What do Gerald Ford, a fossil-fuel plant on the Houston Ship Channel, the second-largest utility in Vermont, and the California legislature have in common?
They each ushered in a major national market transformation in the U.S. power sector over the last 40 years, at a rate of one per decade.
And in 2016, right on schedule, that once-per-decade cycle repeated. This year, it was batteries that made a transformative advance into both the competitive and vertically integrated power markets.
A quick review of how competition entered the power industry, decade by decade:
- 40 years ago: Energy efficiency bills signed by President Ford established incentives to encourage demand management.
- 30 years ago: Generation competition launched as the AES Deepwater co-generation plant began operating in Houston under PURPA.
- 20 years ago: Retail competition launched with Green Mountain Power, then the second-largest utility in Vermont, offering renewable energy choices in the first retail pilot programs in New England.
- 10 years ago: Solar competition launched as California’s legislature passed SB1 supporting the California Solar Initiative, thus creating terminal market velocity for distributed solar to orbit across the U.S. -- the ultimate form of retail choice.
- 2016: Battery competition hits early, widespread market penetration, culminating with FERC’s November efforts to establish national standardization for energy storage participation in organized wholesale markets.
With four momentous market transformations under our belts, what have we learned that can inform industry and advocates’ efforts on the next stage of power market design evolution including central and distributed storage? Here are five conclusions.
1. Market transformations reinforce each other
The combination of 40 years of market transformation creating customer choice, power market competition and renewable energy are now in an interactive dance in both restructured and regulated markets around the country. Energy storage delivers the linchpin -- customers can move from synthetic 100 percent renewable energy products, as measured by annual energy use, to fully delivered, onsite renewable energy.
2. Choice can't be put back in the bottle
The perception of retail choice market stagnation 15 years ago is deceiving if you ignore the quiet advance of the Silicon Valley and big-box purchasers who, this year, established the Renewable Energy Buyers Alliance. In addition, with 2016 election victories in Nevada and Florida, customers and voters demonstrated that choice and solar access can be cracked open in deeply conservative, or even hostile, regulatory environments.
3. The pace of change accelerates with each transformation
Utilities, competitive new entrants and regulators learn from each market transformation and move more quickly with each market advancement. Consequently, exit fees from the PURPA days are recast to apply to net-metered solar customers, while power industry veterans working in solar look two chess moves further out to set up the ultimate threat: adding energy storage to solar systems and disconnecting load from the utility cash register, otherwise known as the grid.
4. Axiomatically, costs decline over time with mass-manufactured technology, including solar and batteries
Over time, cost per kilowatt-hour inevitably declines for mass-manufactured technologies driven by cycles of learning and economies of scale in capital expense, supply chain and distribution. Lower costs drive demand up, revving up the virtuous cycle of manufacturing scale, lower cost and higher demand.
However, equally important is the other side of the mass-manufacturing technology coin -- the price axiom. A mass-manufactured product is generated by factories using multiple shifts per day, every day of the year, to allocate capital costs. Thus, a perturbation in demand will drop prices first to try to maintain factory utilization.
The result can be abrupt and stunning to power market participants unfamiliar with technology price cycles. During the third quarter of 2016, solar modules saw prices plummet by a third, devastating the earnings of solar manufacturers and driving accelerated development in emerging solar markets. And that wasn’t the first time -- nor the last we’ll see that pricing dynamic.
The same effect will be seen in batteries. Both the consumer device and electric vehicle markets will dominate battery sales volumes for the next several years relative to stationary storage serving the grid or buildings. Thus, theoretically, a perturbation in EV battery demand a few years from now will quickly and potentially radically change stationary storage prices.
5. Markets can move faster than regulatory calendars
This point is the inevitable amalgamation of each of the points above. The velocity of market change is now determined by customer demand and how that relates to supply. Regulators operating on a schedule of years per proceeding end up playing catch-up after customers are already into the adoption curve. For example, in a recent AES/IPL filing at FERC over MISO storage tariffs, market participants argue that MISO’s market rules are ineffective for deriving the full benefit from storage technology.
This case reinforces the check-out-the-neighbors’ dynamics of the U.S. power markets. Laggard markets will be pulled toward the positive outcomes in the leading markets by the demands of customers and suppliers who can look across arbitrary market boundary fences.
So what do these conclusions suggest for the latest of our decadal market transformations? Energy storage will come to power markets faster than you think.
Why? Because storage markets build on the results and learning from prior market transformations. They use mass-manufactured technology that is scaling rapidly due to demand in other segments. Thus, storage adoption will push the regulatory community to catch up. It will also challenge the industry and advocacy communities to organize and coordinate -- not just soon, today!
Fundamentally, energy storage will move quickly because customers want it now as prices are hitting the competitive price sweet spot in today’s bids and tomorrow’s planning exercises. Energy storage is a resource that utilities and grid operators intuitively understand: “Imagine pumped hydro that you can use anytime, anywhere, at any scale!” The response: “Can I order it today?!”
End-use customers, transmission and distribution planners, utilities with goals to serve the EV charging market, will all drive rapid energy storage market adoption.
Thanks to battery supply dynamics, which contrast sharply with the solar market a decade ago, stationary storage market adoption drafts behind two other large and fast growing markets: consumer devices and electric vehicles.
Today’s leading battery manufacturers are large, well-funded companies that can scale manufacturing without pushing an IPO through Wall Street’s pipeline, as was necessary for small-scale solar companies. Yes, the exact form factor of the battery pack may differ between market segments, but not enough to keep suppliers from pivoting within a quarter or so to move supply between segments to align with customer demand.
Thanks to 40 years of market transformation experience, we are well on our way to the inevitable dominance of renewable energy -- not just in new capacity additions, but in the percent of annual energy consumption in the power sector.
Regardless of which party is in control of congress, the White House or the governor’s office, markets advance as customers seek to meet their preferences for affordable, clean, reliable power. Attempting to squash customers’ choices leads to backlashes like those in Nevada and Florida.
With energy storage, utilities and regulators have the experience to decide how to harness the opportunities that storage offers as incumbents navigate a path toward the next transformation, expected in 2026.
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Julie Blunden serves as the board chair for CalCEF Catalyst and CalCharge, an executive in residence at the University of Colorado Denver's Business School's Global Energy Management Program, and advises clients through her consulting practice.