Elevating the role of energy storage on the electric grid
Energy storage is critical for mitigating the variability of wind and solar resources and positioning them to serve as baseload generation. In fact, the time is ripe for utilities to go “all in” on storage or potentially risk missing some of their decarbonization goals.
Jim Thomson
Marlene Motyka
Craig Rizzo
Kate Hardin
Jaya Nagdeo
Introduction
The power sector stands at a crossroads, potentially facing unprecedented challenges as the need for decarbonization intensifies. Electric companies are grappling with changing demand patterns, evolving customer behaviors, and increasing electrification of previously fossil fuel–fired sectors, all while managing an aging grid. Climate change challenges, including extreme weather events and wildfires, underscore the urgency for resilient and flexible electric grids. While most utilities have set targets for decarbonization and formulated strategies to meet those targets, achieving them brings a host of complexities. Notably, the relentless rise of the infamous “duck curve,”1 a phenomenon becoming visible in the United States, could challenge grid reliability as the gap between peak demand and renewable generation widens.2
Amid this dynamic energy landscape, energy storage may emerge as an important tool to address these challenges, potentially revolutionizing how electricity is generated, managed, and consumed. Technological breakthroughs and evolving market dynamics have triggered a remarkable surge in energy storage deployment across the electric grid in front of and behind-the-meter (BTM). Battery-based energy storage capacity installations soared more than 1200% between 2018 and 1H2023, reflecting its rapid ascent as a game changer for the electric power sector.3
This report provides a comprehensive framework intended to help the sector navigate the evolving energy storage landscape. We start with a brief overview of energy storage growth. Then, by analyzing three key dimensions—renewable energy integration, grid optimization, and electrification and decentralization support—we explore potential strategies, benefits, business models, and use cases that can equip the power sector with tools to help unlock storage technology’s potential. Additionally, our regional analysis delves into possible opportunities tailored to each region’s unique operating environment. Finally, we identify signposts to watch, including upcoming inflection points in storage technology and deployment.
Growth drivers of energy storage
In 2022, the passage of the Inflation Reduction Act (IRA) supercharged interest in energy storage (see sidebar, “Recent legislative and regulatory focus on energy storage”). This legislation, combined with prior Federal Energy Regulatory Commission (FERC) orders and increasing actions taken by states, could drive a greater shift toward embracing energy storage as a key solution.4 Energy storage capacity projections have increased dramatically, with the US Energy Information Administration raising its forecast for 2050 by 900% to 278 GW in its 2023 Annual Energy Outlook.5 And the pipeline for energy storage projects has never seemed more robust. As of July 2023, around 111 GW of energy storage projects are in various stages of development.6 Moreover, corporate documents show an upward trend of positive mentions of energy storage by a growing number of chief executive officers and chief financial officers of utility companies.7
Recent legislative and regulatory focus on energy storage
- The IRA (passed in August 2022) extended the Investment Tax Credit (ITC) and the Production Tax Credit (PTC) for renewable energy projects that begin construction before 2025 and transition to a new technology-neutral ITC and PTC for property and facilities, respectively, which begin construction after 2024. The technology-neutral "clean energy" tax credits begin to phase out the later of 2032 or once the United States storage projects that are either stand achieves certain annual greenhouse gas (GHG) emissions reductions. The IRA extended the ITC to qualifying energy storage technology property.8 Previously, energy storage property was eligible for the ITC only when combined with an otherwise ITC-eligible electricity generation project. Now, energy storage projects that are either standalone or combined with other generation assets could be eligible.9 This is a potentially significant development, opening new geographies and applications in which energy storage may be economical.
- In recent years, the FERC issued two relevant orders that impact the role of energy storage on the grid:
- Order No. 841 (February 2018) mandates grid operators to implement specific reforms tailored to storage resources in wholesale capacity, energy, and ancillary service markets. This requirement aims to optimize the integration and utilization of storage technologies within the grid system and enhance wholesale markets’ efficiency and reliability.10
- Order No. 2222 (September 2020) directs grid operators to facilitate the active participation of distributed energy resource (DER) aggregations in wholesale markets. These aggregations comprise various DERs and may also include storage resources.11 The order indicates a recognition of the importance of DERs and aims to streamline their integration into the wholesale market framework. This reform could enable more inclusive and diverse participation, potentially fostering a more competitive and dynamic marketplace.
