Improving the Value of Wind Energy Generation Through Back-Up Generation and Energy Storage
Publication Number: CEC-500-2005-183
Publication Date: December 2005
PIER Program Area: Renewable Energy Technologies
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Wind turbine generators are emerging as a competitive renewable resource for electrical generation. As the capital costs have decreased and reliability has increased the cost of energy from wind turbines has declined to the range of $0.0288 to 0.0495/kWh [Wiser and Kahn]. On a cost per kWh generated, this is fairly competitive with other sources of electric power. However, wind generators are intermittent generators. Unlike conventional generators which reliably deliver a committed level of power, wind generators are dependent on wind speed which cannot be predicted exactly from hour to hour. As is discussed below, this can incur additional costs for the operating of the electric grid and complicates the correct structuring and financial compensation for wind generators. The reliability of wind generation can be improved by operation in conjunction with a back-up generator or with an energy storage system. Operating this way can improve the revenue to the wind generator, but at the cost of installing and operating the additional capacity. This study evaluates the potential for overall improvement of the financial performance of a wind generator using back-up generation or energy storage.
Improving the economic value of wind generation
The economic viability of wind generation may be improved by designing a system that ensures that the wind generator provides the maximum possible value to the overall system and ensures that the owner of the generator is compensated for the value that he provides.
The value provided by a generator can be measured by the "system marginal cost" (SMC). This is the cost of increasing the system's power generation by a small increment. At the same time, it is generally equal to the savings due to decreasing generation by a small amount [Stoft]. When a wind generator comes on line, it reduces the load on the other generators and the system marginal cost measures the saving due to that reduction. In principle, the SMC is the amount that a wind owner should be compensated for generation. In these analyses we have used a grid-wide marginal cost (or price) to make the evaluations. It should be noted that the system marginal cost, in fact, varies from place to place on the grid since it is partly determined by conditions on the transmission system. Often local conditions of congestion will cause the marginal value of electricity to be larger than the grid-wide value in that local area. In such cases, the value of either back-up generation or storage can be greater than that found in this study. Such local phenomena would have to be evaluated on a case-by-case basis.
The value of an intermittent generator is reduced by the fact that its power is not "firm"—it is intermittent so that the wind generator output will often deviate from the committed level (either greater than or less than). Wind forecasting can reduce, but not eliminate these deviations. The system operator must manage these deviations by maintaining reserves and by dispatching other generators as the power from the wind generator deviates from the committed level. In theory, this extra cost should be borne by the wind generator to the extent that it is incurred. At low levels of wind penetration, this is not a substantial problem since the amount of variation due to the wind generators is similar to the amount of variation in demand that the system operator must already take into account. At higher levels of penetration (say, above 15% of total capacity [Watson et al]) the variability of the wind may require that additional costs be incurred. As is discussed below, some contracts that wind generators operate under penalize the generators for generating less than the power level committed. This penalty in part compensates for the cost of dealing with the intermittent output and in part is intended to encourage generators to meet their commitments.
Two approaches to improving the value of wind generation are explored here. Both approaches aim to improve the reliability of the wind generator by ensuring that its power output is closer to the level that it bids each hour. The first approach uses a back-up generator (typically a fossil generator) that will start producing if the wind power drops below the bid level. Conceivably with a suitably priced generator it could be possible to provide enough back-up power to avoid most of the penalties. The second approach uses energy storage to increase the reliability of the wind generator. The storage system can provide power in those hours when the wind generator fails to meet its bid. It has the added possibilities of taking in excess wind for sale later and arbitrage between low value and high value hours.
Both storage and back-up generation improve the reliability of wind generation. If reliability is improved sufficiently, wind generators may qualify for capacity payments. This report evaluates the potential financial benefits that capacity payments might have. However, it is beyond the scope of this report to determine whether or not capacity payments would actually be provided.
Overview of the report
The next two sections of the report describe the environment within which a wind generator must operate. A key issue is the type of contract. In this study we consider the "Intermittent Resource" and the "Firm Capacity" contracts. Since the contract determines the way that the generator is compensated, it also determines the way that the generator is structured and operated in order to maximize return to the generator. Each of the subsequent analyses examines the optimal configuration, operation, and financial return given a specific form of contract.
The "Intermittent Resources" contract was designed recently to accommodate intermittent resources such as wind. After the discussion of the types of contracts, the report evaluates the financial performance of a wind generator under this contract. This provides a benchmark for evaluating each of the other approaches to improving the wind generation.
After evaluating the Intermittent Resources contract, the report evaluates the use of back-up generation and storage to improve wind generation performance under a Firm Capacity contract. In each case we first explore the optimal operation and configuration of the system to maximize the return to the owner of the wind generator. We then assess the financial performance of several configurations, including the optimal configuration.
The sections on back-up generation and storage pay particular attention to the financial viability of those approaches. A number of optimistic assumptions are made to determine if there are some plausible configurations that are financially viable in the sense of having an acceptable financial return. In addition, the financial performance of the approaches are compared to the financial performance of the intermittent contact. If the proposed configurations cannot meet the financial performance of the Intermittent Resources contract, they are unlikely to be adopted.
