Global Opportunities in Capacity and Ancillary Markets

Capacity and ancillary services, particularly through energy storage systems, are becoming increasingly valuable with the integration of variable renewable energy onto the grid. Solar and wind energy are entering the electric grid as markets around the world are on a path towards decarbonization. However, because these forms of energy are both unreliable (they can stop at any moment) and uncertain (we cannot predict their output with 100% accuracy), they will create significantly more frequent and intense fluctuations in the grid. Grid-scale storage can alleviate these effects and, as a result, is expected to increase thirteenfold from 2018 to 2024.

This report provides an overview of power markets where Independent Power Producers (IPPs) can be remunerated for capacity and ancillary services via energy backup and storage. The study for this report was conducted as part of the Fuqua Client Consulting Practicum (FCCP), a semester-long course at the Fuqua School of Business, in which teams of students work with a client on a specific deliverable, during the 2019 spring semester. Having a successful business delivering backup power in Chile, the client sought to identify new markets to enter in the near term.

The first section of this report provides background information on capacity and ancillary services and how they are valued in power markets. It also provides background information on the team and client.

The second section outlines the team’s process for identifying new market and technology opportunities. The project was divided into three phases of market research, technology research, and a risk analysis, which are discussed in more detail.

The third section discusses the fifteen different electric power markets that were selected for the focus of the project. These markets are organized into four regions: North America, South America, Asia-Pacific, and Europe. Each market details the macroeconomic overview, the current energy mix, the market regulation, proposed changes to the energy mix, and a rationale for why it was selected.

The fourth section highlights the types of technologies currently being deployed for capacity and ancillary services, mainly focused on the proliferation and declining cost of Lithium-Ion batteries.

The fifth section provides a general risk analysis across the fifteen markets and the final recommendations to the client for their next market opportunities. This section is followed by Acknowledgements and an Appendix.

Overall, the strategy for entering new markets must assess many risks, including financial, regulatory, political, economic, technological, and industry landscape.

North American, Australian, and European electric markets are relatively stable and straightforward to enter, with lower financial risk. However, the lower barriers to entry make them more competitive and will drive down margins for IPPs. East Asian markets, while they also pose a significant opportunity, have been more centralized and closed to foreign investment. They pose a higher barrier to entry, but once a company has a contract, its environment makes it a relatively lower risk to compete in. Several Latin American markets face similar issues: growing electricity demand with a rising standard of living, a pressing need to reduce dependence on hydropower, markets that are relatively younger than those in North America. There is higher financial risk, but with that comes less competition and higher returns. Lastly, while it is possible to find business cases for every type of storage technology, the study found that the dropping cost of Lithium-ion batteries will make it the mainstream technology for the foreseeable future.

The report makes several key points and recommendations:

• Power markets around the world are seeking to increase their use of renewable energy. While each market posed its unique set of risks, challenges, and benefits, some regional trends were also identified.
• The underlying cause of a grid transition is the rising need to diversify a market’s energy mix and reduce reliance on one particular source. This need can come from mandates to reduce carbon emissions, to improve resiliency and reliability, or to address public concern. The source is usually fossil fuel-based, hydropower, or nuclear power.
• A more through study would include connecting with professionals who work in these markets; completing a financial model for the most attractive markets; researching more deeply into outside of Lithium-Ion storage technologies; and completing a thorough competitive analysis in the markets the client is most interested in.