, 2018). In turn, the security. Finally, digitalization and the rise of DERs are growing impacts of such events are giving further impe- important drivers for unlocking system flexibility. In con- tus to decarbonization of the power sector, the largest clusion, flexible resources have become a priority for the contributor to energy sector carbon dioxide emissions power system and, together with other flexibility options, (IEA, 2019c). Energy storage can play a critical role storage has a crucial role to play here. in this domain because it can enhance resilience by providing backup power and enable the capability for local grids to maintain operations even when the main POWER SYSTEM CONTEXTS: transmission system is experiencing a supply-disruption. The modularity of VRE and energy storage systems FOCUS ON WEAK GRIDS (ESS) also allow for a more distributed—and hence The role of storage is likely to be magnified in the resilient—system design that is not dependent on fuel developing country context. Countries that have supply chains (NYPA, 2017). pioneered effective and efficient VRE integration Another trend that is linked to all of the aforemen- strategies are mostly economically developed. They tioned developments is the increased digitalization of feature sufficient dispatchable generation capacity and the power system combined with the rise of distrib- ­ operational reserves; robust and stable grids; and, in uted energy resources (DER). While digital monitoring most cases, good interconnections and energy trade and controls have been used routinely for the opera- agreements with neighboring countries. In these con- tion of the transmission system for decades, they are effective VRE integration strategies focus on texts, cost-­ now increasingly being adopted on the distribution the improved use of existing assets (including ­ existing level all the way to individual electric loads (IEA, ­ storage assets) combined with enhanced system 2017a). While this opens up new opportunities to operations (ESP, 2019). ­ unlock power system flexibility on the demand side, it However, most developing countries are in a very can also expose power systems to new threats, nota- different position; they have what can be referred to bly cyber-attacks (IEA, 2017a). as weak grids. Weak grids suffer from poor security Taken together, these trends have profound impli- of supply, characterized by a combination of insuffi- cations, especially for developing countries that are cur- cient, unreliable, and inflexible generation capacity, rently expanding their power supply infrastructure with a underdeveloped or nonexistent grid infrastructure ­ view to providing energy access for their citizens. Low- (both within and between countries), a lack of ade- cost VRE holds the promise of providing clean energy quate monitoring and control equipment, and a lack of affordably, but it requires additional strategies and skilled human resources and adequate maintenance.1 CURRENT CONTEXT IN POWER SYSTEMS 7 As a result, weak grids are often unable to maintain supplements unreliable grid supply in developing the required balance between electricity supply and countries (excluding China), while 75% of this capacity consumption, leading not only to routine application of has some form of grid connection (Figure 1.2, IFC, 2019). load shedding (rolling blackouts), but not infrequently In terms of VRE integration, weak grids offer not to complete collapse of the grid (system black events). only considerable opportunities but also challenges. On Moreover, frequency and voltage show strong devia- the upside, the total cost of new VRE power plants can tions from nominal values, leading to poor power quality, easily undercut the fuel costs of incumbent generation which can damage the end user’s equipment and inflict assets. For example, the fuel cost of a diesel generator significant losses on the overall economy. in a remote location with poor infrastructure access is Weak grids typically feature outdated, inefficient, frequently in the order of US$250/MWh and can exceed highly polluting, and costly power generation. Diesel US$400/MWh in some cases. This compares to costs and heavy fuel oil (HFO) generators are a case in point. of solar PV in the order of US$40-100/MWh at current Furthermore, such plants are not centrally or automati- (2020) cost levels and typical financing conditions. cally dispatched and are frequently subject to inflexible However, VRE generators are not a simple, self-­ commercial agreements. Moreover, as a result of insuf- contained solution to the problems of weak grids. Firstly, ficient grid infrastructure, technical losses are very high, they may not be reliably available at times of high or with significant non-technical losses consequent upon peak electricity demand, (i.e., they may only have poor sector governance. al ­imited firm capacity contribution). Without addi- The end result is an expensive power system with tional measures, demand cannot be met at all times. low levels of reliability and flexibility. The scale of this Secondly, in terms of electrical engineering, their use issue is significant. A recent study by the International can have a profound impact on weak grids, which are Finance Corporation (IFC) estimated that 350–500 GW typically small compared to the large, ­ interconnected of individually owned and operated generation capacity networks of developed countries with dozens of FIGURE 1.2: Estimated Installed Capacity of Backup Fossil Fuelled Generator, 2016 Generator Classification Small Petrol Small Diesel Medium Diesel Large Diesel 125 400 100 300 Installed Capacity of BUGS (GW) 75 200 50 100 25 0 0 Western Asia Southern Asia Southeastern Asia South America Middle Africa Northern Africa Western Africa Eastern Africa Caribbean Central America Southern Africa Central Asia Eastern Asia Melanesia Polynesia Micronesia All Modeled Countries Key point: Global backup fossil fuelled generator capacity is estimated between 350 and 500 GW. Note: Middle Africa includes Angola with significant diesel-based power generation. Source: IFC, 2019. 8 DEPLOYING STORAGE FOR POWER SYSTEMS IN DEVELOPING COUNTRIES: POLICY AND REGULATORY CONSIDERATIONS gigawatts of average demand. In such smaller systems, This issue has direct relevance for consumers: power a single, large VRE power plant can already have a sub- purchase agreements (PPAs) are typically “take or pay”, stantial systemic impact. Short-term fluctuations in VRE in which customers need to compensate VRE gener- output can directly translate into significant voltage and ators for the curtailed electricity. To reduce renewable frequency deviations in this context (Box 1.1). Moreover, energy curtailment, improve grid stability and facilitate a systems may transition directly to integration phase four smooth integration of a large share of renewable energy (Figure 1.1) with the connection of the first large VRE generation in the grid, crucial short-term investments in plant. In turn, this can necessitate advanced solutions the grid are urgently needed. These critical investments for maintaining grid stability, including more technical include a mix of energy storage solutions, grid/dispatch- issues such as guaranteeing sufficient short-circuit ing upgrades, and flexible generation. ratios (SCR). These considerations serve to explain why for weak In the worst case, these issues can stifle the grids energy storage—in particular battery electricity contribution VRE would otherwise represent in devel- storage—comes into play earlier and more urgently oping countries. Indeed, VRE power plants have faced than for grids in developed countries. In Andhra curtailment as a result of insufficient system flexibility, Pradesh, India, for example, the World Bank financed particularly in weak grids. a hybrid 160 MW Solar PV-Wind Power Plant with Senegal, for example, shows a high reliance on battery energy storage system (BESS). Although India HFO and diesel, supplemented by new coal. By 2030, has a steadily improving grid, it still faces challenges the power system is expected to have a minimum of with maintaining frequency and voltage, and supply 30% renewables by installed capacity, (including solar, disruptions are frequent. The project combines wind, and hydro). Recent stability studies on renewable co-located 120 MW solar PV, 40 MW wind power, energy integration concluded that in Senegal, owing to 10 MW / 20 MWh of BESS, associated infrastructure, low spinning reserve and inadequate frequency reg- and control and energy management systems. As a ulation capacity, significant curtailment of renewable first-of-its-kind at this scale for a developing country, energy would be necessary to maintain grid stability. the project is intended to demonstrate use cases Box 1.1 Solar PV and Batteries Providing Energy Access in the Central African Republic The Central African Republic (CAR) benefits from abundant solar resources, with an annual overall solar radiation of approximately 5 kilowatt hour (kWh) per square meter per day on average, which corresponds approximately to a mean sunshine duration of 2,600 hours per year (7.1 hours per day). Because of the country’s persistent electricity supply deficit, it is expected that any additional power production will be consumed. Despite this, solar power does not yet feature in the country’s energy mix. ­ The CAR Emergency Electricity Supply and Access Project is expected to catalyze the development of solar photovoltaic (PV) by: preparing a site suitable for large-scale PV development; financing the phased installation of solar PV capacity, starting with a 25 megawatt peak (MWp) PV plant with a 25 megawatt hour (MWh) battery electricity storage system; and laying the foundation for future capacity expansion up to 40 MWp. The use of battery storage will enable the harnessing of energy produced with PV, despite fluctuations during the rainy season, and will dispatch it seamlessly to the grid, allowing it to meet evening demand peaks. This solution is the cheapest way to tackle the supply deficit swiftly and effectively. Source: Authors. CURRENT CONTEXT IN POWER SYSTEMS 9 which benefit the system and the generator: avoiding ­ tationary batteries can help to avoid or defer grid s curtailment, ­ minimizing deviation penalties due to investments or provide frequency management services. forecasting/scheduling errors, and piloting ramp rate This is also discussed in the next chapter in the context control benefits (World Bank, 2019). of the different use cases. As detailed in the next chapter, VRE, combined with battery storage, can be an effective package to meet the needs of weak grids. Thanks to falling equipment costs, this package is also becoming increasingly affordable NOTE (Gorman et al., 2020; Greentechmedia, 2020). In 1. Power system engineers use the term weak grids also in a more technically defined and narrow sense. In this context addition, battery storage has a number of relevant the term refers to a region of the electricity grid where the applications in power systems independent of combining short circuit ratio is below 1 (Ghazavi at al., 2018). This report them with VRE (or not) related to issues arising from uses the term weak grid in a broader sense, going beyond this deploying VRE in the power system. For example, technical definition. 2 ENERGY STORAGE AND ITS ROLE AS A FLEXIBLE RESOURCE DIFFERENT ENERGY STORAGE TECHNOLOGIES E nergy storage comprises a diverse range of technologies, which use different fundamental principles to store energy and are best suited for very different tasks in the power and wider energy system (IEA, 2014a). In the broadest sense, energy storage includes all technol- ogies that allow a temporal shift for providing an energy-related service. A hot water tank, for example, can be charged using electricity and provide hot water at a later time. In this broader sense, storage not only encompasses electricity storage (including batteries, compressed air en- ergy storage, pumped hydro storage, flywheels, and supercapacitors) but also thermal and chem- ical storage (such as hydrogen and its derivatives). Thermal energy storage is frequently used to enable demand-side response (DSR), while chemical energy storage is particularly relevant in the transport, industry, and heating sectors (Figure 2.1).1 Because this report has a particular emphasis on the power sector, storage is defined here in a narrower sense to include all those storage tech- nologies that return energy in the form of electricity. A brief overview of global electricity storage swiftly reveals that the vast majority of installed capacity and energy is pumped storage hydropower (PSH). Out of a global total of some 165 GW of grid-connected electricity storage in 2018, PSH accounted for 155 GW or 94% (IEA, 2019d). Pumped storage hydropower will remain an important electricity storage technology (Box 2.1). However, battery electricity storage—notably Li-ion technologies—have seen dramatic cost reduc- tions in past years and very strong growth rates (Schmidt et al., 2019). Costs have decreased by 85% over the 2010–18 period (BNEF, 2019b). This development was driven to a large part by a sharp increase in battery use in electric mobility, which, in turn, was spurred by policy support (IEA, 2019e). In 2018, installed grid-connected stationary battery storage grew by 3 GW, boosting total installed capacity to 9 GW/17GWh (BNEF, 2019a). Stationary battery storage is forecast to grow significantly and attain 1095GW/2850GWh by 2040 (BNEF, 2019a). ELECTRICITY STORAGE AS A FLEXIBLE RESOURCE When considering the role of electricity storage in the power system, it is vital to recognise that storage is only one of several technical flexibility options—flexible generation, DSR, and grid infrastructure are the others. Moreover, policy, market, and regulatory frameworks, as well as the institutional setup in the power sector, are critical for determining if investments in new technical resources will take place in time and if existing resources will be used effec- tively (IEA, 2018a). Indeed, electricity storage should be seen as one element in an integrated strategy to boost power system flexibility and resilience and thereby achieve energy policy objectives (PNNL, 2019). For any given system, such an approach should take into account its current level (phase) of VRE integration (Figure 2.2): Phase 1: The first set of VRE plants are deployed, but they are basically insignificant at the system level; effects are very localized, for example at the grid connection point of plants. Phase 2: As more VRE plants are added, changes between load and net load become noticeable. Upgrades to operating practices and better use of existing system resources are usually sufficient to achieve system integration. 