Reducing Peak Demand: Lessons from State Energy Storage Programs

States are increasingly adopting clean energy plans and climate goals, meaning our electric grids are more frequently fueled by variable renewables like solar PV and wind energy. While renewables are inexpensive and clean, they are not dispatchable without energy storage – in other words, they may not generate power at the right times to meet demand. This is especially critical during peak demand hours, when electricity use is at its highest, and grid power is most expensive. With the addition of energy storage – typically, lithium-ion batteries – a renewable-powered grid can meet peak demand, but only if storage owners are incentivized to use their systems in this way. For these and other reasons, many states are seeking to design energy storage policies and programs that will harness battery storage to reduce peak demand.  

“Peak demand” refers to the period of highest electricity usage within a given time frame. During times of peak demand, if there is not enough renewable energy available, such as when the sun is no longer shining or there is not enough wind to power turbines, the high electricity demand is met by fossil fuel-burning resources. Lowering peak demand can potentially reduce greenhouse gas (GHG) emissions, but it depends on how the reduction is achieved. If batteries are charged when the available electricity is from fossil fuel sources, then the program has only shifted the time in which emissions are emitted. This shift combined with the inevitable slight loss of round-trip efficiency causes GHG emissions to actually slightly increase. Renewable energy that has been stored in battery energy storage systems can be dispatched back onto the electric grid during peak times to reduce the need for these fossil fuel power sources.  

When designing such programs, there are many elements to consider. Who should own battery systems? How should incentive rates be structured? Who should decide when the batteries will be dispatched? Should batteries reduce load from behind the meter (customer-sited systems), or export power to the grid? The answers to these questions may determine the effectiveness of the program.  

In a recently published issue brief, CESA Senior Project Director Todd Olinsky-Paul reviewed battery storage programs from various states to compare key elements of program design and discuss the advantages and disadvantages of each. Here are some highlights of program design from the issue brief: 

Battery Ownership 

Batteries can be owned by customers, leased from a third party, owned by a third party, or owned by the utility. Virtual power plants aggregate many customer-owned (or leased) batteries into a utility-administered program for a set term; the utility dispatches these batteries during peak demand hours, thereby saving money that otherwise would have been paid to peaker power plants. In return, the participating battery owners get paid by the utility for performance. Some customers may prefer resilience as a subscription service over the costs and responsibilities of battery ownership. In this case, a utility-ownership model, under which the utility owns and dispatches batteries from behind customer meters, may be successful.  

Incentive Structures 

Incentives can be used to encourage energy storage deployment, energy storage use, or both. Incentive programs come in many forms: rebates, performance incentives, tax incentives, or incentive adders/multipliers in other programs (such as a solar incentive). They may change over time in a predetermined way or be adjusted as a result of program review.  

In programs designed to reduce peak demand, payments tend to be performance-based. This is because performance payments provide a direct link between battery use and the desired outcome of reduced or shifted peak demand. In contrast, grant or rebate structures can reward the installation of a battery but don’t direct the battery to be used in a way that supports state policy goals or provides grid services.  

Dispatch Methods 

Some programs designed for peak reduction rely on battery owners (or aggregators) to dispatch batteries during peak demand period. Batteries can be dispatched in response to a signal from the utility, dispatched during predefined peak demand hours, or dispatched whenever the dispatcher believes is most likely to be the regional peak demand period.  

Other programs allow utilities (or utility contractors or other agencies) to dispatch customer- or third party-owned batteries. This approach is generally preferred by utilities because it’s more likely to result in accurate, reliable and timely battery dispatch. It also lowers risk for customers, because it relieves them of the responsibility and cost of predicting regional peak demand hours and dispatching their systems. Most programs allow customers to opt out of dispatch events without penalty, even though missing these dispatch calls typically lowers the customer’s incentive payments for that period. 

Load Reduction VS Power Export 

When placed behind a customer meter, energy storage can effectively reduce or shift peak demand in two ways: first, by serving the customer’s load, which reduces their demand on the grid; or second, by exporting stored power onto the grid. From the perspective of grid balancing, load reduction and power export amount to the same thing. For a utility, however, handling power export can be a very different proposition than handling load reduction and may even require costly grid upgrades. This is because the local distribution grid may have limited hosting capacity, i.e. limited ability to absorb additional power from behind customer meters. Grid upgrades to increase this hosting capacity can drive up interconnection costs and lead to lengthy delays in interconnecting newly developed energy storage to the grid.  

However, from the perspective of the storage owner, load reduction-only programs can significantly limit the value of storage, because load cannot be reduced below zero, meaning unused energy may be stranded in the battery. In order to make storage economic for home and small commercial loads, power export may be necessary. 

For more details on these program design elements, as well as CESA’s recommendations for states interested in using energy storage for peak demand reduction, read the issue brief here.