Energy storage growth is generally driven by economics, incentives, and versatility. The third driver—versatility—is reflected in energy storage’s growing variety of roles across the electric grid (figure 1). In 2022, while frequency regulation remained the most common energy storage application, 57% of utility-scale US energy storage capacity was used for price arbitrage, up from 17% in 2019.12 Similarly, the capacity used for spinning reserve has also increased multifold. This illustrates the changing landscape of energy storage applications as the industry seems to adapt to market demands and compensation rules for these additional services and explores new use cases.
Three eras of energy storage growth
Energy storage growth can be portrayed in three different eras (figure 2), driven by technological advances and progressing from short-duration solutions to a mix of short- and long-duration energy storage technologies.13
- The prebattery era (up to 2021): Energy storage technologies were generally in their nascent stage, focusing on research, development, and pilot projects. Pumped hydro storage, a well-established technology, had long been used for large-scale energy storage. However, wider adoption has continued to face challenges due to limited suitable geographic locations, high construction costs, and environmental considerations.
- The era of battery dominance (2022–2035): The current era generally aligns with the important years for the power sector’s transition to net-zero carbon emissions. Battery–based energy storage systems (ESSs) will likely continue to be widely deployed, and advances in battery technologies are expected to enable increased capacity, efficiency, and cost-effectiveness. This era will likely see a growing shift toward combining short-duration (seconds to minutes) and medium-duration (minutes to hours) storage solutions. States and utilities are expressing growing interest in inter-day and multiday long-duration energy storage, particularly by initiating studies and including them in planned capacity additions within utilities’ integrated resource plans (IRPs).14 Flow and solid-state batteries are expected to gain prominence, especially after 2030, and could further expand the capabilities and applications of ESSs.15
- The era of breakthrough innovation (2036–2050): As the United States aims to move toward net-zero carbon emissions, economy-wide, ESSs are expected to play a pivotal role in enabling decarbonization across sectors. Novel storage technologies offering greater capacity, seasonal balancing, faster response times, and improved sustainability—such as next-generation batteries and hydrogen-based storage—are expected to emerge.
A framework for understanding the role of energy storage in the future electric grid
Three distinct yet interlinked dimensions can illustrate energy storage’s expanding role in the current and future electric grid—renewable energy integration, grid optimization, and electrification and decentralization support. Using these dimensions, we developed a framework that details the evolving role that energy storage can play in achieving a clean, flexible, reliable, and resilient grid (figure 3). Within this framework, each dimension has a primary objective, and specific metrics outline the role and impact of energy storage and key energy storage strategies for power companies. This framework also emphasizes the benefits of energy storage, such as enhanced resilience, economic advantages, positive environmental impact, and energy equity. Since ESSs can provide multiple applications (approximately 2.5 per storage project in 2022),16 the storage project configurations highlighted below could also be used for other applications to earn returns. Multiple sources of revenue can be stacked to potentially further improve energy storage economics.
Renewable energy integration
The key objective of this dimension is to minimize curtailment, maximize utilization, and optimize the use of renewable energy in electric grids by considering the following storage strategies:
Colocate storage to minimize curtailment: Curtailment is generally rising with the growth of solar and wind generation, with wholesale power prices increasingly dropping to zero or even negative at certain times of the day when renewable energy supply exceeds electricity demand. This is illustrated by the duck curve in California, which is only getting deeper. In 2022, the California Independent System Operator (CAISO) curtailed ~2,450 GWh of utility-scale solar and wind output, equal to nearly 10% of the state’s monthly power consumption.17 The Electric Reliability Council of Texas (ERCOT), which manages the Texas grid, is also experiencing a growing mismatch of renewable energy production versus load—with up to 5% of its total available wind generation and 9% of available utility-scale solar generation curtailed in 2022, both of which could potentially rise to 20% to 28% by 2030.18 And this phenomenon appears to be spreading nationally, with 8,950 GWh of renewable energy curtailment in 2022 (figure 4).19
Electric power companies can deploy grid-scale storage to help reduce renewable energy curtailment by shifting excess output from the time of generation to the time of need. Energy storage enables excess renewable energy generation to be captured, thereby reducing GHG emissions that would have occurred if conventional fossil fuel-fired backup generation was used. If the renewably generated electricity curtailed in CAISO in 2022 could have been stored for later use, over 534,000 metric tons (mTCO2) of carbon emissions would have been avoided.20
Deploy hybrid renewable energy + storage systems to maximize renewable energy penetration: Electric companies can maximize renewable resource penetration by installing hybrid21 systems that pair renewable generation with energy storage components. This approach could efficiently manage variable renewable generation, helping ensure electricity is delivered to the grid when and where needed.
