Role of Long run contracts and Ancillary Services

markets for E.S. Deployment

Energy Storage for Sustainable Development, ECLAC / Rio de Janeiro, Brazil, April 17th 2015

José Luis Lima R. Research Associate Intelis, U de

Chile

Organization

• Common risks in Low Carbon Projects

• Sources of income for Low Carbon Projects

• Sources of Income: Renewable Energy Certificates

• Sources of Income: Long Run Energy Contracts

• Sources of Income: Ancillary Services Markets

• Conclusions

Common Risks in Low Carbon Projects

Source: World Bank (2015)

Sources of Income for LC Projects

Income mainly comes from spot/contract markets (price/quantity riks).But spot market shows huge price volatility => renewable energy certificates / contracts - feed-in-tariffs (price stabilization)

Source: Green Rhino Energy

Renewable Energy certificates (Chile)

Chile approved Law 20.257 in 2008 to incentivate Renewable Energy entry. A combination of high spot prices (years 2009 to 2014) + increasing transactions of REC fast incorporation of Renewable Energy technologies in both Systems.However, mean transaction prices of REC are declining:

12,5 USD/MWh in 2012 – 11,7 USD$/MWh in 2013 - 8,1 USD$/MWh in 2014

Mean Marginal Costs: SIC (blue) / SING (yellow)

Source: National Energy Commission (2015)

Projects under construction: SIC (up) / SING (down)

Long Run Contracts (Chile)

Long run private contracts stabilize spot prices and are not subject to political risks like feed-in-tariffs. / Easier to get access to credits.

Many countries in LA have alredy long run contract auction systems to supply small clients in electric utilities (Brasil, Colombia, Perú, Chile, for example).

In 2014, Chile modified their long-run energy contract auction system to allow for specific tenders for Renewable Energy.Main characteristics of the 2014 auction (ERNC + conventional):15 years contracts to supply electric utilities, starting at 2016 or 2017.Hourly blocks:• A: 00:00-08:00 / 23:00 – 24:00• B: 08:00-18:00• C: 18:00-23:00 (peak hour)

Results:• 25% of total contracted energy were ERNC.• 555 GWh/year of Renewable Energy, concentrated in block B.• Wind / Photovoltaic and small hydro power plants were financed.• RE prices were lower than conventional energy prices (lowest 80 USD/MWh vs

lowest 109 USD/MWh)

Long Run Contracts (Chile)

Therefore, some Renewable Energy technologies are competitive at current prices in Chile (with carbon based power plants as the alternative conventional technology). However, this may not be the case for other LA countries or regions, where a natural gas-fueled power plant is the most competitive conventional technology.

Source: Valhalla Energy (2015)

Mean energy cost (US$/MWh) vs Capital cost (US$/kW) of solar, ES and carbon technologies

Long Run Contracts

However, Energy Storage Technologies may require further innovation in current regulation, like:• Recognition of a capacity payment• Ancillary Services market.Example: Espejo de Tarapacá (SING, Chile)

Source: Valhalla Energy (2015)

Espejo de Tarapacá Pumped Hydro Storage Project

Ancillary Services Market

A major problem with RE technologies is their increasing pressure for ancillary services from the electric system (intermittation).On the contrary, Energy Storage Technologies may provide various ancillary services, even for RE technologies.

Source: Hinds and Boyer-Dry (2014)

Allocation of Storage Use-Cases across Grid-Domains

Ancillary Services Market

Moreover, it is expected that Energy Storage Technologies provide an important amount of ancillary services in electricity markets worldwide.

Source: Navigant Resources (2014)

Installed Energy Storage for the Grid and Ancillary Services, by Application, World Markets

Ancillary Services Market (EEUU/Chile)

The EEUU has been developing and ancillary service market that allow Energy Storage technologies to sell their services to the system (FERC Orders No. 755, 890).

Chile has recently recognized a (partial) compensation for primary frequency regulation, an above-marginal cost compensation for secondary frequency regulation and voltage regulation, and a cost-based compensation for black-start capability.

Energy Storage technologies require further innovations in the regulation of the electricity sector, allowing markets for ancilliary services at the transmission and distribution grid levels.

Conclusions

Long run private contracts stabilize spot prices and are not subject to political risks like feed-in-tariffs.

Countries in LA that have long run contract auction systems to supply small clients can use them to encourage Renewable Energy and Energy Storage investments.

Energy Storage Technologies may provide various ancillary services, even for RE technologies.

Energy Storage technologies require further innovations in the regulation of the electricity sector in LA, allowing markets for ancilliary services at the transmission and distribution grid levels.

Role of Long run contracts and Ancillary Services

markets for E.S. Deployment

Energy Storage for Sustainable Development, ECLAC / Rio de Janeiro, Brazil, April 17th 2015

José Luis Lima R. Research Associate Intelis, U de

Chile