Do neighbourhood batteries stack up? Five reasons for caution on shared grid storage

Orkestra recently completed what is likely to be the most detailed investigation into community batteries ever undertaken in Australia for the Central Victorian Greenhouse Alliance (CVGA).

Our study considered projects located at 118 potential transformer locations in Powercor’s network in regional western Victoria. We assessed 11,640 different project permutations, analysing both direct revenue and indirect economic benefits at granular interval level.

[The term “community batteries” is undefined and is generally a catch-all for lots of different configurations including batteries collocated with a community. In this article, we have gone with the more specific term “neighbourhood batteries” – i.e. batteries connected to the distribution network located proximate and immediately downstream of LV transformers that provide services to the grid and the customers connected to the same LV transformer. There is a diagram in the appendix of the article.]

How many neighbourhood battery projects stacked up? None

We also found that the grid issues facing communities, particularly regional ones, are clearly real. In the six Victorian communities of Ballan, Clunes, Glenlyon, Lyonville, Pomonal and Wheatsheaf analysed in our report, we found significant issues of grid reliability, poor of solar hosting and low energy independence.

But communities and policy makers looking to neighbourhood batteries as a cure-all solution to energy and grid challenges should look to throw the net wider.

Juxtaposed against the findings of our report are some significant funding announcements for neighbourhood batteries:

• $224.3 million from the federal government to install 400 neighbourhood batteries;
• $42 million committed by the re-elected Victoria Labor government toward 100 neighbourhood battery projects.

So, with that as context – let’s get to the five reasons for caution on neighbourhood batteries:

Reason #1 – A neighbourhood battery is a grid-connected battery masquerading as a behind-the-meter battery but without the key advantages of either of those options

Neighbourhood batteries fall into this dead zone between utility-scale batteries and behind-the-meter batteries. While the main revenue sources for neighbourhood batteries are similar to utility-scale batteries, utility-scale batteries benefit from much lower upfront costs and are roughly half the cost of a neighbourhood battery on a $ per kWh basis. As a result, utility scale battery returns are significantly better. The main reason for this is the spread of fixed costs and significant volume purchase discounts for utility-scale batteries.

Further, utility-scale batteries – with dedicated connections – are less likely to be grid constrained, while, neighbourhood batteries must “compete” for network capacity with load and solar connected to the same transformer. This significantly limits the ability of a neighbourhood battery to participate in FCAS markets or discharge at times of peak pricing in the wholesale electricity market.

Compared with behind-the-meter batteries, neighbourhood batteries miss out on the full benefit of offsetting network and retail costs. Where a behind-the-meter battery is an alternative energy supply to the grid, a neighbourhood battery inherently participates in the grid and requires retailers and network companies to support them. This means the value generated by a neighbourhood battery must be shared amongst more parties.

Reason #2 – There is no clear path to monetising the indirect benefits

There is another issue regarding community drivers for batteries discussed above: there is no clear path to monetisation of the benefits of meeting these drivers.

For example, a neighbourhood battery can indeed improve grid reliability by providing back-up power during grid outages, but who pays for this benefit? Surely the community that benefits from the improved reliability.

But, contrary to what the community might expect, this will inevitably increase the cost of electricity provision, not decrease it. If the costs are socialised through government subsidy, what is the justification for that when the benefits are localised?

I’ve used grid reliability here, but the same is true of improving solar hosting and increasing energy reliability.

Reason #3 – You can find battery options that breakeven, but at the expense of community benefits and with returns that are risky

Our report, as guided by our client, considered Relectrify 3.3-hour batteries of 4 varying sizes. By reducing the capacity of the battery, the utilisation of the asset can be increased. For example, a 1-hour battery tends to be better suited to contingency FCAS and wholesale market arbitrage where battery capacity is less relevant. This can reduce the lithium costs specifically to the extent that a return can be made.

But this overlooks the key drivers by communities for batteries: improving grid reliability, increasing energy independence, and improving solar hosting capacity. All these drivers are best met by batteries with long durations.