Electric power companies can use this approach for greenfield sites or to replace retiring fossil power plants, giving the new plant access to connected infrastructure.22 At least 38 GW of planned solar and wind energy in the current project pipeline are expected to have colocated energy storage.23 Many states have set renewable energy targets or clean energy standards, and companies can more easily meet these requirements by integrating storage with renewable energy sources.
Use advanced forecasting to optimize renewable energy utilization: Advanced forecasting models and predictive analytics tools can provide valuable insights into renewable energy output, helping to optimize energy storage dispatch to balance grid needs. Implementing intelligent algorithms and real-time monitoring to optimize ESS charging and discharging can help integrate variable generation output smoothly. Electric power companies can mitigate the challenges associated with variable renewable energy and help optimize clean energy integration by strategically deploying energy storage assets based on accurate forecasts.
Business models and use cases
- Renewable energy + storage power purchase agreements (PPAs): Electric companies can negotiate with renewable energy developers to procure power from renewable energy projects paired with ESSs.
Use case: Dominion Energy SC and Southern Current, a subsidiary of EnergyRE, signed a US$200 million PPA for the Lone Star solar-plus-storage project in South Carolina, comprising 107.8 MW solar photovoltaic and a 198 MWh battery storage system.24
- Tolling and capacity contracts: Tolling or capacity contracts generally involve a buyer paying a fixed fee to use energy from a storage system under specified conditions. The buyer can benefit from the battery operation, drawing electricity during peak demand, regulating grid frequency, or injecting reactive power.
Use case: Strata Clean Energy and Arizona Public Service signed a 20-year agreement for a 255 MW/1 GWh battery ESS. The project, Scatter Wash, will be owned by Strata, and Arizona Public Service, the buyer, will pay for the electricity used to charge the ESS.25
Grid optimization
The key objective of this dimension is to enhance grid flexibility, reliability, and resilience to accommodate the growing complexity of balancing supply and demand; it could involve the following storage strategies:
Replace natural gas peakers with energy storage for peak demand management: The power sector has a significant opportunity to replace fossil-fuel peaker plants with ESSs to enhance flexibility and improve system performance. In the United States, approximately 876 natural gas–fired peaker plants emit an average of 65 million tons of carbon dioxide (CO2) annually.26 Additionally, peaker plants can place a disproportionate environmental burden on nearby communities.27 Advances in energy storage technologies have made it increasingly economic to replace these plants with ESSs, which can charge from the grid and discharge during peak demand. FirstLight Power plans to replace its Tunnel Jet peaking facility in Connecticut with a battery ESS by 2024–2025.28 New York has introduced a bill that includes plans to replace peaker power plants with renewable energy systems and energy storage, preferably by 2030.29
Companies can leverage existing grid connections and infrastructure by repurposing peaker plant locations. Focusing on fossil fuel peakers with low utilization rates can yield immediate benefits, as these underutilized peaker plants tend to be low-hanging fruit for energy storage deployment.