10 ENERGY STORAGE AND ITS ROLE AS A FLEXIBLE RESOURCE 11 Box 2.1 The Role of Hydropower as an Energy Storage Resource Pumped storage hydropower (PSH) is an important achieving the ambitious target to convert 100% of and cost-effective source of flexibility in the power the energy supply of the Faroe Islands to renew- system and still the largest contributing technology able energy by 2030 (Norconsult 2013). Moreover, to electricity storage installed to date (both in terms the smallest of the Canary Islands, El Hierro, has of capacity and energy). In addition to energy arbi- a hybrid wind-PSH system. This completely cov- trage, PSH is capable of providing system services ered the island’s power demand for more than 24 to maintain the stability of the power grid. These consecutive days in July 2019 and renewables services include black-start capability, ramping and met 54% of the overall electricity demand of the quick start, spinning reserve, reactive power, and island (Renewablesnow 2020). frequency regulations. Reservoir hydropower can also show important Certain PSH plants can operate in a special mode synergies with variable renewable energy (VRE), called hydraulic short-circuit pumped storage even if not equipped with pumping functionality. For (HSCPS), with the main feature of simultaneously example, a study investigating hydro-wind-solar generating and pumping. It enables the plant to synergies for West Africa found that combining contribute to system inertia and frequency regu- technologies while also improving connectivity lation. If the plant is operating in either generator between power systems can bring important syner- or pump mode, it is capable of switching between gies for the system across a wide range of flexibility operation modes very quickly, without having to time scales (Sterl at al. 2020). Interconnections reverse the rotation (IEA, 2017b). allow exploitation of the spatial synergy between solar and wind potential in the north of West Africa The ability to simultaneously operate in both tur- and hydropower potential in the south, enabling bine and pump mode provides greater flexibility a balanced mix with all three resources contribut- to the grid. The power plant is seen by the grid as ing substantially. In addition, there is a seasonal controllable load, with a power regulation range complementarity: the VRE resources in the north equal to that of hydropower turbines in operation. produce more during the dry season, leading to a The contribution to inertia depends on the inertia more balanced overall production. Finally, oversiz- of the unit, while frequency regulation depends on ing wind and solar capacity and adding pump-back the turbine response. HSCPC has been in opera- capabilities to hydropower reservoirs were found tion in hydropower plants in Austria, Switzerland, to increase system resilience to climate change the Canary Islands, and Wales (Cavazzini and related droughts (Sterl at al. 2020). Perez-Diaz 2014; Koritarov and Guzowski 2013; IEA 2017b). But even in a conventional operation Similar synergies were found in a recent study mode, PSH frequently provides system services carried out for Brazil (Tractebel/PSR 2018). Here, including fast-acting reserves that can mitigate again, an important driver behind such synergies the impact of contingencies. One example is are negative correlations between water and wind/ Lithuania‘s Kruonis pumped storage power plant, solar availability. Such synergies can also help with which has been activated to compensate for a fail- managing the seasonal variability of large hydro- ure on a large DC-connector to the Swedish power power plants that are operated as run-of-river plants system (DELF.IN, 2016). (i.e., where reservoir sizes are small). In the case of Brazil, the 11 GW Belo Monte Dam is a case Where topology allows, PSH can be an import- in point. Wind power production in the region has ant component for hybrid power plants to supply a seasonal maximum when water flows are low, smaller remote grids, as well. For example, PSH so that the combination of hydropower and wind has been identified as an important component for resources jointly have a more stable output profile. a.This operation mode is possible in ternary pumped storage units where a separate turbine and pump is located on a single shaft with an electrical machine that can operate in generator or motor mode. The electrical motor and generator is a synchronous machine. b. The transition time between the mode of operation is in the range of 0.5 to 1 minute compared to 1.5 to 5 minutes in normal pumped storage (Koritarov and Guzonwski 2013). Source: Authors. 12  DEPLOYING STORAGE FOR POWER SYSTEMS IN DEVELOPING COUNTRIES: POLICY AND REGULATORY CONSIDERATIONS FIGURE 2.1: Overview of Different Energy Storage Technologies and Applications Technologies Applications Seasonal Thermal Storage Balancing Days Backup Power/ Pumped High-energy Micro Grid Hydro supercapacitors Islanding Black Start Long CAES Hours Duration T & D Deferral Generation time shift Flywheels Discharge time Load Following Batteries Other Minutes Reserve Services High-power Flywheels Frequency Support Seconds Primary Reserve High-power Supercapacitors SMES Voltage Control Milliseconds 10kW 1MW 1GW 10kW 1MW 1GW Storage Size Storage Size Key point: Energy storage encompasses a suite of technologies that match different applications. Note: CAES = compressed air energy system; SMES = superconducting magnetic energy system; T&D = transmission and distribution Source: Adapted from IEA, 2014. FIGURE 2.2: Different Flexible Resources Differentiated by Deployment Phase Power Plants Grids Demand-Side Storage Regulations & Markets Response Phase 6 Synthetic fuels Large-scale Long-term for power networks storage generation to smooth Phase 5 seasonal Tap new loads via Medium-term variability storage electrification Re-evaluation Advanced Electricity taxation Battery Phase 4 plant design Digitalization storage and smart grid Commercial and residential Usage of technologies Reform of system Flexibility from existing storage services markets VRE Additional (e.g., pumped Phase 3 large industrial hydro) Grid Effective short-term Retrofit plants reinforcement, wholesale markets, for flexibility interconnections trade with neighbors Phase 2 Improve VRE forecasting, economic dispatch Phase 1 Key point: The four flexible resources are power plants, grids, demand-side response, and storage. Note: DSR = Demand Side Response; Time-scales are defined in Table 1. Timing by phase is indicative—exact needs and timing will be system specific. Source: Adapted from IEA, 2018a. ENERGY STORAGE AND ITS ROLE AS A FLEXIBLE RESOURCE 13 Phase 3: Greater swings in the supply-demand balance (see Box 2.2). Longer duration battery costs would be prompt the need for a systematic increase in power sys- even less per kilowatt hour. This has led to increased tem flexibility that goes beyond what can be fairly easily interest also in other developing countries with a strong supplied by existing assets and operational practice. increase in renewable energy uptake, such as India (see Box 2.3). Phase 4: VRE output is sufficient to provide a large It has already been pointed out that power systems majority of electricity demand during certain periods have a diverse range of requirements and that different (high VRE generation during times of low demand); electricity storage technologies are best suited to differ- this requires changes in both operational and regulatory ent types of applications. A clear understanding of these approaches. possible requirements is critical for selecting the right Phase 5: Without additional measures, adding more type of flexible resource. The following section elabo- VRE plants will mean that their output frequently rates this point further, introducing the concept of use exceeds power demand and structural surpluses of neg- cases to capture the diverse power system needs. ative net load would appear, leading to an increased risk of curtailment of VRE output. Shifting demand to periods of high VRE output and creating new demand via electri- fication can mitigate this issue. Another possibility is to DEFINING USE CASES AND enhance interchange with neighboring systems. In this APPLICATION CASES phase, it is possible that in some periods the demand is This report has so far focused on general aspects of the entirely supplied by VRE without any thermal plants on contribution of electricity storage to power system needs. the high-voltage grid. However, more detailed analysis will be needed to unlock Phase 6: The main obstacle to achieving even higher this contribution in practice. This section takes this next shares of VRE now becomes meeting demand during step, introducing a number of relevant concepts. periods of low wind and sun availability, as well as sup- A use case is defined as a specific power system plying uses that cannot be easily electrified. This phase need, which occurs frequently in most system contexts, thus can be characterised by the potential need for and which is significant enough to justify the deployment seasonal storage and use of synthetic fuels, such of a technology solution tailored to meet it. As an exam- as hydrogen. ple, the provision of frequency control services con- These considerations notwithstanding, battery stitutes a use case. Use cases do not imply a specific storage is an important and new frontier for flexibility technology solution, (i.e., energy storage may or may in power systems (IEA, 2019a). Battery storage is one not be the best suited option for a particular use case). of the technologies best suited to provide short-term However, there are certain use cases where storage flexibility from milliseconds to several hours due to its offers distinct advantages over alternative options. dispatch ability, fast response time and, under certain Identifying which use cases are relevant in a power conditions, contributions to system adequacy (IEA, system is crucial for implementing an appropriate power 2019a; US DOE 2019). system flexibility strategy, but it is only a first step. Indeed, battery cost reductions are changing how Picking up the example of frequency control, it is clear the electricity system accommodates the rise of VRE, that all AC power systems require a suite of frequency in particular solar PV, in the power mix. In the 2019 control reserves. However, the exact product definition World Energy Outlook, projections for battery storage (response time, how long service has to be provided, capacity were raised by close to 50% compared to the prequalification conditions) depends on system specific previous year, hand in hand with increases for solar PV factors. Policy, market, and regulatory frameworks are deployment (IEA, 2019a). Depending on projections, crucial for determining what entity can provide such costs for four-hour storage systems are projected to reserves and how these are compensated. fall from US$400 per kilowatt-hour (kWh) to less than Thus, it is useful to consider what can be referred US$200/kWh by 2040 (IEA, 2019a) or even 2030 (US to as application cases. An application case is a given DOE, 2019). Prices in China are already in the order of use case, tailored to the specific technical needs of a US$270/kWh to US$320/kWh for Li-ion technologies power system and subject to its particular policy, market, 14  DEPLOYING STORAGE FOR POWER SYSTEMS IN DEVELOPING COUNTRIES: POLICY AND REGULATORY CONSIDERATIONS Box 2.2 Measuring the Cost of Battery Storage Use Cases The cost of energy storage systems and the potential for cost reduction are the basis for evaluating the economics of energy storage technologies. Generally, when evaluating the initial investment for energy storage projects, the cost of installation (CAPEX) is considered. The table below shows the CAPEX of main energy storage technologies. CAPEX OF MAIN ENERGY STORAGE TECHNOLOGIES IN CHINA US$/kWh Technology low high LFP Li-ion 270 310 NMC Li-ion 300 325 NaS 540 595 PHS 115 140 Lead Carbon Battery 210 240 VRB 450 500 However, a comparison based on such an aggregate figure can be misleading. Storage can be used for a variety of different use cases, each with a very different usage profile. Therefore, a more complete picture can be obtained by considering the levelized cost of storage (LCOS). For conventional generation technologies, the levelized cost of electricity is already a well-known metric. In the context of electricity storage is the energy storage cost calculated after leveling the cost of energy storage over its entire life cycle expressed per unit of energy returned from the storage. A very common application of LCOS are use cases related to energy arbitrage, i.e., charging when prices are low and discharging when electricity prices are high. Assuming a certain usage pattern (e.g., one fully cycle per day) and including the cost of electricity used for charging, LCOS then indicates the peak electricity price level at which storage becomes economic. Bloomberg New Energy Finance’s levelized cost for battery storage for H1 2020 is US$150 /MWh on average globally, inclusive of charging costs and assuming one cycle per day. Where CAPEX for battery storage is particularly low, LCOS can be as low as US$115 /MWh. This means that four-hour duration battery storage today can challenge gas-fired peaking power on costs where natural gas is imported, such as in Japan or Europe. Sources: China Energy Storage Alliance (CNESA, 2020a) , Bloomberg New Energy Finance (BNEF, 2020). and regulatory framework, as well as institutional setup. the benefit of an asset for the system: because the Calculating the economic viability of a storage project investment is used in an optimal fashion, the cost of and deciding technology and engineering details is only meeting each use case is reduced. While this concept is possible on the basis of an application case. straightforward in theory, there can be practical barriers It is possible to use one and the same asset to to its realization. Policy, market, and regulatory frame- serve multiple application cases. This is sometimes works have a critical role in whether or not such stack- referred to as benefit or value stacking. Value stacking ing is possible and if all value streams can be accessed can be beneficial for project economics and maximize by the same entity. This is discussed in the next section ENERGY STORAGE AND ITS ROLE AS A FLEXIBLE RESOURCE 15 Box 2.3 Snapshot of Regulatory and Policy Review for Battery Storage in India India is currently experiencing a rapid increase of kilowatt hour and ReNew Power bid for peak tariff variable renewable energy (VRE) capacity against came at Rs 6.85 (~$0.096) per kilowatt hour. the backdrop of an ambitious target to reach 175 GW of renewable energy capacity by 2022 and Challenges for establishing a consistent a long-term commitment to reduce the carbon regulatory framework intensity—and ultimately overall emissions—of its The Electricity Act, 2003 covers the generation, economy. The current context in India highlights transmission, and distribution of electricity, but it the challenges in setting up a consistent, suitable does not specifically cover the storage of electrici- regulatory structure for the many different use-cas- ty. This means that there are uncertainties regard- es that storage