Furthermore, contrary to well held belief, justifying your neighbourhood battery on the basis of contingency FCAS revenue is not a good idea. Given the shallow nature of FCAS markets and the gigantic volume of utility-scale batteries in pipeline, there is a risk that these markets will inevitably saturate and the value in them diminish.

Reason #4 – The promised land for neighbourhood battery projects – shared batteries as a service – is fundamentally flawed

Following on Reason #1, we at Orkestra are highly sceptical of the shared-battery-as-a-service concept that is commonly touted as the panacea for neighbourhood batteries. If you are not familiar with this idea, the basic premise is that rather than individual energy users all having their own batteries, one common battery is used to provide the services of these batteries – specifically store excess solar for later use and provide backup power.

But the flaw in this idea lies in two areas: (1) to get from a home-solar system to the battery, energy must transact through the grid. The moment this happens both network companies and retailers become involved. Even if the regulatory issues could be solved whereby these stakeholders are not able to double dip on the energy moving through the battery, these parties must still be allowed to cover their costs and this eats into the returns of the battery proponent. (2) In Australia, we apply a principle of “postage stamp pricing” for our distribution networks. This means that electricity that transits across the entire distribution network is charged at the same rate as electric that transits across the street. The reason for this is that electricity is an essential service and locational based pricing would likely be highly regressive. It might be solved by having an additional tier of pricing – where local network service provider charges are separate from distribution and transmission charges, but the question then becomes how to account for energy discharged from a battery and consumed locally by a home or business (or visa versa). This is a tricky problem that might be solved by traceability services (e.g. Power Ledger, Enosi), but then we are adding yet another party to the battery revenue split.

More details about these challenges in Appendix C of our report.

Reason #5 – There are far cheaper options to meet key community drivers for neighbourhood batteries

Finally, neighbourhood batteries are an expensive way of meeting community drivers, compared with the following:

For grid reliance, we would recommend that batteries be located behind-the-meter where battery proponents are much more likely to see a return on investment. This resolves a whole host of challenges regarding islanding certain parts of the grid in the event of a grid outage. Behind-the-meter options include, for example, locating a neighbourhood battery at a sports ground so that it can be used in cases of emergency.

For energy independence, the best option is to simply increase the amount of solar connected. If energy users really want to be consuming their own energy, then a battery behind the meter allows the solar owner to fully offset their grid electricity costs. Again, a behind the meter battery is much more likely to obtain a return on investment.

For improved solar hosting, we would recommend simply ensuring and potentially contributing towards the upgrade of transformers currently constrained from a solar hosting perspective. While upgrading a transformer is nowhere near as “sexy” as a installing a battery, it is likely to be less than one tenth the cost of a battery.

So, where should battery project proponents be focused?

We have two main suggestions for battery proponents and policy makers.

Suggestion 1: Pursue investigation of other types of community battery projects

Co-location of a neighbourhood battery at a behind-the-meter commercial facility, for example locating a battery at a town hall or community sports ground.

Neighbourhood battery servicing high-value community needs, for example, an emergency community shelter. This might co-locate with the option above.

A community-led virtual power plant for residential batteries.

Co-location of a battery at a community generator (for example Hepburn Wind).

With the support of distributors, find project locations where additional network benefits can be realised beyond the transformer level. For example, a distributor might have the option to replace an expensive long SWER (single-wire-earth-return) line servicing a remote community with a microgrid.

Suggestion 2: Address community issues regarding the grid with non-battery solutions

There is definitely a place for governments, local distributors and regulators to do more to address concerns of grid reliability, energy independence and increasing solar hosting capacity of networks, but community groups could also take more direct action themselves. For example, community groups could contribute towards network upgrades that improve solar carrying capacity, voltage rise issues, and grid resilience. As mentioned above, this could be at significantly lower costs to the community.

James Allston is a co-founder of Orkestra Energy, software-as-a-service feasibility modelling tool for commercial and industrial solar and battery projects. James has written extensively on the topics of batteries and energy regulation.