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18 May 2018

Tesla battery ruins Australian frequency control grid market

Tesla’s grid-scale battery in South Australia has, according to reports, utterly savaged the Frequency Control and Ancillary Services (FCAS) market, taking 55% of the work and driving the price down by 90%. This is a big shock for gas plants, which have traditionally performed this role, and if these figures are true, a death knell for such operations.

FCAS generation is used when parts of a grid need to be repaired or taken offline, standing in for the downtime. According to the new McKinsey report, the FCAS pricing hit as much as $14,000 AUD per MW, which is orders of magnitude above the typical costs. Figures from 2012 list Australian prices at $150-200 for coal and $111-122 for wind, meaning that Neoen is making a very high margin.

Tesla’s 100 MW (129 MWh) battery, which Riot has covered before when it won another Virtual Power Plant (VPP) contract in the country, is able to outperform the traditional FCAS suppliers, both in cost and in emissions. The report estimates that it made $1m AUD ($800k USD) for owner Neoen over a few days in January, although Tesla says it isn’t being paid correctly because the current measurement system does not account for a system as fast as Tesla’s.

Speaking at Australian Energy Week, McKinsey’s Godart van Gendt said “in the first four months of operations of the Hornsdale Power Reserve (the official name of the Tesla battery, owned and operated by Neoen), the frequency ancillary services prices went down by 90%. And the 100MW battery has achieved over 55% of the FCAS revenues in South Australia. So it’s 2% of the capacity in South Australia achieving 55% of the revenues in South Australia.”

Expanding on this, he noted that no other markets in Australia had seen a fall in FCAS pricing, just South Australia, and that other estimates have put Tesla’s revenue at around $30m over those months. Key to its success is the wind power that is being used to recharge the battery. Neoen’s rivals are stuck with using more expensive and more price-volatile fuel.

In the current setup, 70 MW of the battery are reserved for the South Australian government to use, leaving 30MW for Neoen to provide FCAS services with. Neoen is planning to expand into both Victoria (20 MW) and Queensland, with the latter project potentially larger than South Australia.

To be clear, Tesla doesn’t have a stranglehold on this new approach. Others can go out and cause similar disruption, as the technology itself is apparently so much more competitive than gas or coal. SIMEC ZEN is also planning a sizeable battery only 100-miles from the Neoen installation.

Tesla’s most recent conference call saw CEO Musk say that the company could announce a gigawatt-hour scale project within a matter of months. Such a project would be the largest in the world, beating Rongke Power’s planed 800 MWh project in China.

Tesla’s energy generation and storage revenue grew 92% ($192m) between Q1 2017 and Q1 2018, although its costs grew 147% ($223.6m) in that same period. Tesla said that revenue attributable to the South Australia battery project was $72.5m.

However, it is important to note that South Australia is something of a unique market, with high demand for FCAS services. In more stable grids, such services will not be in such high demand, and it’s worth bearing in mind that if lots of suppliers rush in, they’ll begin racing each other to the bottom in no time at all.

In the longer-term outlook, as more grids use more renewables, batteries will become more important to overall grid stability, rather than purely from an FCAS perspective. Instead of cutting in to save a blackout caused by an emergency shutdown in a gas plant, a battery might be used to prevent a fall in generation from wind or solar.

Also worth noting were the UK’s results, where wind generation overtook nuclear generation through a quarter for the first time, and where the country went 55 hours without using coal. It’s a sign of the shift that is occurring towards renewable sources, which for a long time were pushed for their environmental credentials but are now also winning the economic arguments.