can provide while simultaneously ing regulatory jurisdictions of appropriate com- demonstrating how auctions for renewable energy missions, as well as regulatory jurisprudence of and storage hybrid systems can be effective in pro- certain applications of the BESS. For example, if a viding both flexibility and green electricity to grids. distribution utility brings in cost efficiency to supply electricity to consumers by using BESS, the State Main drivers and experience in procuring Electricity Regulatory Commission (SERC) can energy storage consider the investment as appropriate. However, Several modelling efforts have established the regulatory treatments would differ when the same need for flexibility to extend beyond existing sourc- distribution utility would add different applications es in the supply and demand sides, if a predomi- of BESS. For example, when 50% of the BESS nantly VRE-led future is envisaged in India (CEA cycles are used for energy arbitrage and 50% of 2017; CPI 2019; NREL 2017). It is understood that the BESS cycles are used to reduce deviation existing potential sources of flexibility in the grid settlement mechanism penalties, the treatment will be inadequate in meeting the grid balancing for regulatory jurisprudence will differ. Similarly, if requirements under high VRE scenarios of the a BESS is installed by an inter-state transmission future. The debate, so far, has been confined to utility and this entity executes service agreements when and to what extent the country should com- with system operator (for ancillary services sup- mit to battery storage systems (BESS) in light of its port), renewable energy generators (capacity current costs, which have been declining rapidly. In firming) and distribution utilities (energy arbitrage), addition, there are ambitious plans to increase the it is unclear at the moment if this falls under the installed capacity of pumped storage hydropower jurisdiction of the Central Electricity Regulatory in India (Economic Times India 2019). Commission (CERC) or SERC. In March 2019, the Union Cabinet approved the The CERC’s staff paper on the introduction of elec- establishment of an integrated, multi-disciplinary tricity storage systems in 2017 was an important National Mission on Transformative Mobility document discussing such issues and the possible and Battery Storage to drive clean, connected, interpretations of CERC in similar situations. In shared, sustainable, and holistic initiatives by addition, several regulatory provisions have been promoting local manufacturing. India’s current introduced over the years with long- and short- grid-scale commissioned BESS capacity stands term implications for battery storage resources in at around 11.25 MW. Additional tenders have the country. Some of the key regulatory provisions been announced for more than 1,400 MW of include: (i) real time market (CERC 2019), (ii) a BESS projects in the first half of 2019 throughout draft Indian Electricity Grid Code (CERC 2020), country. These projects were launched mainly with and (iii) the new market design for ancillary ser- the objective to control variability of solar and wind vices. The need for a well-established regulatory power. Experience in recent tenders has shown oversight that will direct the investment in the area that the BESS are becoming competitive. In Jan of storage technologies is understood and various 2020, two companies won the auction to supply options to address issues around grid connectivity 1,200 MW of clean power in one of the largest of storage devices, tariff structure including depre- renewable-cum-energy storage power purchase ciation rates, cost recovery methods, incentives, tenders through a reverse auction method. and rebates, etc., are being analyzed. Greenko was awarded 900 MW after quoting a peak power tariff rate of Rs 6.12 (~$0.086) per Source: Authors. 16  DEPLOYING STORAGE FOR POWER SYSTEMS IN DEVELOPING COUNTRIES: POLICY AND REGULATORY CONSIDERATIONS FIGURE 2.3: Relationship Between System Need, Use Case and Application Case Specific needs in a given power system Project 1 General system needs Set of general in modern Application case(s) Project 2 use cases AC power systems Project 3 Applicable policy, market and regulatory framework Key point: The combination of use case and system specific factors defines an application case. Source: Authors. in more detail in the context of system and project value via electricity storage. Note that while all of these use (see Chapter 3). cases are provided, the size of each use case for most Another use case is the provision of firm capacity to systems is highly variable. The need for reserve products meet peak demand. It depends on the duration of this and ancillary services would be much smaller than peak- demand, and here flexible resources are in principle ing power or energy arbitrage for example (Table 2.1). extremely useful. In turn, the policy, market, and regu- The different use cases can be differentiated on the latory frameworks determine which options will actually following bases: whether storage acts on the generation entail a viable remuneration structure to unlock invest- side (similar to a generator), or on the customer side ment. The relationship between system needs, use (similar to a responsive load), or on the network (similar to case, and application case are illustrated in Figure 2.3. a network asset). This distinction is not always completely clear-cut: for example, transmission systems generally fea- ture network assets that can provide voltage control (e.g., components referred to as Flexible Alternating Current GENERAL USE CASES Transmission Systems, FACTS) and customer side A number of different categorization systems for use resources can be aggregated to bid on the wholesale mar- cases exist (see CIGRE, 2018, Chapter 4). While they ket similar to a generator. Hence, the following allocation to are generally quite similar, differences can arise depend- broader categories is indicative. Also, note that a genera- ing on the degree to which the list of use cases applies tion-side service does not imply that it must be co-located only to a subset of system contexts. For example, with generation; rather, these are services that have been frequency control is a universal use case that any AC traditionally associated with generation-side resources. power system requires. However, some categorization systems further differentiate, for example, the provision of regulation reserves and load following reserves. While both these reserves contribute to frequency control, Selected generation-side services they are defined in some but not all power systems. This Frequency and voltage control is the use case driving report adopts a general definition of use cases that apply a large proportion of grid-scale storage projects in the to all AC power system contexts, based on the different power systems of developed countries. The required flexibility timescales defined in the introduction. The services are generally segmented into different sub- emphasis is on use cases that, in principle, can be met categories, reflecting different system needs and ENERGY STORAGE AND ITS ROLE AS A FLEXIBLE RESOURCE 17 TABLE 2.1: Use Cases as a Function of Flexibility Timescale Medium-Term Short-Term Flexibility Flexibility Long-Term Flexibility Sub- Seconds to Days to Months to Timescale seconds to Minutes to hours Hours to days minutes months years seconds Response Relevant asset Capacity / latency Energy Large energy volume characteristic Energy Capacity Generation Based • Frequency control • Frequency and voltage • VRE forecast error control correction • Black start • Balancing seasonal and • Short circuit current • Firm capacity • Firm capacity inter-annual variability • VRE ramp control • VRE generation time shift Customer Based Use Cases • VRE self-consumption optimization • Demand response • Backup • Uninterruptible power • Backup power / Micro grid • Time of use optimization power / Micro supply islanding • Network charge grid islanding reduction • Micro grid islanding Network Based • Grid congestion relief & T&D avoidance / deferral Source: Authors. regulatory environments. Usually there is a service ramps become more pronounced with very high levels that: (i) responds (almost) instantaneously to any of solar power in a particular on the system. deviation of system frequency from its nominal value VRE forecast error correction is relevant for systems (inertial response, frequency containment reserves); where VRE plants have an obligation to report short- (ii) responds automatically in response to a control term generation schedules and face penalties if their signal from the system operator (frequency restoration real-time output deviates substantially from schedules. reserves); and (iii) manually at the request of the If grid codes require plants to adhere to schedules system operator (replacement reserves). Slower acting at the point of connection, electricity storage is in a reserves generally relieve faster acting reserves in order privileged position for this use case. However, if VRE to recover the system’s response capability. Voltage generators can be pooled in a portfolio, forecast errors ­ control is generally differentiated by services during can be corrected by trading on short-term markets and normal operations (steady state reactive power) and ­ relying on system-wide frequency control, which is during system disturbances (dynamic reactive power generally more efficient. and short-circuit current). Generators, storage, and demand-side resources can be used in this use case. Firm capacity is a broad category generally referring VRE ramp control refers to limiting the speed at which to the ability of (aggregate) generation capacity to meet a VRE plant may change its power generation in load at all times. Dispatchable generation generally has response to a change in resource availability, by absorb- a substantial contribution to firm capacity, and depending ing excess energy or discharging during periods of low on the load structure (duration and frequency of demand output. Grid connection codes for VRE plants include peaks) demand-side resources can reduce the need for such requirements in order to limit short-term variabil- firm capacity, and/or storage assets can supply it. ity, especially on smaller systems or weak grids. This (VRE) Generation time shift refers to a use case where use case generally requires a limited amount of energy a flexible resource is combined and possibly co-located storage with sufficient capacity rating. Note that these 18  DEPLOYING STORAGE FOR POWER SYSTEMS IN DEVELOPING COUNTRIES: POLICY AND REGULATORY CONSIDERATIONS with a (VRE) power plant to (partially) shift its output to a Time of use optimization aims at shifting customer later time. Storage is the only resource that can provide demand to times when electricity prices are comparably this use case—a solar PV system with a battery to meet low. This requires that electricity tariffs differ depending demand after sunset is the most common example. on when electricity is consumed. This case is similar to It is not necessary for storage and generation to be implicit demand response (see below). co-located. Demand response (DR) requires the customer to shift Black start capability is needed following a system wide or shed electricity consumption either in response to blackout. Black start capable resources do not require a price signal (implicit DR) or as part of a contractual any external power supply to energize the electricity agreement (explicit DR). In many cases, thermal energy network, gradually building supply and adding demand. storage enables DR but electricity storage can, in princi- Generation and storage can be used to provide the sup- ple, be used for this case, as well. ply-side component of black start capabilities. Network/demand charge reduction, or demand Balancing seasonal and inter-annual variability is a charge reduction, also requires shifting consumption use case that becomes relevant at very high shares of in time. However, the main objective is not to move a variable supply (which includes reservoir hydro at these certain amount of energy but rather limit the maximum timescales). This can be achieved by chemical storage consumption (at specific time periods). This use case technologies (hydrogen and its derivatives), very large- is relevant for larger customers that are metered at scale thermal energy storage (such as underground short intervals. storage in aquifers) or batteries that can decouple rated capacity and energy storage volumes, such as flow batteries. Grid-related use cases Grid congestion relief can be achieved by a number of options. Dynamic line rating and other measures on the Most relevant demand-side use cases electricity network itself can help to boost transmission capacity and thus reduce congestion. Storage can also Uninterruptible power supply (UPS) provides a cus- be used to meet demand peaks at the end of an other- tomer seamless switching between grid electricity and wise overloaded line. a backup system in case of loss of grid power. Batteries are the only flexible resource that can provide the Transmission and distribution (T&D) deferral or required rapid response combined with sufficient energy avoidance is similar to grid congestion relief, but it volumes for this use case. refers to the investment timescale on the grid. This use case is sometimes referred to as non-wire alternatives Backup power / micro grid islanding refers to the and can be met by demand-side resources, (distributed) capability of a smaller, often privately owned, grid to generation, and storage. use its own generation resources when grid power is not available. The main difference between this use case and UPS is that backup solutions may allow for an interruption of power, but generally aim to supply power USE CASES IN WEAK GRIDS for longer periods of grid unavailability. Micro grids may There are a number of use cases that are of particular be designed to operate fully autonomously under normal relevance in weak grid contexts of developing countries. conditions—a use case that is especially relevant for These include: electricity access in remote and smaller communities. • (VRE) Generation time shift can help to meet a VRE self-consumption optimization is relevant for larger portion of electricity demand via VRE/other customers with their own (behind-the-meter) generation generation thus reducing load shedding and/or who can arbitrage between using self-generated power decreasing the reliance on expensive generators and grid electricity. Demand side resources and storage running on diesel and/or HFO. can help maximize the share of demand that is met by • Frequency control services can also be a relevant self-generated electricity. use case. However, the specific application case is likely to be different in weak grids compared to ENERGY STORAGE AND ITS ROLE AS A FLEXIBLE RESOURCE 19 frequency control in developed countries, reflecting • Behind-the-meter use