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"The nonstorability of electricity causes occasional very large movements in the spot price."
John C. Hull in Options, Futures, and Other Derivatives (8th ed., p. 751)
The rapid adoption of utility-scale batteries is among the most important developments in energy in the 21st century, alongside fracking, solar, wind, and electric vehicles (EVs). The ability to store large amounts of electricity makes the electric grid more reliable1 and electricity cheaper. The two states leading in battery adoption are California and Texas.2 The rate of growth in installed capacity is astonishing.
Source: California ISO 2024 Special Report on Battery Storage, page 8
As implied by the quote from the financial engineering bible, increased battery storage capacity in California and Texas has coincided with declines in electricity price volatility.3
Batteries have enabled reductions in prices and volatility by enhancing the operation of renewables and traditional sources of generation.
Pairing Storage with Renewables
Batteries are often paired with solar and wind energy to store power when their generation isn’t needed. In the case of solar, generation peaks around noon, well before the evening peak load when people return home from work. When there is large-scale solar production, the slope of net load (total demand minus renewable generation) can be steep heading into peak hours. If it is steep enough, utilities will have difficulty ramping up other sources to meet net load with traditional power plants. This is called the “duck curve.”
Batteries allow net load to be smoothed out, which reduces prices in two ways:
- Solar (and wind) energy has near-zero marginal costs. Batteries allow utilities to provide cheap electricity when it is most expensive. This is called arbitrage.
- Power plants are brought online in order of how economical they are to run. The least efficient plants are turned on only when needed, typically during peak hours. Less generation is required from high marginal cost plants by smoothing out net load.
Although batteries are often associated with renewable energy sources, they are technology-neutral — they can be charged from any generation source. Batteries also complement the operations of other types of power plants, including gas plants.
Beyond Renewables: Batteries and Traditional Generation
As with solar, batteries enable arbitrage for natural gas plants. Although utilities hedge their gas position, they still have significant exposure to spot gas prices. Natural gas prices are highly correlated with electricity prices4, so utilities can charge batteries with generation from gas plants when gas and electricity are cheap and discharge the batteries when gas and electricity are expensive. To demonstrate this idea, I ran a simulation using PyPSA, based on 2022 CAISO hourly load and day-ahead LMP electricity prices. The idea is that I am operating a single plant and have committed to meeting the required load. I scaled the CAISO load to peak at 1,000 MW. Since I didn’t have access to hourly gas prices, I used electricity spot prices as a proxy, scaled to match industrial gas price data (converted from $/MCF to $/MWh equivalent). It’s not perfect — it assumes perfect foresight and ignores hedging — but it gives a useful approximation.
Plant Setup
I modeled a three-turbine gas plant with the following characteristics for each turbine:
- Max Output: 400 MW
- Min Output: 120 MW (30%)
- Ramp Up/Down Limit: 160 MW (40%)
- Min Up Time: 4 hours
- Min Down Time: 2 hours
- Start-Up Cost: $5,000
- Shut-Down Cost: $500
And a 4-hour, 200 MW battery:
- Max Output: 200 MW
- Capacity: 800 MWh
- Charge/Discharge Efficiency: 92%
Results
- Without battery: Operating cost = $219.7 million
- With battery: Operating cost = $207.9 million
- Savings: $11.8 million (5.4%)
A plot of dispatch on the day of peak load is shown below.
The battery charged during low-demand (and low-price) hours and discharged during peak periods, displacing more expensive gas-fired generation.
Arbitrage is not the only way batteries improve gas plant operations. Utilities contract with pipeline companies to receive a certain amount of gas daily. There are lower and upper limits on these contracts, which carry steep penalties if exceeded. Utilities can run their gas plants to charge batteries instead of wasting electricity if they are close to the lower limit, and discharge batteries instead of switching to more expensive units or fuels, like oil, if close to the upper limit.
Additionally, a gas generator may not be economical to run in a given hour but will be in several hours. A utility must choose between wasting energy and cycling turbines on and off. Turning a turbine on and off causes wear and tear on the blade through thermal cycling. If the utility has batteries, it can just charge the battery. This is a salient benefit given the current shortage of turbine blades.
Having shown how batteries reduce system costs, the next question is how those savings are passed on to consumers.
How Batteries Cut Costs for Consumers
The mechanism by which lowered costs reach consumers depends on the type of market the consumer is in.
- In regulated utility-owned grids, utilities operate as natural monopolies overseen by regulators. Their earnings are typically tied to their return on capital and not operating revenues, so lower operating costs should filter down to customers through rate cases.
- In deregulated market-based grids, companies submit bids to a grid operator to supply a given amount of electricity at a specific price. As their costs go down, so do their bids and the market-clearing price.
Batteries lower costs for electricity producers and consumers, but the speed of their adoption is threatened. I’ve focused on marginal costs up until now, but fixed costs matter in capital-intensive projects, like utility-scale battery installation. Policies enacted under the Biden administration lowered the already falling fixed costs of battery installation and enabled rapid adoption.
