Mixed picture for pumped storage

While increased use of energy storage is widely seen as essential to support increasing shares of intermittent renewables on the grid, the economics of existing pumped storage hydro facilities in Europe have been greatly weakened by low electricity wholesale prices.

Swiss power company Axpo has, for example, recentlypostedamassivewritedownonwhat it describes as its “epic” Limmern pumped storage hydro (PSH) facility. The profitability of Limmern strongly depends on the difference in prices for baseload and peak electricity. “Thismarginisnotenoughtoguaranteethe profitable operation of the plant”, says Axpo.

Nevertheless, Axpo expects that it will be able to improve the profitability of Limmern in the future: “balancing energy is its trump card”, thanks to the flexibility of its pump/ turbines and “the trend towards increasingly irregular energy production”. To this end “the company must be able to exploit all possible sources of income (spot, intraday, option and system service markets, capacity, grid and supply reserves), while the burden of taxes and duties must be reduced.”

The issues obstructing PSH development in the UK, as well as the potential benefits, are addressed in a recent report, The Benefits of Pumped Storage Hydro to the UK, commissioned from DNV GL by Scottish Renewables on behalf of the Pumped Storage Hydro Working Group (with funding from ScottishPower, SSE and the Scottish government).

It is widely acknowledged that greater flexibility is required in the electricity system of Great Britain (GB) to decarbonise at acceptable cost to consumers, says the report, and PSH is one of the best proven technologies available at scale to provide the required flexibility, delivering many operational and cost benefits to the electricity system as well as wider societal and environmental benefits, including: 

• System operation: PSH can provide a wide range of ancillary services needed for system operability in the future low-carbon world, with capabilities similar to or better than thermal generation and other energy storage technologies (eg, frequency response, reserve, voltage management, black start).
• Congestion costs: PSH can alleviate network congestion costs by storing excess generation in constrained zones for later use, thereby avoiding or deferring investment in network reinforcement.
• Environmental benefits: PSH avoids waste of low carbon electricity production during periods of low electricity demand, and avoids the environmental impact of new transmission infrastructure.
• Security of supply: PSH is the most economic storage technology for the long discharge periods required to contribute to security of supply.

There are four PSH plants in GB, with aggregate power output and storage capacity of 2.8 GW and 24 GWh respectively. No new schemes have been commissioned since the 1980s, but a number of sites have been identified by investors at which additional PSH capacity could be developed. This includes significant storage capacity which now has planning consent, one of which alone could more than double the total existing UK storage volume.

Investment in PSH infrastructure is characterised by relatively high up-front costs, long project lead times, lengthy lifespans (>50 years), and long project payback periods. The wide range of different roles played by PSH in the electricity system means that storage providers will need to ‘stack’ multiple revenue streams. However these revenues are subject to considerable uncertainty, particularly arising from long term uncertainty in energy policy. This makes it extremely difficult to develop a robust long-term business case based on projected market revenues alone, moreover, some of the benefits and positive externalities that PSH can deliver, for example environmental benefits and savings on network reinforcement costs, cannot be easily or directly monetised, the report says.

Internationally, less than 5% of existing PSH capacity has been built under liberalised market conditions. Most PSH has been developedinelectricitysystemscontrolled by a state electricity board or other quasi- government institution, the report notes.This is because such organisations tend to value longer term benefits more (through lower discount rates) and they can include in their decision-making (‘internalise’) long-term benefits which are likely but uncertain, and risks which are highly unlikely but severe.

The investment challenge is illustrated by the mismatch between the long project payback period and the short durations of typical contracts in the markets in which PSH operates:

• Capacity market: agreements are available for a maximum 15-year duration up to four years ahead of delivery (meaning that a PSH project would be approximately half way through its construction phase before it could be awarded a capacity agreement).
• Energy market: liquidity exists to support trading activity only up to two years ahead of delivery.
• Ancillary services market: long-term agreements are not generally available beyond the two-year horizon of the system operator’s agreed incentive scheme.

Whilst these markets are difficult to forecast and revenues are not easily bankable, the outlook of up to £8bn annual consumer benefits from flexibility by 2030 suggests there could be many scenarios in which PSH project investments prove to be in the interest of consumers, the report suggests. However, given the long lead times and high upfront capital requirements of PSH, existing market arrangements do not provide a clear route to market with sufficient certainty for investment in additional PSH.

To mitigate these investment challenges and realise the potential benefits of PSH, the report recommends that government considers options to provide the long-term confidence required by investors.

The UK government has already introduced a cap and floor (C&F) support mechanism for interconnectors, the report notes. Such projects face financing challenges similar to PSH. A C&F agreement is a risk mitigation mechanism rather than a subsidy, allowing consumers to share in the gains should revenues turn out to be above the cap, whilst limiting the risk to investors should revenues turn out to be significantly less than forecast.