This white paper evaluates the use of back-up generation and energy storage for improving the economic performance of wind generation. Since wind is an intermittent resource, a generator cannot be assured of producing the power levels as bid in any given hour. Under a Firm Capacity contract, a generator will be penalized for under-generation and will not be able to sell excess power when there is over-generation. Both back-up generation and energy storage can, in principle, reduce the under-generation and storage can provide a way to sell excess power. This analysis examines the economic performance of these approaches. For both approaches the optimal operating procedures and system configurations are developed assuming operation under a Firm Capacity contract. The rate of return on investment in back-up generation and storage are then determined. These are compared to the financial performance of a wind generator operating under an Intermittent Resources contract (which has no penalties for under or over-generation). Since the addition of storage or back-up generation will improve the reliability of wind generation, such arrangements may qualify for capacity payments. The financial benefits of such payments are also evaluated. It is found that, even under fairly optimistic assumptions, the energy storage approach is unlikely to perform as well as operating under an Intermittent Resources contract. Under some optimistic assumptions, the back-up generation approach does approach the rate of return for operation under and Intermittent Resources contract. However, it may be difficult to realize these assumptions in practice. Adding capacity payments also provides significant financial benefits, if they can be made available.
In both cases, the analysis has assumed that there is unconstrained access to the grid. Therefore the prices for electricity reflect grid-wide conditions. There can be locations on the grid with constraints resulting in congestion. This would change the electricity prices, possibly improving the financial viability of these approaches in a local area.
Table of ContentsAbstract iii
Table of Contents iv
Table of Figures vii
Table of Tables x
1. Introduction 1
Overview of the report 3
Intermittent Resources contract 5
4. Financial performance of a wind generator under the Intermittent Resources contract 8
5. Use of back-up generation to firm power under a Firm Capacity contract 9
Analysis of use of back-up generator to firm capacity 12
Potential benefits of capacity payments for wind with back-up generation 18
Optimization and financial analysis of storage system operation and configuration 24
Components of storage system 25
Optimization of operation to derive technology-neutral results 25
Use of technology-neutral results to evaluate specific technologies 28
Calculation of internal rate of return to evaluate specific technologies 30
Assumptions about storage operation and storage technology costs 30
Basic assumptions about configuration and operation of storage system 30
Storage technology costs 31
Evaluation of stand-alone storage system 33
Stand-alone storage system without charges for transmission and losses 35
Evaluation of storage operating with wind under Firm Capacity contract 39
Evaluation of smaller storage system (0.1 kW charge/discharge capacity) 40
Evaluation of larger storage system (1 kW charge/discharge capacity) 44
Potential financial benefits of capacity payments for a 1 kW storage system 46
Comparison of operations between stand-alone storage system and storage system operating with wind generator 48
8. References 51
Appendix 1 : Derivation of optimal bid for wind generator 52
Appendix 2 : Statistical model for wind forecasts 54
Appendix 3 : Procedures for operating storage in conjunction with wind generator operating under Firm Capacity contract 57
Procedure for selling energy 58
Case when Storage would be selling, and there is excess wind 58
Table of Figures
Figure 2: Wind generator power output for 1 kW of capacity. 8
Figure 3: Back-up generation Cases A, B, E. 15
Figure 4: Back-up generation Cases A, C, F. 16
Figure 5: Back-up generation Cases A, D, G. 17
Figure 6: Back-up generation Cases A, H, I. 17
Figure 7: Rates of return for Case E with capacity payments 19
Figure 8: Reliability for Case E as function of back-up capacity 19
Figure 9: Rates of return for Case F with capacity payments 20
Figure 10: Reliability for Case F as function of back-up capacity 20
Figure 11: Rates of return for Case G with capacity payments 21
Figure 12: Reliability for Case G as function of back-up capacity 21
Figure 13: Rates of return for Case I with capacity payments 22
Figure 14: Reliability for Case I as function of back-up capacity 22
Figure 15: Computations in developing the technology neutral results. 26
Figure 16: Net operating revenue of stand-alone storage system as a function of storage capacity (with T&L charges). 34
Figure 17: Marginal value of storage capacity for a stand-alone storage system. 35
Figure 18: Net operating revenue of stand-alone storage system as a function of storage capacity (without T&L charges). 36
Figure 19: Marginal value of stand-alone storage capacity without a charge for transmission and losses. 37
Figure 20: Rate of return for stand-alone storage system using batteries. 38
Figure 21: Rate of return for stand-alone storage system using pumped hydro. 38
Figure 22: Energy flows and payments for storage system operating with wind generator under a Firm Capacity contract. 40
Figure 23: Net operating revenue of storage system as a function of storage capacity operating with a wind generator under Firm Capacity contract. 41
Figure 24: Marginal value of storage capacity as a function of storage capacity operating with a wind generator under a Firm Capacity contract. 42
Figure 25: Annual rate of return for investment in battery storage. 43
Figure 26: Annual rate of return for investment in pumped hydro storage. 43
Figure 27: Net operating revenue of storage system operating with a wind generator under Firm Capacity contract. 44
Figure 28: Marginal value of storage capacity for storage system operating with a wind generator under Firm Capacity contract. 45
Figure 29: Rate of return for an investment in battery storage. 45
Figure 30: Rate of return for an investment in pumped hydro storage. 46
Figure 31: Rates of return for wind generation with pumped hydro storage for different capacity payments 47
Figure 32: Rates of return for wind generation with battery storage for different capacity payments 47
Figure 33: Reliability of wind generation plus storage 48
Figure 34: Histogram of the hour-to-hour changes in the differences between actual and average winds. 56
Figure 35: Decision procedure for operating storage in conjunction with a wind generator operating under a Firm Capacity contract. 59
Table of Tables
Table 2: Financial performance of Intermittent Resources contract for wind generator. 9
Table 3: Descriptions of cases analyzed for the back-up generation analysis. 13
Table 4: Cost and performance parameters for example storage technologies. 32
Table 5: Incremental cost of storage capacity and charge/discharge capacity. 33
Table 6: Tabulation of optimistic assumptions made in the analyses. 60