Integrate BTM storage with demand response programs and provide ancillary services: Electric companies can actively manage and shape electricity consumption patterns by combining customer-owned distributed energy storage with demand response programs. In 2022, several utilities filed plans to offer new battery storage demand response programs, typically offering a performance-based incentive or bill credit for energy discharged during specified time periods.30
Additionally, deploying aggregated BTM ESSs to provide grid services can help with peak load management and maintain grid reliability and stability. FERC orders 841 and 2222 are intended to expand wholesale markets by facilitating the participation of ESSs and aggregated DERs, including ESSs, in capacity, energy, and ancillary service markets. Electric companies can unlock the value of distributed energy storage systems to earn revenue. These revenue opportunities vary across independent system operators (ISOs) and have generally been evolving based on the applications that energy storage can provide within different ISOs (figure 5).
Storage can be combined with other load management mechanisms, such as time-of-use rates, under which storage can be charged when power is cheaper. Legislation introduced in multiple states would require electric utilities to develop at least one rate for ESSs.31 As part of a general rate case filed on April 28, 2022, Consumers Energy proposed a large wholesale electric storage tariff for customers who have a battery of 100 kW or more and are interested in participating in the wholesale capacity, energy, and ancillary service markets.32
Create storage-centric transmission infrastructure to help reduce congestion and bolster resilience: The increasing transmission capacity shortage calls for more flexible alternatives.33 Electric power companies can enable a flexible yet integrated ecosystem that prioritizes energy storage at strategic locations on the grid. These resources can address rising congestion (figure 6), provide voltage support, defer infrastructure upgrades, and improve grid intelligence by adding services to the transmission system.
ESSs can help alleviate thermal overloading on transmission lines, manage power flows, and balance renewables by reducing peak loads and absorbing excess power, thus potentially extending transmission asset life and deferring the need for new infrastructure.
Further, integrating these resources with advanced grid automation technologies can help detect and respond to grid disturbances such as power outages or voltage fluctuations, thereby potentially providing operational flexibility and increasing resilience. The Midcontinent Independent System Operator and Southwest Power Pool have implemented storage as transmission-only assets, while other regions are still assessing feasibility.34
Business models and use cases
- Virtual power plants: By aggregating BTM ESSs with other DERs and controllable loads using software, virtual power plants can help balance the grid without investment in additional power generation plants.
Use case: In 2021, Green Mountain Power (GMP) introduced a program that allows 200 customers with Tesla Powerwall batteries to create a virtual power plant. The batteries are intended to help balance the regional power grid, replacing fossil-fuel peaker plants during peak demand. This initiative aligns with GMP’s four-year-old Powerwall program, which reportedly saved over US$3 million in 2020 by reducing electricity purchases during price spikes. GMP pays participating customers US$13.50 monthly, benefiting the environment and all customers through reduced power supply costs.35
- Storage as a transmission asset: Deploying storage systems strategically on the transmission network can help address multiple grid challenges and provide valuable services. Several states have initiated studies to evaluate the role of energy storage as a transmission asset.
Use case: A recent New York study proposed adding a 200 MW/200 MWh storage as a transmission asset instead of a new 345 kV tie line to help increase the power transfer capability and reduce congestion. Its estimated cost would be US$120 million, compared to the US$700 million capital cost for a wire-based solution. In addition, depending on where it was situated, local congestion savings could add up to around US$23 million annually.36
Electrification and decentralization support
The primary objective of this dimension is to facilitate the electrification of end-use sectors and support the integration of DERs in a decentralizing electric grid. The industry can leverage various storage strategies to help support electrification and decentralization.
