Storage Business Models: Lessons for Electricity from Cloud Data, Frozen Food and Natural Gas.

• Author: Anaya, Karim L.

1. INTRODUCTION

   Electrical energy storage (EES), along with interconnection and flexibility in demand, is among the innovations that can support the transition to a non-fossil fuel energy system based on renewables. In the UK, the 'Smart Power Revolution' facilitated by these innovations has been estimated to save customers up to [pounds sterling]8 billion a year by 2030 (NIC, 2016). Driven by the climate change targets set by the European Commission (40% and 80-95% cut in GHG by 2030 and 2050 respectively, compared to 1990 levels) and its individual member states, it is expected that intermittent generation such as wind and solar will increase substantially in the EU. EES storage can help to balance supply and demand, integrate less controllable power sources and decarbonise the energy market (and hence other sectors). The quick implementation of EES (in months rather than years for conventional generation and network investments) and the cost reduction of storage technologies will also contribute to its expansion. Between 2010 and 2016, electric vehicle (EV) battery pack prices have fallen around 80%, from US$ 1,000/kWh to US$ 227/kWh, with prices expected to be below US$ 190/kWh by 2020 (McKinsey, 2017). The downward trend has also led to recent announcements of large-scale storage projects, such as those in Australia (1) and Chile. (2)

   EES has a multiproduct nature and may offer different revenue streams to those that operate or own the facility. The potential welfare gains from storage can be influenced by the type of ownership arrangement (Sioshansi, 2010; Schill and Kemfert, 2011). Integrated solutions (e.g. storage plus distributed energy resources--DER) help to mitigate the variability of intermittent generation (Mount et al., 2012), can enhance the reliability of distribution and transmission networks (Mountain and Carstairs, 2018) and may represent a potential game changer in places with high household PV penetration (Macgill and Smith, 2017). In general, the size of the revenue streams depends on different factors such as the place where the facility is located (at a generator, on the transmission or distribution system or at the end-customer), the type of service provided (ancillary services, investment deferral, arbitrage), the type of arrangement (individual storage units or integrated solutions with DER), the storage technology (which determines the type of service to be provided under different technical specifications), the market and regulatory context (which may or not encourage its deployment) etc. Even though there are powerful forces promoting EES, there are some barriers that may prevent its full deployment. Among these are regulatory barriers (around the classification of EES, the charging methodology, connection rules, ownership and unbundling rules and regulatory revenue compensation), market barriers (EES and related products as new market participants in existing wholesale and ancillary services markets, EES services provided across multiple classifications) and technological barriers (high capital costs, few technologies at the commercialisation level, lack of modelling capabilities, lack of smart technologies for real time dispatch) (see Sioshansi et al., 2012; Bhatnagar et al., 2013; Anaya and Pollitt, 2015; IRENA, 2015; BEIS and OFGEM, 2016; Pollitt and Ruz, 2016; Sidhu et al., 2018).

   The implementation of well-designed regulatory frameworks and established business models for EES is still a work in progress. The lack of a defined asset class for EES and the failure to properly value its unique attributes, characteristics and benefits represent a barrier to its participation in organised wholesale electricity markets (FERC, 2016, p.24). The European Commission is working on a proposal to define energy storage and related rules regarding its ownership. However, its asset classification (as generation or consumption) along with the issue of double charging (as a generator and as a load), has not been addressed yet (EC, 2017). In Great Britain, the Office of Gas and Electricity Markets (OFGEM) is also evaluating specific changes to the current residual and balancing services use of system (BSUoS) charging methodology for storage (OFGEM, 2017a) and changes to the current electricity distribution licence related to storage ownership (OFGEM, 2017c). Based on this, new proposals (driven by industry) have emerged for changing the current method for charging storage for using the system. (3) In the USA, there are initiatives that aim to reduce barriers to the integration of electricity storage resources (and its participation in the wholesale market) and to set a more appropriate cost recovery mechanism, FERC (2017). At the state level, there are also different initiatives that are being promoted such as California's Energy Storage and Distributed Energy Resources (ESDER, phase 1 and 2) (CAISO, 2016, 2017).

