Many Latin American countries are facing increasing challenges to integrate renewable energy into their energy markets; and the rapid expansion of renewable energy has created several challenges for existing business models as well as opportunities for energy storage.
One such country is Chile. In recent years, it has gone from having no solar nor wind to reaching an installed capacity capable of generating close to 10% of all power needs. The development momentum is poised to continue given the significant renewables project pipeline. Additionally, the Chilean government has just committed to transforming the energy base so that 70% comes from renewables by 2050. The main challenge will be how to integrate that renewable energy into the energy system.
Renewable energy developers were the winners in the last energy auction in Chile. Renewable energy developers were able to bid aggressively even when they had to commit to supplying the energy at particular points and at specific times in a market in which prices are constantly changing. To make matters more difficult, the speed of renewable energy development coupled with particularities of the Chilean power transmission system have created significant congestion issues producing large variations between spot prices at different nodes across the system. What this means is that there are nodes in the northern part of the Chilean power system were spot prices are reaching $0 kWh during the sunniest hours.
Infrastructure improvements should help alleviate many of these congestion problems, but given the size of the country’s solar resource and the difference in the natural development cycles between renewable energy projects and transmission infrastructure, congestion issues will most likely continue to emerge and impact spot prices. The result is that market participants are now looking to more creative solutions such as energy storage that can provide a more balanced generation curve over the day to satisfy their PPA’s requirements and decrease market risks.
Jorge Moreno, Partner at Inodú, a leading Chilean energy and sustainability consulting firm sees great opportunities for energy storage solutions in some niche markets. Additionally, there is some regulation in the pipeline which if defined correctly could create even more opportunities for storage. And as long as transmission congestion continues, batteries, for instance, will enable some renewable energy players to avoid dispatch issues and take advantage of selling energy when prices tend to be higher and when the energy is needed.
But it is not just Chile. Guatemala, for example, has not been able to fully exploit its vast solar resources for C&I customers because of the current system of capacity payments which are mostly based on energy consumption between 6pm and 10pm, when Guatemala has peak energy demand. Energy storage could enable these C&I customers to better manage their consumption during peak times and thus decrease capacity payments and costs. It is also a similar situation in Mexico.
We have seen astonishing developments in the battery market in recent years both on the technology and cost sides. In addition, we see further technological improvements and 50% cost reductions over the next decade. This is being driven by the electric vehicle industry and will have a positive impact on grid connected energy storage opportunities. An investment of almost US$ 700 million has gone into corporate funding in 2015 in energy storage. The energy storage mandate in California to install 1.3 GW of storage until 2020 alone will more than double global installed capacity of 1.2 GW, excluding hydro.
Even though the levelized cost of storage is still not at a level one could expect for a very strong business case when considering one single application, a combination of applications already represents a very interesting investment case. Take the example of a regulator that asks market participants to provide energy storage infrastructure and considers the benefits of having an energy service infrastructure asset that is able to provide ancillary services and also bring a value added by deferring investments in transmission and distribution. In addition, while not providing ancillary services, the storage asset may be used to provide other kind of revenue generating services.
What this all means is that storage is becoming a very interesting growth opportunity.
Ramon Candia is an investment professional active in different regions of the world, specially in Latin America for the last six years. He has executed and has been responsible for investments in renewable energy infrastructure and clean technology companies, including the energy storage sector.