Integrate storage with electric vehicle–charging infrastructure for transportation electrification: Energy storage can gain from transportation electrification opportunities, such as investments made through the Infrastructure Investment and Jobs Act to deploy a network of EV charging stations nationwide.37 Integrating energy storage with EV charging infrastructure can enable fast charging during peak demand periods, especially in supporting regions where grid infrastructure lags behind in EV adoption. This integration may not only alleviate grid stress but could also help EV fast-charging station profitability, which prohibitive demand charges can challenge.38 Moreover, electric power companies can leverage EV batteries to offer innovative solutions like vehicle-to-home backup power and upcoming vehicle-to-grid infrastructure support. The emerging secondary market for repurposed EV battery storage could hold promise for stationary grid storage system applications, potentially fostering technological advancements and embracing opportunities for a sustainable circular economy.39
Power and heat storage solutions for industrial electrification: The industrial sector represents 28% of US primary energy-related CO2 emissions annually, or 1,376 MMmt of CO2.40 As industrial companies electrify assets to help reduce their scope 2 emissions, many will have 24/7/365 demand requirements. This demand growth could occur during periods when renewables are not generating. Different energy storage technologies can facilitate industrial electrification and decarbonization, while tailoring solutions to each sector’s unique needs. In the chemicals sector, process heat requirements can create opportunities to electrify and incorporate storage to add flexibility and resiliency. In the mineral manufacturing industry, synthetic, fused, and engineered oxide minerals are manufactured in electric arc furnaces. As the processes are primarily electrified, they can already leverage battery storage paired with demand response programs. Additionally, electric furnace waste-heat capture and utilization using thermal storage could store process heat for later use. The iron and steel industry could benefit from hydrogen storage for both fuel and process reactions. Process electrification can offer further opportunities to harness battery storage, while waste gas can provide operational backup. Meanwhile, cement manufacturers could potentially meet thermochemical heat requirements through solar thermal energy or electric heating coupled with thermal storage solutions.41
Integrate energy storage in microgrids and community-based solutions: A community resiliency energy storage program could be integrated into utilities’ IRP processes, which can focus on identifying and serving customers’ needs and addressing their energy vulnerabilities. Implementing community-based microgrids integrated with energy storage and renewables in underserved areas could potentially provide access to more reliable and affordable electricity. The microgrid generally deploys localized energy storage systems within a community, helping to ensure energy security, demand response, and grid independence during emergencies and peak demand periods. It can enhance resiliency and affordability and act as an equity asset, potentially providing reliable and affordable electricity to underserved communities.
Use storage to support potential peer-to-peer (P2P) energy trading platforms: P2P trading platforms on which consumers and prosumers42 trade electricity among themselves can be a challenge to implement, but they may be a potential future use case. The electric company could connect, manage, and maintain the P2P sharing network and use energy storage to facilitate energy sharing. They could charge transaction fees for grid stability assurance, efficient settlement processing, and energy storage utilization.
Business models and use cases
- Storage as an equity asset: By deploying decentralized storage assets, electric power companies can help provide reliable, resilient, clean, and affordable electricity to low-income communities.
Use case: In a recent IRP document, Portland General Electric explored community-resiliency microgrids and solar and storage setups with islanding controls for continuous power during grid outages. Microgrids differ from other solar plus storage plants by incorporating advanced communications and controls to coordinate diverse DERs within microgrids.43 The investigation identified 100 MW potential by 2030. Portland General Electric expects it to help enhance grid resilience, promote sustainable energy solutions, and fulfil equity objectives, potentially making electricity more affordable in low-income communities.44
- Microgrid-as-a-Service: The Microgrid-as-a-Service (MaaS) business model can offer customers, especially in the commercial and industrial segments, turnkey access to microgrid infrastructure, battery storage, and renewable energy sources through subscription-based arrangements, helping to ensure reliable and resilient energy supply without any upfront investment.
Use case: Xcel Energy (“Xcel”) introduced the Empower Resiliency program for Minnesota’s large commercial and industrial customers. The microgrid-based service is designed to enhance reliability for customers requiring higher-than-standard service. Xcel owns, installs, and maintains microgrid assets, including battery storage and renewable energy, providing a turnkey resiliency solution and upfront capital. The program, which Xcel previously offered in Wisconsin, reflects a growing trend of microgrid adoption, as the US market is expected to expand 19% annually through 2027.45
Different regions, different reasons: Factors shaping regional energy storage growth
As the role of energy storage evolves, ISOs have made varied progress in adopting it, with each having distinct drivers influencing deployment. To analyze this, we developed a model to assess regional transitions across the three dimensions in the years 2018 and 2022 (see sidebar, “Methodology for regional analysis”).
