ACaseStudyofGrid EnergyStorageinNYISO

KenDitzel December14,2011

The New York ISO (NYISO) has been the first market to have emerging electricity storage technologies commissioned at commercial scale and competing with conventional generators
AES Energy Storage Facility Located at AESs Westover coal plant in Johnson City, NY (using existing infrastructure) A123 Lithium-Ion technology 8 MW in operation as of January 2011 15 minutes of capacity 12 MW planned addition

Beacon Power Facility Located in Stephentown, NY Beacons own proprietary flywheel technology 8 MW in operation as of January 2011 Full 20 MW commissioned in June 2011 15 minutes of capacity 2 flywheels of the 200 have failed

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These facilities operate in the frequency regulation market, helping to maintain the grid at a consistent 60 Hz operation
NYISO Frequency Reg Overview
Frequency Regulation is part of the NYISO Ancillary Services market which includes:
Operating Reserve and Energy Imbalance (using market-based pricing) Scheduling, System Control and Dispatch, Voltage Control and Black Start (Cost-based services)

Market Size
Regulation market size is within the range of 175 to 275 MW-h, 1-2% of the energy market Day-ahead and Real-time NYISO operates a co-optimized energy, capacity, and frequency regulation market.
NYISO considers bids for all three markets and selects the market clearing price for each market that provides the least cost to the entire system in the most reliable fashion.

Participation in the frequency reg market commits generators to raise or lower output as necessary using automatic generation control (AGC)
Up Reg (move output up to increase frequency to 60 Hz) Down reg (move output down to decrease frequency to 60 Hz)

Electricity Storage
In 2009, NYISO allow limited energy storage resources (LESR) to start participating in day-ahead and real-time markets. NYISO does not compensate regulation participants based on their performance, that is the speed at which they can respond and the accuracy of their response.

Generators typically submit bids based on the concept of lost opportunity cost (LOC).
LOC is the revenue that generators would forgo from the energy market

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The AES and Beacon Power NYISO projects developed quickly from announcement to operation
Town of Union Const. Permit granted System CPCN & EWG Impact Status Study Granted Approved Project breaks ground

$17.1 MM LG approved 12MW addition to be completed

Announcement
NYISO 20MW Interconnection Request Filed Application for Const. Permit

Operating
8MW system on-line

2007

2008

2009

2010

2011

Announces planned 20MW project

DOE Environmental Approval

PSC Construction Approval

$43 MM LG approved

8MW system on-line

Announcement
Stephentown environmental approval and special use permit
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Operating
Awarded $2 MM from NYSERDA Project breaks ground Interconnection Agreement signed 12MW addition completed

The historically attractive frequency regulation market was the primary driver leading to commercialization success
Attractive Regulation Market Timely Federal Support
Provision of LGs Granting of EWG Approval of tariff modifications Timely approval of environmental permits Highest average prices in U.S across all markets from 2006 -2010: ~$40-60/MW-h

Strong State Reg. & Leg. Support

Commercialization Success
Objective Project Developers Efficient Local Backing

Funding and support by NYSERDA Exemption of PSC approval Quick approval of CPCN

Focus on leveling not tilting the playing field

Quick approval of const. & envir. permits Efficient process to work through local concerns

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While NYISO regulation prices had been the highest across the U.S. Markets since 2006; they recently have converged with other markets
Frequency Regulation Prices in U.S. Markets

70 60
Frequency Regulation Prices ($/MW-h)

NYISO - RTH PJM - RTH ISO-NE - RTH CA Reg-Down DAH CA Reg-Up DAH

50 40 30 20 10 0 2005 2006 2007 2008 2009

NYISO prices have been higher due a combination of natural gas and oil prices and legacy generators (expensive oil and gas steam units) sticking around to collect capacity payments, participate in ancillary services markets, and to receive real-time energy payments

2010

2011

Source: Energy Velocity, CRA Analysis

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The convergence in prices mainly has been due to a steep drop in gas prices; new additions and flat load growth have been factors as well
Fuel Impacts Market Impacts NYISO Regulation and Gas Prices
14.0 30-day Trailing Henry Hub Prices ($/MMBtu)

80.0 30-day Trailing DA Regulation Prices ($/MW-h) 70.0 60.0

12.0

Regulation
50.0

10.0

8.0 40.0

Reg. prices have been ~70% correlated with gas since 2008 670 MW Empire Gas CC came on-line Oct 2010 2011 annual load is flat at about 2006 levels

Natural Gas
30.0 20.0 10.0 0.0 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11

6.0

4.0

2.0

0 .0

Source: Energy Velocity, CRA Analysis

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What were once attractive projects during the concept and development phase are now uneconomic
NYISO Storage Breakeven Economics (Illustrative) 120 Frequency Regulation Prices ($/MW-h)

100
Economic Rents (+ NPV) ROI = WACC (0 NPV)
2007 NYISO Avg. Frequency Regulation Price

80

60
Storage Cost Range*

40

Uneconomic Investment (- NPV)

2011 NYISO Avg. Frequency Regulation Price

20

0 500 750 1000 1250 Capital Cost ($/kW) 1500 1750

* Storage Cost Range is defined by future Li-ion costs at the lower end and current flywheels costs at the higher end; both are based on 15 minute capacity
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FERC Order 755 is expected to improve the economics for storage devices by at least a factor of two due to their higher performance
Generator vs. Flywheel AGC Response FERC Order 755
Issued on Oct. 20th; Federal Register on Oct 31st. Remedies undue discrimination in the procurement of frequency regulation in the organized wholesale electric markets Commission found the following: Current frequency regulation compensation practices are unjust, unreasonable, and unduly discriminatory or preferential Current compensation methods fail to acknowledge the inherently greater amount of frequency regulation service being provided by faster-ramping resources Final Rule requires RTOs and ISOs to compensate frequency regulation resources in two parts: A capacity payment that includes the marginal unit's opportunity costs A payment for performance that reflects the quantity of frequency regulation service provided by a resource when the resource is accurately following the dispatch signal Expectation is an approximate doubling in the capacity payment to fast ramping devices

Source: Beacon Power

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If total compensation to fast-ramping devices doubles from 2011 levels, some storage technologies would become economic in NYISO
NYISO Storage Breakeven Economics (Illustrative)

120
Frequency Regulation Prices ($/MW-h)

100 80 60 40 20 0 500 750 1000 1250 1500 1750

Capital Cost ($/kW)
Storage Cost Range

Economic Rents (+ NPV) ROI = WACC (0 NPV)

Uneconomic Investment (- NPV)

2x 2011 NYISO Avg. Reg Price 2011 NYISO Avg. Reg. Price

Source: CRA Analysis

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What lessons can be learned and leveraged going forward?

Give careful consideration to historical and future market conditions

Understand the underlying drivers of historical regulation prices (whats driving the marginal prices?) Consider a range of future regulation price scenarios using the drivers as levers Select quickly deployable storage technologies to capture rents while market conditions are favorable

Think about financial hedging/ optionality to protect the investment

Hedge fuel prices in advance of commissioning if they are determine to be a major driver for frequency regulation prices Make assets re-deployable (ability to move them using truck, rail, and/or barge) in case the investment turns sour Consider whether additional value is possible from a future extension of the storage offering (e.g., in the energy and capacity markets) as technology costs decline Have a portfolio approach (instead of a single project focus) to average out bad bets

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Ken Ditzel Charles River Associates 1201 F St. NW Suite 700 Washington, DC (202) 662-7821 kditzel@crai.com