cases for commercial and differences in technical requirements and frame- industrial applications aim at UPS and backup options work conditions (see next section). to increase reliability of supply. The same is relevant for providing backup power to critical infrastructures. • In systems that struggle to maintain stable fre- quency and voltage, ramp control for VRE can be a relevant use case. FROM USE CASE TO • Depending on the load structure, providing firm capacity can also be an important use case. APPLICATION CASE Use cases are deliberately general and capture generic • Mini-grids are relevant use cases in low access areas, applications. By themselves, use cases do not define a including small island states, areas only weakly con- given flexibility project, thus further steps are required nected to the main grid, or in weak-grid environments. to move to a specific application case, against which Box 2.4 South Korea’s Battery Storage Development South Korea is one of the leading countries in battery storage with approximately 4.8 GWh installed in 2018—accounting for almost half of the global market. Generous government support for research, demonstration, and project development contributed to the creation of a domestic battery storage market. In 2009, the Government of South Korea announced the Green Growth policy to promote a synergistic relationship between economic growth, green transformations, and international efforts to fight climate change. Battery storage was featured in the Energy New Business initiative of 2014 with a roadmap to 2030 and in the Korea Energy Storage Technology Development and Industrialization Strategy 2020 (K-ESS 2020) which set the target of reaching a 30% share of the global market by the year 2020. As part of the Renewable Portfolio Standard (RPS) scheme, renewable energy projects that included energy storage could benefit from a higher multiplier for the Renewable Energy Certificates (REC). Solar PV plus battery storage projects were granted a REC weight of 5.0 and wind projects a REC weight of 4.5, where the price of one REC was roughly US$73/MWh. Additionally, public buildings were mandated to install energy storage systems (five% of peak power) accompanied by various financial incentives. These incentives prompted the proliferation of battery storage systems across the country. As a result, South Korea saw a sharp increase of battery storage systems from 1.2 GWh in 2017 to nearly 4.8 GWh in 2018. However, the market temporarily stopped during investigation into the cause of more than 23 fire incidents in battery systems. The investigations were completed in summer 2019 with the announcement that the causes were: (i) inadequate battery protection against electric shock; (ii) inadequate control of operating environment; (iii) faulty installation; and (iv) inadequate overall systems control and protection. As of spring 2020, the REC weighting for energy storage systems connected to wind power ranged from 4.5 to 5.5. The country expects to continue growing its battery storage installations, including new safety measures, for which the government is providing financial support. Sources: Authors based on Korea Energy Agency (2020), World Bank (2020b), and EY (2020). 20  DEPLOYING STORAGE FOR POWER SYSTEMS IN DEVELOPING COUNTRIES: POLICY AND REGULATORY CONSIDERATIONS projects can be designed and developed (Figure 2.3). Secondly, policy, market, and regulatory frame- There are two main additional components needed for works determine project requirements, including this. what is needed to obtain relevant permits, what Firstly, a more detailed, system specific, techno-­ performance requirements the flexibility asset needs economic assessment is required to provide further to meet and what revenues a project can achieve. insights into the different use cases. For use cases Storage is frequently hampered by regulatory frame- that fall into the generation based and network-based works that are not geared towards storage (e.g., use cases this assessment takes place on the power see CNESA, 2020b, for a discussion on barriers in system level. For the customer-based use cases such China). an assessment is needed based on the customer’s load profile, supplemented by selected system level data. For example, all AC power systems require NOTE frequency control. However, smaller systems with 1. Chemical energy storage is also of importance in the power relatively low synchronous inertia may require very sector for bridging multi-day shortfalls of renewable electricity fast responding frequency control, which is not needed production via reconversion to electricity. This application is in large systems with more synchronous inertia. As relevant once VRE provides the large majority of electricity on explained in the next chapter, a detailed study is an annual basis and is beyond the scope of this report. needed to determine which type of frequency control provides value to the system. The same is true for the other use cases. 3 UNDERSTANDING SYSTEM VALUE PROJECT AND C ost-benefit analysis has long been a standard decision-making tool in the power sector (CPUC, 2001). Traditionally, the entire power sector was viewed as a natural monopoly, which in turn required regulators to approve investment plans of utilities on the basis of cost-benefit assessments. In many jurisdictions, this has been changed by unbundling (different ownership of generation, transmission, distribution, and supply in varying combinations) and wholesale market liberalization (allowing private companies to compete for generating electric- ity). However, there still remains an important role for (indicative) planning, policy, and regulation. For grid infrastructure, planning is crucial in all types of governance setups and leads to binding investment plans. Especially in developing countries the electricity sector is still structured around a vertically inte- grated utility, which either invests directly in new assets or procures these from independent power producers (IPPs) via long-term contracts. In this context, regulators will need to approve investment plans and there may also be questions regarding fair remuneration of different flexibility use cases. In many countries, even where markets have been liberalized, there remains an important role for system operators acting as single buyers for system services (frequency and voltage control, black start). Regulators also have a crucial role in approving tariffs for monopolistic parts of the system such as networks (and frequently also retail tariffs). Consequently, a proper understanding of the economic value a certain use case can bring to the system is indispensable. This is captured by the notion of system value (IEA, 2016a). System value captures the aggregate benefit to the power system following the addition of a new resource. This can be a generation and/or flexibility asset. For example, deployment of electricity storage may help reduce load shedding, which has a direct economic value. This monetary value is one component of the storage asset’s overall system value. Other factors, such as deferred T&D investment may further increase system value. In order to specifically calculate the system value of a technology, one must first specify which factors need to be taken into account. For example, a calculation may or may not include positive externalities of technologies that do not rely on fuel that sees significant price fluctuations and associated risks (IEA, 2016a; ENTSOE, 2020). It is important to note that the system value of a given asset is not static, but can change along with changing demand patterns or shifts in the asset structure of the system. For example, along with the general economic principle of diminishing returns, the system value of adding more of a certain technology tends to diminish as more and more capacity is deployed. While this is a general principle that holds for all resources, the speed at which value saturates depends on the asset type and use case (see Denholm et al., 2018, for an example of storage providing peaking capacity in California). Comparing the system value of an asset to its direct cost allows determining if building the asset is desirable from a total cost perspective or not. Calculating the system value of an asset requires a reference case—which assumes that the asset is not built—and a case where the asset is present. The aggregate change of costs in the system (excluding direct costs of the asset itself) is the system value of the asset. A favourable system value, however, does not indicate if an investor (this could be a private or public entity) will be able to obtain sufficient remuneration to actually invest in the asset. The financial attractiveness of a flexibility asset from this perspective is captured by the notion of project value. The project value is composed of the different revenue streams that can be tapped by the project minus costs incurred. Project value is often expressed by net present value (NPV) (i.e., discounted revenues minus discounted costs). Another metric of project viability is the internal 21 22  DEPLOYING STORAGE FOR POWER SYSTEMS IN DEVELOPING COUNTRIES: POLICY AND REGULATORY CONSIDERATIONS rate of return. The internal rate of return of the project validation process using a production cost model (see needs to be above a certain threshold, referred to as the Step 3). This reference scenario must be clearly defined hurdle rate, for an investment to go ahead. In turn, the in terms of system composition, operational rules and hurdle rate is set by the weighted average cost of capital reliability levels. (WACC) of the project. Step 3: A production cost model (PCM; also known as It is a fundamental task of policy, market, and regu- dispatch or unit commitment model) is a model that latory frameworks to ensure that projects with a positive specialises in representing the operation of the power system value also have a favorable project value. system often at the level of individual power plants and a disaggregated representation of demand (e.g., one demand curve for each substation). PCM also frequently ASSESSING TECHNO-ECONOMIC includes operating reserves and other short- and SYSTEM VALUE medium-term flexibility options. It is worth noting that including storage in a PCM is a recent focus of model Analysing the system value of a power system asset development and legacy tools will not be fit for purpose frequently requires a detailed assessment based on (Bhatnagar et al. 2013). In step 3, the PCM is used to advanced modelling tools (sources). The level of detail refine the results of the CEM using the results of the at which the power system is represented will depend PCM in an iterative process. on the specific question. For example, where an asset clearly reduces the amount of unserved energy, a Step 4: As a next step, the capital cost implications of rough estimate of the avoided unserved energy will be various flexibility measures can be tested. A new mea- sufficient to approximate the system value. However, in sure can be incorporated into the CEM framework as an many cases the issue will be more complex, requiring input condition, and thereafter the model can formulate a more comprehensive assessment. In general, such a long-term investment plan. For a fair comparison, the an assessment is carried out in the following order reference and flexibility scenarios should satisfy the (Figure 3.1; see IEA 2018b, for a detailed discussion): same demand at the same level of reliability. Where Step 1: Establish a model of the current power sys- flexible resources reduce load shedding, this should tem (generation, grids, and demand) alongside a set be valued at the value of lost load. Costs and benefits of different options for future investments. This step accruing in the future need to be discounted and con- involves collecting a large amount of techno-economic verted to NPV. data about the power system and selecting an appropri- Step 5: Next, a PCM analysis is used to evaluate oper- ate power system model. This will often be a so-called ational costs and/or savings of the flexibility measures capacity expansion model (CEM), which is capable of in question. The new PCM results are benchmarked determining the least-cost mix of new investments over against the reference PCM scenario established in the long-term. CEMs create least-cost power generation Step 3. This step enables analysts to precisely evaluate portfolios in future years with detailed considerations of how the new measures would impact system flexibility capital expenditure (CAPEX) but an incomplete picture and operational costs, and to identify flexibility surpluses of power system operations (and thus, operating expen- or shortfalls that can be addressed by modifying input diture, OPEX). CEMs have the advantage of capturing conditions of the CEM in the previous step. long-term planning timescales but this comes at the cost of less spatial and temporal granularity. Thus, they need Step 6: At this stage, the CAPEX and OPEX implica- to be combined with a more detailed model that builds tions of various flexibility measures can be compared on the results of the CEM. and contrasted with the reference scenario (and relative to one another) to inform long-term planning pathways. Step 2: In the next step analysts first create a reference Also here, costs need to be discounted and are usually case scenario using the CEM, which relies on reason- expressed as NPV. able, fairly conservative predictions of future technology and market conditions. This reference scenario will A number of experimental models have been ultimately serve as a point of comparison with scenarios developed lately combining the long-term time scope that include additional flexibility considerations. To fully and decisions of a CEM with the operational detail of develop this scenario, it must first undergo an iterative PCMs, largely reflecting the impact of plant operations UNDERSTANDING PROJECT AND SYSTEM VALUE 23 FIGURE 3.1: Modelling the Techno-Economic System Value of Power System Assets Updated Scenario 1. Build a CEM 2. Build 3. Validation 4. Build 5. Validation 6. Compare for the power reference of reference flexibility of flexibility scenarios system: scenario for scenario, using measure scenario using Compare total Build a CEM future power PCM: scenarios for PCM CAPEX that accurately system: Evaluate future power Evaluate (from Step 4) characterizes Use CEM to operational systems: operational and OPEX (i) today’s power formulate a performance Use CEM to performance (from Step 5) system and reference case of future power formulate a new of future power implications (ii) future scenario for system created power system system created of prospective expectations a long-term by CEM using scenario that in Step 4 using flexibility measures of demand, investment plan for PCM; understand includes a PCM; understand against reference technology cost the power system. flexibility shortfalls particular physical flexibility shortfalls scenario to inform and performance, or