Methodology for regional analysis
For each dimension, we selected metrics that capture the essential aspects of that dimension’s role in energy storage deployment. A total of 19 metrics were identified across all three dimensions, and data from 2018 and 2022 was collected to track dimension transitions.46 The selected metrics were then normalized, transforming them into a common scale between 0 and 1. Each metric within a dimension was assigned a weighting based on its impact on the overall dimension’s performance. The normalized metrics within a dimension were then combined using their respective weightings to calculate a composite dimension score between 0 and 1 for each region. This score provides a quantifiable measure of a region’s performance in a specific dimension in a given year. The metrics used for each dimension are given below (figure 7).
By examining this transition, we identify regions where storage has been leveraged, potentially uncovering key factors behind successful regions and providing insights to help other regions (figure 8).
While CAISO has remained the strongest region across all three dimensions, ERCOT shows potential for energy storage. Other regions, such as NYISO and the Southwest (not an ISO), are also potentially ripe for storage growth based on the indicators analyzed.
- CAISO spearheaded energy storage growth with a 2013 mandate requiring the three major utilities to install 1,325 MW of storage, which was expanded in 2016.47 The region currently has the strongest pipeline of energy storage projects—about 43.7 GW of capacity.48 The recent US$400 million investment proposal by the California Senate Budget Committee is intended to fortify community solar and storage initiatives.49
- Energy storage is expected to grow exponentially in ERCOT, aligned with the rapid growth of solar and wind power. With 92 GW of wind and solar, plus 32 GW of storage in the pipeline, the region’s outlook appears promising.50 Additionally, the grid faces possible reliability issues due to high congestion costs, primarily attributed to increasing load, supply, and outages in the region, making storage even more attractive.51
- In 2022, New York doubled its 2030 energy storage target to 6 GW, motivated by the rapid growth of renewable energy and the role of electrification.52 The state has one of the most ambitious renewable energy goals, aiming for 70% of all electricity to come from renewable energy resources by 2030.53 These targets, along with a strong need for grid resiliency, will likely be the primary drivers of energy storage growth in the region. New York is also exploring storage as a transmission asset, although it is still working out the details regarding dual participation as a wholesale market resource and a transmission asset.54
- Southwest states also may have potential for wind and solar development. The current renewable energy penetration is 17%, and this is expected to increase as 80% of the projects in the pipeline are slated to come online in the next few years.55
Below are snapshots of some of the key factors that could make these regions potentially strong growth areas for energy storage (figures 9–12):
Signposts to watch as energy storage revolutionizes the grid
As energy storage helps redefine the power sector, strategic adoption becomes paramount. The dynamic interplay of technological advances, policy evolution, and market dynamics can underscore energy storage’s pivotal role. The electric power companies poised to integrate storage solutions strategically could be well positioned to accelerate renewable energy integration, navigate grid challenges, and facilitate a resilient energy future.
- Advances in materials and technology will likely play an important role in helping to ensure energy storage’s significance in the future grid: Innovations in materials science and battery chemistry are expected to improve energy density, prolong battery life, reduce costs, and improve overall storage economics. Integrating smart grid technologies and artificial intelligence could be pivotal in optimizing storage system performance. By leveraging data analytics and real-time monitoring, ESSs could respond dynamically to grid conditions, potentially enhancing its ability to balance supply and demand and support grid stability.
- Policy and market dynamics will likely be instrumental in shaping the future of energy storage and its role in the broader energy landscape: Supportive policies and dynamic market structures could help drive additional investment, innovation, and widespread adoption of energy storage technologies, helping to ensure their effective integration into electric power systems. Policy activity to watch for includes state storage mandates, state tax credits, and the implementation of FERC 2222. Additionally, efforts to streamline interconnection processes and address delays, which could facilitate the integration of ESSs, may also be important. The trajectory of electricity prices could also be key to influencing the competitiveness of energy storage. Certain policies can encourage sector investment in energy storage projects, and dynamic market design and pricing structures can reflect the true value of energy storage in a modern grid.
- Efficient manufacturing and robust supply chain management are important for industry competitiveness of energy storage: Establishing domestic manufacturing facilities and supply chains, along with diversification through free trade agreement countries, can enhance the resilience of the energy storage industry. Monitoring the emergence of battery and battery component manufacturing facilities nationwide and production volume growth is important. The ability to recycle or reuse battery components will become increasingly important as competition from mobile storage, especially for battery storage, continues to increase.