Decentralized Energy Storage the Shortcut to a Net Zero Future

Mexico is in a privileged position to generate more than 100 percent of its energy through renewables sources. Without storage to level the variability of this type of electricity production, the national grid will not be ready for that transition. Storage, whether centralized or decentralized, is needed and it is needed for Mexico today. Changing regulations and market structures for storage deployment in the utility scale, although viable, will require time and effort from policymakers who have other priorities. Instead, all effort should be fixed on further promoting storage through distributed generation: a market space with no regulatory barriers, that holds a strong business case and can still provide all the benefits of energy storage that help meet net zero targets. 

In an earlier article, I evaluated the benefits of energy storage and discussed the reasons for its slow deployment in each section of the Mexican energy value-chain (generation, transmission and consumption). Continuing on that scope of work, I now propose solutions to market and regulatory barriers previously identified. This is followed by a feasibility analysis and concluding recommendations endorsing distributed generation as the quick win (highest impact, lowest effort) catalyzer for storage deployment in Mexico.

As noted earlier, there exist two main factors that impede the rapid deployment of storage in Mexico: an inadequate regulatory framework and a lack of policy support.

Regarding regulatory framework barriers, the first thing that should be done is to provide a legal definition suited to energy storage and its applications. The Electricity Market Basis 3.3.21 (SENER, 2015) states that, “electrical energy storage equipment must be registered as a Power Plant and must be represented by a Generator.” Classifying storage as generation presents an issue as it requires storage to assume all responsibilities of a load center, and all responsibilities of a generator. To begin with, it would have to pay double distribution and transmission tariffs (once when electricity is “consumed” for storage and once when electricity is “generated” again, or released back into the grid). The same thing would happen with payment of CELs.  Additionally, classifying storage as generation would eliminate the possibility of offering distribution and transmission applications. It will not be recognized as a transmission or distribution asset — independently of how beneficial it might be for the national grid — because of strict legal separation between generation and other asset classes.

From the outset, the easiest solution would seem to be to define a completely new asset class for energy storage that recognized the nature of the technology and its applications. I would advise otherwise. Since the electricity supply chain is defined by the Mexican Constitution, creating a new asset class for energy storage might require a constitutional reform, which right now is seemingly impossible and would only further delay the technology’s deployment. Instead, I would recommend defining energy storage under traditional categories (such as generation) but suggest modifications at a regulatory level (under CRE’s jurisdiction), eliminating the need for changing the LIE. For example, instead of classifying storage as generation or another specific class, define when storage should be classified as generation and in what instances it could be treated as transmission or distribution. A bylaw could be set to identify electricity “consumed” for storage and electricity that is “generated” again (released back into the grid) so that it could be considered a generator, transmission or distribution asset accordingly and be exempted from certain illogical tariffs. 

Once equipped with a suitable legal definition for storage, the next step is to tackle market barriers where the remuneration methodology for regulated ancillary services is not defined and, for some storage applications, is simply inexistent. For example, the Market Basis 6.2.5 states that primary regulation (or rapid frequency response) is not to be remunerated in the market. One of the main advantages of battery technology is its rapid response service. Without this application being recognized it cannot be benefited from and much less remunerated. The creation of a rapid response market would not only be beneficial to deployment of storage, but it would also accelerate the development of renewable generation, which faces challenges today associated with frequency control. As is the case with a rapid response market, it is essential to define and introduce within the regulatory framework other services necessary for the proper functioning of the national electric system that can be supplied through storage (namely frequency control, ramp control, load following and congestion relief) and could allow utilities to delay capital upgrades or building extra grid infrastructure.

Nevertheless, as straightforward as it may seem, modifying regulations and eliminating market barriers can be a very timely and costly procedure that should be viewed in the long term. As an immediate solution, I would advise concentrating deployment efforts where regulation and infrastructure already exist and are fit for storage applications. The only area where this is the case in Mexico today is in distributed generation. Companies, such as Quartux, which develop tailor-made storage projects for final users, are taking advantage of regulation schemes that are already in place (such as net billing and net metering) to offer solar-plus-storage solutions that 1) present a clear business case with an economic benefit to the user; 2) liberate the transmission grid and eliminate transmission losses (which account for 15% of total generation); 3) can be highly scalable (given the high connectivity of the Mexican grid) and could be interconnected through smart control to reduce generation emissions drastically.

In this sense, my advice for Mexican policymakers in the short term would be to direct efforts into generating incentives that target these types of projects that already operate under current regulatory frameworks, carry high impact potential due to scalability and have been proven to operate properly and reliably by companies like Quartux. This could be done through a regulatory approach (draft regulations that require use of storage, for example Código de Red) as was the case in the California market or through fiscal incentives similar to those afforded to solar installations and which can be commensurate with the value of positive externalities associated with storage. By doing so, Mexico would be taking advantage of the already established foundations for distributed generation and prioritizing efforts for obtaining a reliable grid, clean generation and lower energy costs