surpluses; or institutional or surpluses. decision making. expected augment relevant flexibility measure retirements, public input parameters (or set thereof). policies, etc. for CEM to create a more operationally cost-effective system. Feedback Key point: Modelling system value requires a sequence of steps using different modelling tools. Note: CEM = Capacity Expansion Model, PCM = Production Cost Model Source: Adapted from IEA 2018b. on investment decisions. While these models avoid to technologies, different discharge times). For example, a large extent the iterative cycles between CEMs and there is a different value (and cost) for different durations PCMs, PCMs are typically used to test that the pro- of storage (2 hrs vs. 10 hrs), depending on the specific posed expansion plan is technically feasible at all levels, system (de Sisternes, Jenkins, and Botterud 2016). including transmission considerations. Use of these Modelling frameworks should also allow for the deploy- models is not widespread yet, but they may become ment of one asset for multiple use cases. These aspects more common in the future as computational capacity unavoidably render the modelling environment rather increases and commercial solutions become available. complex, in that an accurate picture of the flexibility There are a number of details that are not fully contribution requires consideration of multiple sources of captured by this general description. For example, value (de Sisternes, Jenkins, and Botterud 2016). additional analyses using specialized models to inves- In addition, sensitivity analyses can be carried out tigate very short-term effects (system stability) are to determine how much capacity/energy of a certain often needed, especially in weak grids, and assessing resource should be deployed. This is relevant, because impacts on grid infrastructure may also require the use flexible resources generally face diminishing marginal of dedicated models. This can include power flow mod- returns (i.e., the first unit of flexibility generally has a els to capture how the power system responds under higher system value than adding more flexibility to an periods of high stress, such as peak demand days or already flexible system). For example, when investigat- after large generators trip offline. ing the system value of adding batteries to a system, a The flexibility scenarios should give due consider- set of cases should be considered with varying capaci- ation to a range of options both across flexible resource ties of storage in order to see how system value evolves categories (storage, demand response, flexible genera- at different capacities. tion, grids) as well as within categories (different storage 24  DEPLOYING STORAGE FOR POWER SYSTEMS IN DEVELOPING COUNTRIES: POLICY AND REGULATORY CONSIDERATIONS Different system value assessments may consider In general, if it is to receive a favorable assessment, different costs and benefits. Hence, a conscious and the higher the risks a proposed project faces, the more explicit prior choice must be made about which cate- profitable it needs to be. gories to include, bearing in mind that assessments Such assessments consider a broad range of costs, are only comparable to the degree that they consider including those for required engineering studies and the same costs and benefits (Box 3.1). The following, permits, direct equipment costs, costs for operation non-exhaustive list provides examples of costs and and maintenance, as well as any applicable taxes and benefits that may be considered. so forth. Risk assessment is also a crucial aspect of project evaluation. This can include technology risk Benefits: reduced fuel costs, reduced load shedding, (will the asset perform as expected?), project develop- reduced or deferred costs for investments in new ment risks (will required permits be secured in time and generation/grid infrastructure, reduced wear and tear as planned?), construction risk (can the asset and all especially for conventional generation, reduced VRE required supporting structures be completed on time curtailment, lower CO2 and other pollutant emissions, and on budget?), counterparty risk (will the off-taker/ and indirect effects such as job creation and economic purchaser pay as expected and remain in the contract benefits (Delgado et al. 2018). A further benefit can be as foreseen?), and regulatory risk (will applicable taxes, improved resilience of the system. tariff structures, or surcharges remain constant or Costs: costs of enabling technologies for system opera- change?). Where offtake is not ensured via a long-term tion; and negative environmental impacts. contract, projects will be exposed to market risks. These can be significant, especially when the price structure and required system services change as part of the transformation of the system. Higher risks generally ASSESSING FINANCIAL drive up the profits an entity expects for the delivery PROJECT VALUE of a certain product or service. This includes, most importantly, the cost of financing. As a result, a robust The complexity of assessing the financial value of a understanding of the risks to which a project is exposed project will vary depending on the use of storage and and their mitigation must underpin not merely project the power system in which it will be operating. In sin- development but also policy, market, and regulatory gle-use applications with predefined revenue sources, frameworks. financial evaluations generally do not require the same There are crucial interdependent links between level of modelling complexity as techno-economic system techno-economic value, a project’s financial evaluations. Assessments are generally carried out in value and policy, market, and regulatory frameworks. spreadsheet based models that capture various cost Ultimately, the task is to ensure that, in any given proj- and revenue items over time. These are then discounted ect, all relevant factors that drive system value can be according to the return requirements of the investor, monetized to achieve an alignment with project value. factoring in the risk profile of the project. However, if Put differently: a good framework will render those a system could potentially access several revenue projects with a high system value more attractive than streams by participating in spot or balancing markets, rival options. for example, the analysis would require forecasting of future market prices, involving complex models. UNDERSTANDING PROJECT AND SYSTEM VALUE 25 Box 3.1 Jordan’s Analysis of Different Energy Storage Technologies to Add Flexibility to the System This case study illustrates to what extent storage solutions contribute to optimal electricity generation as envisaged in Jordan’s investment plan for the period up to 2035. In particular, it examines the economic benefits of Li-ion batteries and concentrating solar power (CSP) associated with thermal storage to assess which storage option is the most suitable. The baseline scenario comprises all main electricity sources: gas, oil, waste, solar PV (fixed/tracked), wind, CSP associated with thermal storage, and batteries. For comparison purposes, another scenario allows for batteries as the only storage option available, and a third scenario does not allow for storage solutions at all. As the need for flexibility increases with variable renewable energy penetration, CSP provides an interesting alternative to a combined cycle gas turbine plant (CCGT), specifically with its ability to cover evening peak periods. In the baseline scenario, CSP enters the energy mix in 2030, replacing CCGT as baseload to the extent that, in 2035, most of the electricity is produced by solar and wind. Although more costly at first, investing in CSP rapidly and significantly decreases the total system cost by 7% in 2030 and up to 33% in 2035 as compared to the scenario without storage. Furthermore, the overall installed capacity in 2035 amounts to 10.9 GW (including 3.6 GW of CSP), making it 15% smaller than without storage. Batteries would entail uncompetitive costs and fewer hours of storage than CSP, making them less able to cover evening peaks properly. For instance, 20% lower costs would be needed to enable their deployment alongside CSP, leading however to low utilization rates and installed capacities. Preliminary modelling studies conclude that Jordan’s cheapest energy trajectory heavily relies on solar and a viable flexibility source such as CSP instead of batteries. This not only satisfies energy security considerations, as it comprises mostly domestic resources, but also complies with the country’s renewable energy targets. Such results demonstrate the importance for countries to consider several flexibility sources and individually tailored solutions during their quest for the optimal electricity investment plan. Source: Authors based on internal World Bank documents. 4 POLICY, MARKET, AND REGULATORY CONSIDERATIONS A fundamental objective of policy, market, and regulatory frameworks is to provide an environment in which projects with a favorable system value also have a business case alongside the basic conditions that allow for project development, construction, and operation. This chapter first discusses three fundamental ways in which assets can be remunerated. The discussion then turns to broader issues of policy design. REMUNERATION OPTIONS The common binary distinction between vertically integrated monopoly systems, on the one side, and competitive market systems, on the other, fails to capture important aspects of remuneration structures in the electricity system. The assets needed for electricity systems fall into different economic categories. For example, elec- tricity grids are natural monopolies while generation assets are not. In addition, electricity systems need more than megawatt hours to supply customers: a variety of additional system services are needed to reliably operate the system. As a result, different remuneration models are generally present in an electricity system. In the fol- lowing discussion, the concept of a remuneration model does not refer to the entire power system, rather, it is meant in relation to remunerating a specific use case. For example, when it is stated that frequency and voltage control cannot be implemented in a market with multiple buyers and sellers, the statement refers only to the submarket for these services. It is possible to have a whole- sale market with multiple buyers and sellers while, in the same system, the market for frequency and voltage control is organized as a single-buyer market (with the system operator acting as single buyer on this market). Indeed, most vertically integrated systems (where generation, transmission/distribution, and supply are in one hand) allow for participation of independent power producers (IPPs). IPPs compete amongst each other, bidding on tenders where the vertically integrated monopoly is the single buyer. In this example, the remuneration model for the IPPs is a single-buyer market. Conversely, even where the wholesale market is liberalized and multiple generators can sell to multiple off-tak- ers, the transmission grid is still a regulated monopoly business.1 Flexibility options, notably electricity storage, can be used across different parts of the electricity system. For example, they can trade on wholesale markets like buyers and sellers of bulk electric- ity, they can substitute network investments, or they can provide frequency and voltage services. Consequently, the standard, system-wide distinction (competitive market vs. regulated monopoly) fails to take sufficient account of remuneration options. Depending on the use case, electricity stor- age could be subject to different remuneration models, even within the same country. In summary, a different way to categorize remuneration models is needed. Fortunately, there are only three different categories of remuneration models. It is important to note that in each country, multiple arrangements or combinations of these models are possible. They jointly constitute the overall market, policy, and regulatory framework for remunerating assets in these systems. These are: Non-market: Under this model, a regulated monopoly receives regulatory approval to recover the cost of a flexibility asset from its customers. There is no dedicated commercial transaction linked 26 POLICY, MARKET, AND REGULATORY CONSIDERATIONS 27 to flexibility provision, there is no buyer and no seller— Single-buyer market: Under this model, multiple sup- hence a non-market. A prime example of such an pliers compete, but there is only one buyer. The buyer arrangement is a transmission system operator that is in this case is generally a regulated entity. The crucial allowed to invest in building and operating the ­ electricity aspect is that there is a contract between the selected network up to a certain reliability level and can collect a seller and the buyer. An example from generation guaranteed return from all users of the grid. assets is a power purchase agreement with an IPP. For flexibility, a common example is a system operator that FIGURE 4.1: Illustration of Remuneration Models procures frequency control services competitively from private companies via an auction. Non-market Regulated entity Customers Multiple buyers and sellers, full market: Under this Example: Monopoly Utility, via regulated tariffs model, there is competition on both sides of the market. Transmission System Operator The most relevant use of this model are wholesale mar- kets where there are liberalized customers (retail com- petition). Here several generators compete to supply a Remuneration number of different customers. Contracts can take the form of hourly auctions on spot-markets or long-term, Single Buyer bilateral contracts. For simplicity, this model is referred to as full market in the following text. Examples for Company 1 flexibility include energy service companies that offer an Bid integrated efficiency and flexibility package to cut bills Regulated entity Example: for a customer based on a mutually agreed contract. Monopoly Utility, Transmission System This report now examines the three basic remunera- Company 2 Operator Remuneration tion structures that can be applied for flexible resources (for selected bidder) including electrical energy storage. The basic setup Bid is illustrated in Figure 4.1. The following examples Bid illustrate how the different remuneration options can be Company 3 implemented for different use cases. Non-market based remuneration Full Market Company 1 Customer 1 In countries where there is a regulated, vertically integrated utility that covers generation, transmission, Remuneration distribution, and supply, all use cases (with the excep- (via contract) tion of customer based use cases) can be implemented by allowing the utility to recover the cost of the flexibil- Company 2 Customer 2 ity asset via regulated tariffs. It is paramount that any regulatory approval for such an investment is based on a robust cost-benefit assessment to ensure that the system value of the project is favorable. An advan- Company 3 Customer 3 tage of such a setup is that the utility can use flexibil- ity assets in a highly integrated way, maximizing the simultaneous provision of different use cases. However, implementing this option may require adjusting the Key point: There are three basic remuneration regulatory framework to the characteristics of innovative models that can be combined for different services. flexible resources including battery electricity storage Note: Contract arrows illustrate different possible constellations. (Chattopadhyay et al. 2019). Full market transactions are frequently handled via a clearing house Network based use cases can be implemented (exchange). under a non-market based setup even in systems that Source: Authors. 