   The aim of this study is to explore well-established non-electric storage markets such as natural gas, cloud data and frozen food storage to identify some key lessons applicable to EES operated by electricity distribution companies. (4) The selection of the non-electric storage markets covered in this paper has been made to illustrate alternative storage markets with respect to degree of maturity (different stage of their life cycles) and business models, while still being relevant to electricity. After selecting the storage sectors, we looked for company cases which were well documented and/or willing to participate in our research. We decided to select only one case per type of storage market for a better and deeper discussion. Section 2 discusses the life cycle stage of each market and provides additional details about the selection of case studies and EES.

   In contrast to the current literature in EES that concentrates on technical aspects and cost benefit analysis (Sioshansi, 2010; Schill and Kemfert, 2011; Shcherbakova et al., 2014; Newbery, 2016; Sidhu et al, 2018), and the identification of EES business models but without looking at other industries (Pollitt and Ruz, 2016; Lombardi and Schwabe, 2017); this study explores the opportunities that EES owners/operators have for capturing the value of storage by (1) identifying properly the job to be done (the storage products offered to customers), (2) the way to monetise them (that defines the value to the storage firm) and (3) the resources needed to make this possible (assets, partnerships, storage capacity allocation mechanisms, among others). A look at different non-electric storage markets provides valuable insights on the way in which the different components of business models are interacting and capturing value for both customers and storage firms. The business models' discussion across the different markets is based on the method proposed by Johnson et al. (2008). The authors identify four interconnected components: the customer value proposition, the revenue formula, key resources and key processes. Further details are given in Section 3.

   The rest of this paper is structured as follows. Section two describes the life cycle associated with the three non-electric storage markets and EES. Section three explains the business model methodology. Section four explores the three non-electric storage markets and their respective business model components. Section five compares and analyses the three cases based on the methodology proposed and identifes key lessons for EES. Section six sets out our conclusions.

2. LIFE CYCLE OF EES AND NON-ELECTRIC STORAGE MARKETS

   Studies that define the product life cycle (PLC) have their origins in the 1960s (Levitt, 1965; Cox, 1967). The original concept identified four independent stages associated with the PLC (introduction, growth, maturity and decline) (5) and the well-known bell-shaped curve with sales volume (on the y axis) and time (on the x axis). (6) It was developed under the marketing arena first (M-PLC) but its use has been extended to other fields. Different criticisms of the four-stage PLC have also emerged over time. Among them are those related to the sequential framework of the stages, their length and issues with the definition of the product (Dhalla and Yuspeh, 1976). The limited value of the PLC in forecasting (across the four stages) is discussed by Day (1981) and Grantham (1997), while Lambkin and Day (1989) discuss the shortcomings of the PLC model and the need for a more comprehensive approach that includes both demand and supply-side factors in the process of market evolution. In spite of these criticisms, the concept is still well accepted in the literature of PLC within and beyond the marketing field. In their study of the 115 product life cycle articles (over the period 1950-2009), Cao and Folan (2012) identify 77 articles that discuss the traditional product life cycle model (M-PLC), 37 articles that follow a later product life cycle model (E-PLC) (7) and one that discusses both.

   The selection of non-electric markets that are in different stages of their respective life cycles allows us to capture the different operating approaches across their business models' components. Figure 1 depicts the different life cycle stages associated with each of the different non-electric storage case studies and EES.

   We have classified EES in distribution as an emerging market (Introduction stage). Even though energy storage has been around for decades (i.e. pumped hydroelectric storage), it is the new EES application that places this market in the introduction stage. The downward trend of battery prices is also triggering the development of this market. EES in distribution is currently being introduced in a few jurisdictions with relevant initiatives linked to trials (e.g. the Smarter Network Storage and Customer-Led Network Revolution projects in Great Britain; the Horizon Power pilot project in Australia). The demand for EES in distribution is being created but as...