Storage:
Changing the Nature of Electricity If the electric car has the capacity to turn the oil market on its head, efficient electricity storage will be no less revolutionary for power markets. It would change the very nature of electricity as a commodity and thus the way it trades. It would reduce the amount of required new generation capacity, and challenge the notion that gas-fired power plant is the best fit with intermittent renewables.
By Ross McCracken I
nterest in developing efficient methods of electricity storage has intensified with the growth of renewable energy sources. Effective storage is seen as a means of overcoming
the adverse effects of intermittency. Electricity can, of course, already be stored, but the only economic utility-scale method is pump storage, where excess electricity is used to pump water back up into reservoirs for re-use in hydroelectric power stations. This also requires particular geological features to be present. Other technologies under development hope to create
storage that is not location specific but still utility scale. They include an array of different battery types, flywheels, super capacitors, heat engines and fuel cells. All have their pros and cons, but none yet appear sufficiently efficient for wide scale deployment. Nevertheless, it would appear to be only a matter of time before electricity storage becomes a widespread feature of modern power systems.
Storage & Trading The ability to store a commodity has a profound impact
on the way it is traded. The key factors that govern storage are perishability, market structure and cost, which includes financing, insurance and warehousing, and a scarcity premium. The latter reflects the price people are willing to pay to hold larger than necessary inventory in case prices rise or the commodity simply becomes unavailable. It’s OK to run out of strawberries, for example, but not so good if your power plant runs on U238. For markets where the commodity is difficult and expensive to store, there is a greater incentive for the market to clear because any oversupply quickly incurs heavy costs. Perishables, for example, have to clear before they become valueless. Oil and gas are low value, high volume commodities and thus expensive to store. Metals, by contrast, are the opposite, high value, low volume commodities, which are easy and cheap to squirrel away. The typical market structure for oil is backwardation – prompt
prices are higher than for delivery of the commodity at a later date – because the high costs of storage create a large incentive for the market to clear. If the market struggles to clear, prompt prices fall below prices for later delivery. This “contango” is the opposite of backwardation. When the contango becomes larger than the cost of storage, inventories start to grow. This acts as
worldPower 2010
a stabilizer in removing excess supply from the prompt market, but it also tends to depress prompt prices further because traders know that the oil will still eventually have to be sold.
Baseload Winners Electricity is a unique commodity for the simple reason that
it cannot be stored easily. It is in effect instantly perishable, so the market for electricity must constantly clear. That’s not to say traders cannot trade electricity forward, but it is not the commodity that is traded, it’s the capacity to produce it. An oil or gas well will keep producing regardless of intra-day changes in price, the flexibility in the system is in whether the oil or gas is sold or stored. In extreme circumstances, oil and gas wells will be shut in response to price declines sustained over weeks or months, but with reluctance as there are costs incurred in doing so. These stop-go costs are a constant feature of the electricity sector. For electricity, the generator has to respond to intra-day
The ability to store electricity ... would change the very nature of electricity as a tradable commodity
price signals because if there is oversupply or undersupply of electricity, the stability of the system is threatened. The producer with the highest marginal costs should shut down first, although different means of electricity generation have different abilities to respond. Combined Cycle Gas Turbines are very flexible and can respond within seconds if held on spinning reserve. By contrast, a combined heat and power coal plant may have very little flexibility as it has a heat load to serve and must produce electricity at the same time. Nuclear is also inflexible, owing to the high cost of stopping and starting the process. Throw into this mix intermittent power sources, and the desirability of flexible response increases. However, the ability to store
electricity with the same ease as oil, or even gold, would change the very nature of electricity as a tradable commodity. While storage is normally discussed with reference to the advantages for intermittent energy sources, baseload generators would in fact benefit most. The most efficient way to run a nuclear power station is to keep it running constantly. With storage, as prices fall towards or below breakeven, it would make sense to withhold power from the market, supporting baseload prices, and store it, releasing it later at peak demand when prices are higher. Depending on the storage capacity, a nuclear plant would
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