28  DEPLOYING STORAGE FOR POWER SYSTEMS IN DEVELOPING COUNTRIES: POLICY AND REGULATORY CONSIDERATIONS feature liberalized electricity markets and unbundling. place. Another relevant market, which is also frequently In this case system operators must also demonstrate organized according to a single-buyer model, is that for that a given option (e.g., battery electricity storage) firm capacity, where electricity storage can qualify in is the most economic option compared to deferral or some cases. avoidance of grid investments. However, depending on But other use cases can also be implemented the specific unbundling rules of the system, this may using single-buyer based remuneration. For example, in preclude storage from participating in other use cases. markets that feature single buyers for bulk power, elec- In this case, it can be more efficient for a transmission/ tricity purchases are usually implemented via long-term distribution company to procure a service via the sin- power purchase agreements (PPA). Such PPAs can gle-buyer model rather than owning and operating the include different price patterns, depending on time of asset (D. Chattopadhyay et al. 2019). day and season (Figure 4.2). Such time-of-generation PPAs can provide a strong incentive for co-developing VRE and storage and have been used successfully in projects deployed in Morocco, South Africa, and the Single-buyer based remuneration United States. Single-buyer based remuneration arguably is currently the most important remuneration stream for electricity storage. The reason behind this is that the majority of Market-based remuneration battery projects are currently used to provide system services (IEA 2019f) and these services are usually Customer based use cases are usually implemented via procured by system operators as single-buyers in sys- market based remuneration models, because invest- tems that have dedicated frequency control products in ments take place behind the meter.2 However, this does FIGURE 4.2: Sample PPA Structure Using a Time of Use Based Multiplier for Two Selected Months Jan 1.05 1.00 0.95 0.90 0.85 0.80 0.75 0:00 1:00 2:00 3:00 4:00 5:00 6:00 7:00 8:00 9:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 19:00 20:00 21:00 22:00 23:00 Sep 1.05 1.00 0.95 0.90 0.85 0.80 0.75 0:00 1:00 2:00 3:00 4:00 5:00 6:00 7:00 8:00 9:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 19:00 20:00 21:00 22:00 23:00 Key point: PPAs can align system and project value by paying time-dependent prices. Note: Bidders submit an offer based on US$/MWh during peak hours. Generation during regular and off-peak hours receives only 93% and 85% of the ask price, respectively. Source: Authors. POLICY, MARKET, AND REGULATORY CONSIDERATIONS 29 not mean that policy, market, and regulatory frame- by ill-adapted regulations) or use of the same asset for works do not matter for these use cases. Indeed, the different purposes simultaneously (which can compro- opposite is the case: behind the meter investments are mise the ability to deliver certain services reliably). valued against grid-electricity tariffs. Hence, the design It can be a challenge to establish a framework of electricity and network tariffs have a strong influence in which one asset can access remunerations under on what types of flexibility investments go ahead (Milis different remuneration options. In California, there are et al. 2018). This issue has led to some controversy in proposals for regulations whereby the regulated entities markets where customers can use battery storage to could use storage as grid assets (non-market reve- optimize their self-consumption of self-generated elec- nues) while also participating in the wholesale market. tricity against grid electricity prices (DIW 2017). In the The revenues achieved in the market would then be context of developing countries, this can be particularly returned to customers (Delgado et al. 2018). However, relevant because customers paying higher electricity the complexities of implementing this in practice led this tariffs have the strongest incentive to displace grid elec- process to be postponed in 2019 (CAISO 2019). Benefit tricity consumption. This can erode the financial health stacking is less complex when single-buyer and multiple of the power sector by reducing fixed customer charges buyers/sellers markets are combined. For example, the and/or cross subsidies which are crucial to ensure over- Hornsdale battery in South Australia uses part of its all revenue sufficiency (RMI 2014). capacity to perform energy arbitrage on the wholesale Many of the generation based use cases can also market while keeping part of its capacity reserved for be implemented via the market remuneration model, frequency control services (AEMO 2018). if a liberalized wholesale market is in place. A primary There is a link between remuneration structure and example is using electricity storage for arbitrage on the importance of carrying out an assessment of system wholesale markets: charging when electricity prices value: such an assessment is crucial when deciding on are low (e.g., mid-day in systems with a lot of solar the regulatory approval for a non-market remuneration. PV) and discharging when the system needs power It can also be important for the single-buyer model to most (e.g., during evening hours when PV gener- decide cost ceilings for competitive procurement and/or ation is dropping away and demand is picking up). determining the quantity of a specific service that should However, generally this use case is far from econom- be procured. ically straightforward under current market conditions While storage can provide a variety of services, it (D. Chattopadhyay et al. 2019). cannot provide them all at once, and some services are This remuneration model is particularly sensitive to mutually exclusive (i.e., it is not possible to provide firm wholesale market design, notably pricing during periods capacity and frequency response with the same unit of of tight generation capacity compared to demand. storage capacity). Chosing which suite of services to Introducing capacity remuneration mechanisms that provide requires understanding possible value streams, ­ recognize and compensate firm power capacity addi- and checking these against operational capabilities. tions, or removing price caps and introducing admin- Based on this an optimisation can find the best dis- istrative scarcity pricing (e.g., via operating reserve patch strategy. demand curves) are options to better align project and system value (IEA 2018a). OWNERSHIP AND OPERATION: Combining multiple revenue options DIFFERENT POSSIBLE SETUPS AND A single asset may capture revenues under different REMUNERATION STRUCTURES arrangements. For example, under certain conditions it It is worth noting that one crucial role of policy, market, is possible to provide system services via a single-buyer and regulatory frameworks concerns the allocation of contract while also using the asset to reduce VRE imbal- rents between different actors in the power system, ances on the spot market or implement arbitrage use notably customers on the one side and utilities and cases. It is important to distinguish between use of the other companies active in the sector on the other. A same asset under different revenue structures at differ- project that has a favorable system value brings a net ent times (not usually problematic, but may be hampered benefit from a total cost perspective—this cost reduction 30  DEPLOYING STORAGE FOR POWER SYSTEMS IN DEVELOPING COUNTRIES: POLICY AND REGULATORY CONSIDERATIONS Box 4.1 Who Can Own and Operate Storage Assets? Experiences from the European Union European Union Regulatory Framework In the European Union (EU), the Third Energy Package (2009) required the separation or ‘unbundling’ of vertically integrated energy companies into the different stages of energy supply: generation, transmission, distribution, and retail (CEER). Since energy storage was not explicitly mentioned, it was unclear whether it should be considered as a generation or transmission/distribution asset and how the unbundling rules should apply. This uncertainty constituted a major barrier to investment in energy storage and led to a fragmented approach across different Member States. The newest package of EU energy legislation, the ‘Clean Energy for All Europeans’ Package, finalized in 2019, clarified the ownership and operation of energy storage facilities by regulated entities (transmission system operators, TSOs, and distribution system operators, DSOs)—a major step forward for the energy storage sector in Europe. The Recast Electricity Directive (EC 2018) (Art. 36 and 54) states that in general, TSOs and DSOs should not “own, develop, manage or operate energy storage facilities” (unless these facilities are considered ‘fully integrated network components’* and the National Regulatory Authority (NRA) has given its approval). However, regulated entities can be allowed to own and operate energy storage facilities after obtaining a derogation: if there is no market party willing to build a storage device, the NRA may introduce a derogation to allow TSOs and DSOs to own and operate an energy storage facility. The regulated entity must prove that this facility is necessary to ensure efficient, reliable and secure operation of the transmission or distribution system. Moreover, energy storage facilities cannot be used to buy or sell electricity in the electricity markets. If the derogation is applied, the NRA must run a public consultation at least every five years to assess whether a market party is interested in investing in energy storage facilities. If market parties come forward, the system operator must phase out their activities in energy storage within 18 months (TSOs and DSOs may receive compensation to recover the residual value of their investment in the energy storage facilities). Insights and Lessons Learned Clarifying who may own and operate energy storage facilities in the context of unbundling is critical for the development of the energy storage sector. In the EU, the discussions on ownership of storage were contentious, and the relevant articles were heavily debated until the final agreement on the Clean Energy Package was reached by the European institutions in early 2019. The final text provides much- needed clarity, but still leaves room for improvement. For instance, rather than determining which players may own and operate storage facilities in general, it would be easier to consider which entities are allowed to provide specific energy storage applications or services. Applications deemed to be market services, such as arbitrage, could be clearly defined so that only market players be allowed to own or operate energy storage facilities for their provision. The regulatory framework should also clearly allow energy storage facilities to provide applications that fall under the category of infrastructure services (services which are already provided by regulated (continued) POLICY, MARKET, AND REGULATORY CONSIDERATIONS 31 Box 4.1 (Continued) entities using other technologies, for instance by building a line). In situations where market-based service procurement is not feasible, ownership of energy storage by regulated entities (e.g., for the provision of system services) in the absence of competitive supply should be allowed on an exceptional and temporary basis, subject to periodic review. This approach—reframing the discussion in terms of use cases and related ownership and operation issues, rather than ownership and operation of a storage facility—is a compromise solution that is flexible enough to provide clarity without limiting market growth. It can also allow for new commercial arrangements to emerge. For instance, ‘multi-service business cases’ (arrangements between different market players and, potentially, regulated entities) could enable an energy storage facility to provide both market and regulated services. This would maximize the value of the storage facility to the system and enable regulated entities to make use of energy storage to provide specific services without distorting the market (EASE 2019). Finally, in addition to clarifying energy storage ownership, it is also important for policymakers to address other principles related to storage and system operators. According to the Clean Energy Package, TSOs and DSOs must consider energy storage in their network planning and are encouraged to move towards market-based tendering of flexibility services as an alternative to grid extension. This is essential to allow energy storage to access more revenue streams, building a more robust business case, and creating a level playing field between the different flexibility options. Source: European Association for Storage of Energy (EASE). * Defined in the recast Electricity Directive, (Article 2, para 51) as ‘network components that are integrated in the transmission or distribution system, including storage facility, and are used for the only purpose of ensuring a secure and reliable operation of the transmission or distribution system but not for balancing nor congestion management’. Exemptions to the unbundling requirements (and therefore, restrictions on energy storage ownership) are also possible for small connected systems and small isolated systems (recast Electricity Directive, article 66). can either increase the profit margin of companies at Storage assets can have more value for society if constant prices for consumers or it can be used to lower owned and operated by an entity that can tap different costs for customers at constant profitability for compa- value streams. Alternatively, it is possible to co-own the nies. As a rule of thumb, frameworks will aim to split asset to achieve the same effect. For example, a market benefits between both sides to maintain incentives for participant, who can use storage in other commercial companies while also allowing customers to enjoy the activities, such as de-carbonized backup capacity, can benefit of lower costs. tap a value stream that a network operator cannot. Which type of remuneration can be adopted Therefore, procuring services can be more efficient for depends on the market structure of a power system a