Policy Support for Storage in the early-2020s
Utility-scale battery storage became more attractive as the price of batteries fell in the early 2020s. As discussed above, this is good for the efficient operation of the American electric grids, but most of these batteries were coming from China. Batteries are a strategic technology on which the West should not be reliant on China. To balance the benefits of installing batteries now and developing a domestic or “friend-shored” battery industry, the Biden administration put policies into place that encouraged battery installation and the creation of a US and US-allied industry.
The Inflation Reduction Act (IRA) of 2022 extended section 48 tax credits to projects built before the end of 2024, giving a 30%5 tax credit to clean energy projects, including batteries. It created the 48E tax credit to replace the Section 48 credit after 2024, which retains the 30% tax credit for the year a project comes online and offers up to an additional 40% in incentives depending on where projects are built and if they meet domestic sourcing requirements. Additionally, it made these tax credits transferable to reduce the need for complicated tax equity deals with investors. Finally, it modified the 30D tax credit that gave consumers $7,500 for purchasing electric or hybrid vehicles, subject to escalating sourcing requirements of inputs from domestic or free-trade agreement partner countries. The sum of these policies made it cheaper to build battery storage projects and encouraged shifting battery supply chains from China to the US and partner countries. That is now at risk due to the current administration’s trade policy and the One Big Beautiful Bill Act (OBBBA).
The One Big Beautiful Bill Act and Batteries
Tariffs on China make Chinese batteries more expensive and reduce the attractiveness of building more storage capacity, as does the uncertainty around trade policy. The OBBBA’s effects are more complicated.
The OBBBA has received negative coverage from energy analysts for its overall effect on the energy industry. REPEAT projects US energy expenditures to be 7.5% higher in 2030 and 13% higher in 2035 relative to the case where the Infrastructure Investment and Jobs Act and IRA policies remained in place. The solar and wind industries receive the worst treatment with the accelerated phase-out of the 48E and 45Y tax credits, but batteries were not spared. While REPEAT projects battery investment to increase from the base case through 2027, the increase is more than offset by decreases from 2028 to 2035. Gracelin Baskaran and Meredith Schwartz of CSIS identify three policy changes in particular that will damage the mining industry, and by extension, the battery industry:
- The 30D Clean Vehicle tax credit will end this year. While this doesn’t directly affect utility-scale batteries, EVs are the largest source of demand for battery production, so this is a blow to the burgeoning US battery industry.
- The 45X Advanced Manufacturing tax credit remains in place, although it will now begin ramping down for critical mineral production by 25% annually starting in 2031, ending in December 2033. These inputs are vital to battery production. The prices of many of these minerals have fallen, reducing the incentive to invest in new mines, and mines require years to come online. Losing the tax credit further disincentivizes investing in new mines within the US and countries with which it has free trade agreements.
- The OBBBA expands the Foreign Entity of Concern (FEOC) definition and bans companies that meet that definition from receiving the 45X tax credit starting next year.
Tariffs are making batteries more expensive now, and the policies in the OBBBA make building a domestic/friend-shored battery industry less attractive. The US should change course to reap the benefits of battery storage.
Policy Recommendations: Building Storage and Sovereignty
Batteries are an important tool for cheaper and more reliable energy. At the same time, the world is over-reliant on Chinese batteries and battery inputs. It is important to foster an alternative battery ecosystem among the US and its partners. This takes time and incentives.
- Reduce the current tariff rate on batteries across all countries. Escalate them over time against non-allied countries.
- Reinstate the 30D tax credit and maintain its escalating domestic and FTA partner sourcing requirements to stimulate demand for domestically produced or friend-shored batteries.
- Extend the 45X tax credit for battery production and upstream industries over a longer time horizon to make factory and mine investments less risky.
- Phase in FEOC requirements over several years to give companies time to adjust.
- Incentivize battery research.
- Either provide funding through the National Science Foundation or the Department of Energy for batteries with increased energy density, cycling efficiency, etc.
Conclusion: Batteries, Security, and the Energy Future
Batteries are an important technology for energy abundance. They are also critical to military technologies, and the US and its partners cannot become wholly dependent on China for them. To square that circle, we need to return to policies encouraging building storage capacity now, while simultaneously building US-aligned production capacity. Sustained support for storage deployment and domestic battery production is essential for meeting rising electricity demand and maintaining a reliable, cost-effective grid.
1 How Batteries Are Making the Electrical Grid More Reliable
2 Batteries, alongside solar, are credited with meeting Texas’s record load demand last summer.
3 Correlation does not equal causation, but proving causality is difficult and beyond the scope of this post.
4 Electricity generation is the single largest consumer of natural gas at 40%.
5 6% is multiplied by 5 if the project has a maximum output under 1 MW after the conversion from DC to AC, or meets the prevailing wage and apprenticeship requirement.
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