An article by RenewEconomy’s Sophie Vorrath and Giles Parkinson brought us some good news about the big battery, the Hornsdale Power Reserve, which Tesla built in South Australia late last year. It tells us that the battery has had a profoundly powerful effect on electric power prices in the state. And that effect will be very positive for the customers who are tied into the local grid.
In the article, Godart van Gendt, a McKinsey & Company partner, is quoted as telling the Australian Energy Week conference in Melbourne, “In the first four months of operations of the Hornsdale Power Reserve …, the frequency ancillary services prices went down by 90 per cent, so that’s 9-0 per cent.” Van Gendt added, “And the 100-MW battery has achieved over 55 per cent of the [frequency control ancillary service] revenues in South Australia.”
The article goes on to say that South Australia put up $50 million (Australian dollar is about $0.76 US) for the battery, but it saved $35 million in the first four months of its operation.
That is all pretty amazing. But the figures do not tell the whole story. We should start with an explanation of what is meant by frequency control ancillary services or FCAS (with apologies to those who already know all this).
Retail customers often have the idea that when they buy power, the price they pay for electricity is a simple markup from a steady and predictable wholesale price, which is in turn based on the costs of coal, gas, operating expenses, and so on. This idea is almost entirely wrong.
A so-called baseload power plant, whether it is fueled by coal, natural gas, or nuclear materials, is not merely huge, it is an inflexible leviathan. Because of its size, it may take days to get its boiler to full pressure. It cannot be ramped up and down to meet changes in demand.
Meanwhile, the demand goes up and down in somewhat predictable waves. It is typically high during working hours, especially during summer heat waves, and it is typically low at night, when most people are asleep. The waves may be regular, but their changes cannot be met by baseload power.
Historically, the combination of inflexible power supplies with highly variable demand has been resolved through a somewhat complicated system for buying and selling power, with variations from one country to another. Typically, there are long-term power contracts, promising power at a price over periods that might be many years long. There are shorter-term contracts, looking at delivering power a year, a month, a week, or even a day, into the future. Since even these do not make it possible to match power to demand, there are spot prices for immediate delivery that are bid at intervals; in some places the intervals are as short as five minutes.
The longest-term contracts are typically for low-cost power. Those generated by wind and solar systems can be priced at $20 per megawatt hour ($/MWh) or even lower. A report of record-low prices is in a CleanTechnica article by Christopher Arcus. By contrast, the prices for power from baseload natural gas, coal, and nuclear power plants can come in at a multiple of that, and this is necessary in part because there is no guarantee on the cost of fuel.
At the other end of the spectrum are peaking plants, usually powered by natural gas, which are set up only to deliver power when the demand is exceeding the supply. These plants need to be maintained even when they are not needed, on a ready basis. Some operate as “spinning reserve,” running without actually putting power on the grid just so they can respond to demand changes as quickly as possible. Clearly, it is only fair that they charge high prices for power, possibly $250/MWh.
In emergency situations, the price of electric power can go to amazing heights. When a major baseload power plant goes off-line suddenly and without warning, power prices can go to over $10,000/MWh in minutes. Another of Giles Parkinson’s articles on RenewEconomy provides an example, in which Australian spot prices hit $14,000/MWh (Australian) when two large gas-burning power plants failed.
On the other hand, when the power supply exceeds the demand, spot prices can go into negative territory. Anyone who is set up to buy wholesale power can absorb the excess and be paid to take it. Batteries and pumped storage facilities do that.
Power generators often do not wish to lock themselves into contracts for production at a low, fixed rate. For example, when a contract between the state of Vermont and the Vermont Yankee nuclear plant had to be renewed in 2012, the owners of the nuclear plant offered to supply half of the amount of power Vermont had been buying from them at $65/MWh, with the remainder at spot prices. Vermont went with hydropower at $60/MWh for the entire amount instead. Vermont Yankee closed not long after that because it was no longer economical to keep it running.
Like Vermont Yankee, many power generators wish to maintain only some portion of their power under contracts at a low fixed price. With a contract for power at a low price, they can get a steady income, but they do not make a lot of money on it. They sell the rest of their power on the short-term or spot markets, because they believe they can get higher income there.
And this is where Elon Musk’s harpoon comes in. Tesla’s Hornsdale Power Reserve, by cutting the income available from spot power prices, has not merely cut into the incomes of peaking plants and other short-term suppliers. It has also eliminated some options available for baseload generators make profits.
When the high prices of spot power are pushed down, baseload power plants will no longer find the spot market profitable. In order to keep baseload plants profitable, the baseload power plants will have to sell their power under contracts at higher prices.
Meanwhile, with batteries like the Hornsdale Power Reserve, power from solar and wind power will be more valuable, because with battery backup their power can be used to supply an increasing share of baseload power. And that increase in value, which might not necessarily be reflected by an increase in price, makes their power all the more attractive.
One of the interesting things about this development is that it did not happen so suddenly because of market forces. It happened the way it did because Elon Musk felt frisky enough to place a $50 million bet that he could build his hundred-megawatt battery in a hundred days. He offered a bet too good for South Australia to miss out on, and the state committed $50 million in the big battery. As it happens, the state benefited from Musk’s win; it saved $35 million in the first four months of operations. And that is a pretty short return on the investment.
Fossil fuels have been harpooned.
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