transmission/distribution company than owning and and, most importantly, the ownership rules for flexible operating a battery (D. Chattopadhyay et al. 2019). resources, including storage. For example, if storage In the case of a fully vertically integrated utility, for can be owned and operated by a transmission or example, it is straightforward to stack benefits, because distribution system operator or a vertically integrated all cost savings accrue with a single entity. However, utility, it can be remunerated via a non-market setup. this arrangement faces some of the classical problems Policymakers face trade-offs when deciding how flexible of regulated monopolies: there is always an information resources can be remunerated and even within one asymmetry between regulators and utilities, which can power system all three different structures can be in lead to overinvestments, inefficient operation with few place in parallel. incentives to reduce project costs. Conversely, relying on market based revenues alone—for example, by using 32  DEPLOYING STORAGE FOR POWER SYSTEMS IN DEVELOPING COUNTRIES: POLICY AND REGULATORY CONSIDERATIONS a battery for arbitrage on wholesale markets—does REQUIREMENTS FOR provide strong efficiency incentives, but can expose investors to unduly large risks, which can in turn increase APPROPRIATE REMUNERATION financing costs. STRUCTURES AND PROCUREMENT In sum, energy storage may be owned, dispatched, The three remuneration models imply different priorities and connected to the grid by different entities. Each for the detailed design of remuneration structures. In the entity is impacted by the energy storage system’s opera- non-market case, the most crucial point is the overall reg- tion in a different way; similarly, each entity has different ulatory framework for the utility and a robust cost-benefit interests in when and how the energy storage system assessment before allowing a regulatory pass-through can or should be dispatched. This multi-party coordina- of costs to customers. The broader aspects of monop- tion can result in a complex interaction in which multiple oly utility regulation are beyond the scope of this report standards and constraints are applied to a single energy (but see IEA 2016b for details). The basic elements of storage system (Draft ACES 2019). cost-benefit analysis are discussed in Chapter 4. Policymakers need to be aware of such trade-offs In the single-buyer model, the duration of awarded and navigate them against the backdrop of their specific contracts is a critical consideration. For example, a sys- system context. It is clear that different system stakehold- tem operator can tender a multi-year contract for system ers could have a powerful incentive to lobby governments services, which could then be awarded to a company to move ownership and operation into their domain. that builds, owns, and operates the plant in order to supply the requested services. The advantage of a long-term setup is that it gives remuneration certainty OVERVIEW OF over a longer period, which can be required to unlock REMUNERATION OPTIONS investments. However, this locks in the system operator for a longer period, during which more favorable options FOR DIFFERENT USE CASES may become available. Shorter term contracts have The previous discussion included a number of examples the advantage of effectively keeping the window open of the application of different types of remuneration to for new options. Very short-term contract periods for different use cases. The link between use cases and system services (in some countries this can be as short type of remuneration is not automatic—not all use cases as a five-minute interval) broaden the base of possi- can be combined with a given remuneration model. ble providers, notably demand-side response (DSR) Conversely, certain use cases can only be implemented options. While there are many considerations that will with some of the remuneration models (Table 4.1). go into deciding contract duration, a rule of thumb is that For example, there is generally no market demand multi-year contracts are better at mobilizing investments (i.e., demand from private market actors) for frequency in new solutions while short contract periods are better and voltage control, hence a purely market-based when there is already a pool of possible providers with remuneration is not possible here. In this case, system existing assets. operators frequently act as single buyers for frequency In the full market setup, contracts, in principle, can and voltage control in liberalized markets. Conversely, be freely negotiated between suppliers and customers. uninterruptible power supply is generally a behind-the- Similar considerations apply regarding contract duration meter solution, procured by customers from private as in the single-buyer case, but there is a higher degree companies. Of course, there can be certain precondi- of flexibility. tions for a remuneration option to be available for a use In the context of developing countries, a very rel- case. For example, remunerating VRE generation time evant situation is the procurement of flexibility assets shifting on a market basis requires the existence of a via a tender. This can be either the procurement of the wholesale spot market and the ability of a VRE storage physical asset, which then will be owned and operated operator to access this market and capture more attrac- by the vertically integrated utility (non-market) or it can tive electricity prices via the time shift. be a tender for a multi-year contract to provide a certain service (single buyer). The World Bank has established a set of procure- ment guidelines with a focus on battery electricity POLICY, MARKET, AND REGULATORY CONSIDERATIONS 33 TABLE 4.1: Possible Combinations of Use Cases and Remuneration Options Remuneration Option Single Multiple Buyers Use Case Non-Market Buyer & Sellers Comment Only system operator has demand for frequency and Frequency and Option Option voltage control services. This means either system — Voltage Control possible possible operator has to procure service (single buyer) or provision is mandated (non-market) Option Option Can also be required via grid connection code or power VRE Ramp Control Option possible possible possible purchase agreement VRE Forecast Error Option Option Option possible Can be required implicitly via power purchase agreement Correction possible possible Option Option Market based remuneration based on capturing very high Firm Capacity Option possible possible possible energy prices during periods of scarcity VRE Generation Time Option Option Can be incentivised in single buyer model via time -based Option possible Shift possible possible electricity pricing in PPAs Option Option Black Start — No market demand for such services possible possible Uninterruptible Option not Customer-side option paid by customer; a market where — Option possible Power Supply possible customers can generally choose from multiple providers VRE Self- Customer side option, electricity and grid tariffs crucial for Consumption — — Option possible determining economic viability Optimization Option Explicit demand response via single buyer model, implicit Demand Response — Option possible possible demand response via market-based model Time of Use Customer side option, electricity and grid tariffs crucial for — — Option possible optimization determining economic viability Network Charge Option Customer side option, grid tariffs crucial for determining — Option possible Reduction possiblea economic viability Backup Power / — — Option possible Customer side option, paid by customer(s) Micro Grid Islanding Grid Congestion Option Option No market demand for such services. Only system — Relief possible possible operator has demand for such a service Transmission and Option Option No market demand for such services. Only grid owners / Distribution (T&D) — possible possible planners have demand for this option Deferral a. In the U.S., distribution utilities that operate within a reorganized market pay a network charge based on their demand at peak periods throughout the year, which compensates transmission system owners. Several utilities, particularly in the northeast, have begun deploying energy storage to reduce peak demand and reduce these network charges. Source: Authors. storage (World Bank 2020a). Tenders should be issued • Physical requirements: operating temperatures, as soon as functional requirements are specified—this humidity, dimensional restrictions includes the identification of the use case—based on a • Safety requirements system value assessment as discussed in Chapter 4. • Cyber security requirements Once the system is specified, the actual tender can take place. The tender should cover all relevant require- • Environmental requirements, including decommis- ments, notably: sioning and EOL disposal • Technical requirements: charging and discharging • Regulatory requirements including grid codes power, usable energy capacity, lifetime of the sys- • Relevant standards tem (both calendar and cycle lifetime), end-of-life • Control requirements, including communication (EOL) criteria, converter requirements, response channels and protocols (requirements to commu- time, efficiency, and other relevant technical param- nicate with DSO/TSO control systems of active eters for the BESS 34  DEPLOYING STORAGE FOR POWER SYSTEMS IN DEVELOPING COUNTRIES: POLICY AND REGULATORY CONSIDERATIONS network management schemes), data and cyber environment to unlock investments and real-life proj- security and communications (of alarms) between ects. The final section of this report discusses these subsystems aspects, covering so-called non-economic barriers. Further details are beyond the scope of this report, but These include: definitions and standards; the granting of can be found in the aforementioned document. permits; grid codes; taxes, surcharges and levies. The While remuneration structures are a crucial com- final subsection highlights who and how to engage in ponent for unlocking investments in flexible resources, electricity storage deployment. including battery electricity storage, they are only one aspect of the broader policy, market, and regulatory framework that is needed for successful deployment. Definitions and standards Legal definitions are fundamental for placing energy storage within an existing policy, market, and regulatory OTHER OPTIONS TO ENSURE framework. As a resource type in its own right, energy storage must be considered as its own legal and regula- SUFFICIENT PROJECT VALUE tory category and legal definitions should not arbitrarily In addition to remuneration of storage via different place storage into existing categories such as genera- contracting arrangements, it is possible to put in tors (Delgado et al. 2018). place obligations or quotas to ensure deployment of For example, the states of Colorado and Nevada energy storage or other flexibility assets. For example, in the United States have introduced legislation that California introduced a mandate for energy storage prohibits discriminatory rate structures and intercon- systems in 2013 and, since then, multiple jurisdictions nection policies (PNNL 2020). Europe’s recent Clean in the United States have adopted dedicated policies for Energy Package gives storage its own technology storage.3 The integrated resource plan issued in 2019 neutral legal definition. This is important to allow existing in South Africa has a dedicated allocation for storage and emerging energy storage technologies to compete (SAFR DOE 2019). on a level playing field. The Clean Energy Package also While such mandates can be effective in stimulating aims to remove barriers for market participation (as well deployment, volumes and targets must be based on as for other flexibility options) and requires TSOs/DSOs thorough analysis of present and future system needs to to consider storage as an alternative for grid reinforce- ensure customers do not pay for superfluous assets. ments based on competitive procurement of storage Other possible mechanisms are up-front capi- services (see Box 4.1). tal grants or tax credits. For example, in the United Standards and other documents, such as codes and States, solar PV investment tax credits also apply to guidelines, that collectively establish criteria by which storage that is co-located with solar PV and installed at safety, performance, and reliability can be documented the same time. This can be combined with state level and verified, can have a direct impact on the cost of support systems, such as the California Self-Generation an energy storage system (ESS) and its installation in Incentive Program. This provides a rebate of up to terms of material and manpower costs (ACES 2019). US$250/kWh of installed energy capacity for new bat- Standards are required for ensuring safety of the instal- tery storage systems (Energysage 2020). An investment lation and ensuring reliable performance. In turn, this tax credit for stand-alone storage projects is currently requires testing and certification procedures that are under discussion in the United States. reflective of real-world operating conditions. Chapter 5 of CIGRE TB provides the main international standards in place, or being developed, related to BESS interop- TACKLING NON-ECONOMIC erability and communication and BESS testing and performance measurements. Standards are relevant for BARRIERS manufacturing, installation, and operation in particular to Successful deployment of electricity storage projects ensure safety of installations. depends on the interplay of various policy, market, and A new area of standardization relates to cyber regulatory aspects. In addition, different stakeholders security. As energy storage assets become more need to engage appropriately to create an enabling widespread and better integrated into the electrical grid, POLICY, MARKET, AND REGULATORY CONSIDERATIONS 35 cybersecurity will need to extend to all aspects of the compliance requires various resources, including techni- control systems, especially the operation and mainte- cal capacity and legal competence. Ideally, compliance nance monitoring systems that touch on all aspects of verification should be performed throughout a VRE the system. This will be of even more importance at project, from planning, installation, and commissioning, those smaller, more remote facilities that do not have a through to the end of operating life (IEA 2016a). maintenance staff on site (ACES 2019). Taxes, surcharges, and levies Permitting and grid connection codes Storage can both consume electricity and function as A permit allows a developer to construct, develop, a generator. This can lead to a problematic situation install, operate, and maintain an energy storage project where storage assets are obliged to pay taxes, levies, subject to conditions that often require continued com- and surcharges for both loads and generation assets. pliance while the permit remains in effect. Revisions or This can lead to double-charging and other unintended other changes to project design may require an amend- consequences. Policymakers and regulators, thus need ment to the permit, even if the proposed revision or to review frameworks with a view to establish a level change does not seem to be material (ACES 2019). playing field for energy storage projects. As a new type of power system asset, electricity Taxes also provide an opportunity for supporting storage may not have established rules for permitting energy storage projects via tax credits. In the United in place. Under such circumstances, it is important that States, energy storage resources can also benefit from permitting agencies do not impose excessive require- certain federal tax incentives, including accelerated ments on developers. It can be useful, for reference depreciation. Tax rebates or incentive payments exists purposes, to propose benchmark processes, maybe in eight states in the United States: Arizona, California, borrowed from more standard renewable energy Maryland, Massachusetts, New York, Nevada, Vermont, projects (ACES 2019), but these should first be sense and Virginia (PNNL 2020). checked for their applicability to storage. For example, as electricity storage is unlikely to interfere with bird wildlife, certain environmental strictures could WHO AND HOW TO ENGAGE be adapted. Another relevant area concerns grid connection IN THE ROLL-OUT OF ENERGY codes. To ensure proper coordination of all components, STORAGE TECHNOLOGIES? a set of rules and specifications needs to be developed Energy storage technologies—notably batteries—bring and adhered to by all parties. This set of rules is referred substantial change for power systems. Using them to to as a grid code. Grid codes cover many aspects of their full potential can challenge existing regulatory system operation and planning (IRENA 2016). Grid setups and institutional arrangements that may lead codes may need to be updated to appropriately include to negative consequences for some stakeholders. In electricity storage—in particular battery storage. order to maximize benefits, ensure swift progress, and a The existence of a grid code is not in itself sufficient. broad consensus, early and comprehensive stakeholder Its enforcement is key. The extent to which grid codes engagement is crucial. Depending on the different roles are enforced depends on their legal status, which can of stakeholders, the following points are most relevant: vary across countries and jurisdictions. In some coun- Energy ministries need to articulate an overall tries such as Australia, grid codes are mandated and strategy for energy storage within the countries’ broader established by law; therefore failure to comply with grid energy strategy and policy goals. Setting credible and code requirements could result in fines. In some other ambitious targets can provide certainty for the sector countries, grid connection codes are not mandated in and ensure broad engagement. Depending on policy law; rather they are guidelines and applicable rules for targets, dedicated support instruments can be consid- generators connected to the system (IEA 2016a). ered. Ministries and/or energy agencies also play a Regardless of legal status, there should be a key role in organizing stakeholder engagement pro- process to verify that generators comply with grid cesses and ensuring appropriate funding for regulators, code requirements. Checking and certifying grid code 36  DEPLOYING STORAGE FOR POWER SYSTEMS IN DEVELOPING COUNTRIES: POLICY AND REGULATORY CONSIDERATIONS Box 4.2 Australia—Energy Storage Roadmap Preparation In 2016, Australia launched its Electricity Network Transformation Roadmap identifying the complex challenges facing Australia’s electricity system and setting a strategy for the future, as well as a deliverable plan to achieve it. The roadmap, which took two years of collaborative work, details milestones and actions to guide an efficient and timely transformation over the 2017-27 decade with modelling out to 2050. Energy Networks Australia and the Commonwealth Scientific and Industrial Research Organisation (CSIRO) developed the roadmap together with more than 200 different industry representatives. To advance constructive collaboration between stakeholders, a Customer Engagement Handbook was developed with input from consumer representatives and CSIRO social science experts. The Handbook provides practical, industry-endorsed guidance that supports energy network businesses to foster transparent dialogue with their customers. It identifies meaningful performance measures to assist in tracking engagement performance over time. The Handbook recognizes that engagement practice and expertise evolve over time and there is important ongoing work that should take place between all participants in the energy system to share experience and local expertise, fostering more efficient and effective engagement practices, and supporting the sustainability of engagement through corporate culture, organizational capability, and increasing engagement based on trust. Source: Authors based on Energy Networks Australia (2016/17). planners, and permitting administrations. Regional and contribution that energy storage can bring to meeting local policymakers can play an important role, ensuring systems needs. One important practical element is public support and helping craft policies that can speed upgrading prequalification criteria for providing system up decarbonization strategies and storage deployment services in order to level the playing field. in specific contexts (such as islands and isolated areas). The permitting process and the entities granting Regulators are crucial for levelling the playing field them are an often overlooked aspect of the project for electricity storage. This includes proactively updating development ecosystem. However, the permit can make regulations with a view to remove barriers to electricity the difference between successful implementation and storage and enabling fair remuneration of services that project failure. Prior to implementation, prospective could be offered by storage. They also have an import- permitting rules should be compared to international ant role in flagging inconsistencies within policy, market, practices in advanced jurisdictions with a view to con- and regulatory frameworks with a view to update frame- solidate the number of required permits (a ‘one-stop- works swiftly. shop’ approach). System planners have an important role in assess- Storage manufacturers can support success- ing the different use cases in which energy storage can ful roll-out in developing countries by considering help reduce overall system costs. This is likely to require these countries’ specific requirements and adapting upgrading of planning tools and creating detailed tech- product specifications and characteristics in line with nology databases that include relevant techno-economic countries’ needs. Relevant points include ease of characteristics. transportation and installation, simple maintenance System operators should balance their obligation to protocols, and resilience under adverse climatic ensure security of supply—which usually implies a more conditions. conservative approach—with recognition of the future POLICY, MARKET, AND REGULATORY CONSIDERATIONS 37 Project developers and investors can help to NOTES create a sustainable market environment by communi- 1. However, there exist a variety of ways in which this is imple- cating transparently regarding possible shortcomings mented in practice with different levels of market competition. in the regulatory systems and other ‘on the ground’ In some countries, for example, individual lines can also be experiences. Speed of implementation and a focus on built by private companies (following tenders) that may also lowest cost should not negatively impact performance retain ownership of the assets. and sustainability of installations. Investors can facilitate 2. Notable exceptions are flexibility/efficiency programs that are offered to customers by a vertically integrated utility. Under sustainable deployment by focussing on low-cost financ- such a program, the utility partners with customers and both ing options and minimizing the cost of capital. share the value of the flexibility / efficiency asset. 3. A database of policies for storage in the United States is available at https://energystorage.pnnl.gov/regulatoryactivities. asp  5 NEXT STEPS FOR POLICYMAKERS AND REGULATORS IN DEVELOPING COUNTRIES E nergy storage deployment is increasing rapidly and this trend is bound to continue. Battery storage use in power systems is accelerating against the backdrop of rapid cost reductions of 85% over the period from 2010 to 2018. While storage is not new in power systems— pumped hydro storage and thermal energy storage have seen significant deployment glob- ally decades ago—recent trends mark the beginning of a new phase, with battery storage seeing widespread use. Battery electricity storage is not a ‘silver bullet’ that can solve all and any challeng- es in 21st century power systems. Nevertheless, storage is opening an increasing number of oppor- tunities for developing countries to meet energy policy objectives at least cost. Battery storage is particularly well suited for developing countries’ power system needs in the era of large-scale deployment of low-cost VRE in these countries. Developing countries frequently feature weak grids. These are characterised by poor security of supply, driven by a combination of insufficient, unreliable and inflexible generation capacity to meet demand, underdeveloped or nonexistent grid infrastructure, a lack of adequate monitoring and control equipment, and a lack of skilled human resources and adequate maintenance. In this context, batteries can help enhance reliability. Deployed together with VRE, they can help displace costly and polluting generation while increasing security of supply. Establishing good market, policy, and regulatory frameworks for storage requires understanding costs and system benefits of energy storage. Storage can meet a wide range of use cases. Computer-based modelling tools allow identifying which use cases have higher benefits than cost (i.e., have a high system value). Policy, market, and regulatory frameworks then need to ensure that those use cases are also attractive from a business perspective. Policy, market, and regulatory frameworks often lack specific provisions for storage. Depending on how it is used, storage can act as a generator, a flexible load, and/or substitute grid infrastructure (by improving the use of existing networks). This versatility challenges existing legal setups, often leading to incomplete and inconsistent frameworks. This means that policymakers and regulators have an important role in adjusting frameworks to make the best of the opportunities storage brings. • Policymakers can facilitate sustainable deployment by: • Adopting a system view on energy storage: Battery storage changes how power systems need to be best planned and operated. This means that policymakers should adopt a comprehensive approach when adjusting policy, market, and regulatory frameworks. This means less focus on single, high-profile projects and an increased emphasis on establishing a robust framework based on data. • Identify what services are needed—and allow flexibility on how these can be provided: This report highlights the different use cases needed in power systems. The more clarity there is on what kind of services are needed for the system, the more it is possible to identify the best technology solution to meet this need at least cost. By contrast, trying to push a specific solution or technology as a means in itself can lead to inefficiencies and challenges in meeting actual system needs. In turn, this calls for establishing sufficiently independent (and sufficiently resourced) planning organizations. • Setting credible and ambitious targets: This can provide certainty for the sector and ensure broad engagement. Depending on policy targets, dedicated support instruments can be considered. 38 NEXT STEPS FOR POLICYMAKERS AND REGULATORS IN DEVELOPING COUNTRIES 39 • Regulators can facilitate sustainable range of jurisdictions and country contexts. International deployment by: sharing of experiences, of what works and does not work, is particularly valuable in such a situation. Consequently, • Taking an enabling approach to technology this report can only be an intermediate step and further innovation: Regulations cannot foresee work is required. Possible next steps in this area include: technology progress and new developments may arise in an area where policy is not fully clear or • Identification of regulatory frameworks and consistent. Regulators have an important task in procurement instruments tailored to standard ensuring reliability and affordability of the system. use cases in weak grid contexts: As more This core mission can be compatible with driving experience is collected, it is very likely that innovation by taking a positive view on change ‘typical’ application cases can be identified to established structures and procedures. Such with a more standardized set of remuneration an innovation friendly approach can help identify models and wider regulatory specifications. how existing rules and regulations can allow for Examples include hybrid VRE plus storage new technologies to be deployed efficiently. projects with guidelines on how to compare and fairly remunerate projects with different shares of • Identifying and highlighting regulatory gaps storage, and provide remuneration that secures and inefficiencies: It is often regulators who see investments at low cost. where existing policy, market, and regulatory frameworks are no longer fit for purpose. It is • Cataloguing non-economic barriers and important that regulators are empowered to solution strategies: As deployment of battery systematically communicate this knowledge in storage becomes more widespread, a more order to inform policymakers and the general complete picture of the various non-economic public of what changes are needed. Market rules barriers can be obtained via surveys with project should be clear about ownership and participation developers and other relevant stakeholders. of storage in the market, enabling remuneration Such a survey could help accelerate learning in line with the value offered to the system. across countries and catalyze uptake of best- practice solutions. • Working with government and industry to find new solutions: Regulators have an • Financing instruments for battery storage: interface with both government and industry. Battery storage requires low-cost financing to This positions them well for also developing deliver electricity services at least cost. Sharing new solutions and proposals, which can help to best practices for financing in developing coun- achieve policy objectives via market responses. tries is key to fast track uptake and reduce costs. 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