How to Re-think Pumped Storage and Improve its Market Value

Pumped Storage Hydropower is a proven, energy-efficient and dispatchable solution for bulk energy storage that has been around for generations. This type of hydroelectric energy storage is gaining interest for its ability to energize the grid during peak demand or when renewable sources are not providing sufficient power or energy. However, its high initial price tag and long rate of return (40 years+) are slowing its growth and investment. So, how do we overcome these barriers and make pumped storage more economically viable and attractive to investors and developers?
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1. Provide financial incentives and government mandates: Outside the U.S., pumped storage is growing faster in countries where governments are taking a vested interest in the technology. Whether government-funded, like in China, or through public-private partnerships like in Australia and parts of Europe, pumped storage is on the rise as a way to reduce dependence on fossil fuels and support renewable generation.

In the U.S., the Infrastructure Investment and Jobs Act (IIJA) has allocated $355 million to support energy storage demonstration projects like pumped storage. An additional $150 million is available for long-duration energy storage technologies. This financial incentive, along with other investment tax credits available through the Inflation Reduction Act (IRA), low-interest loans, or tax credits growth, have helped to increase interest and early-stage development of pumped storage projects. Setting targets or mandates for using a certain pumped storage energy capacity may prove beneficial as well.
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2. Make market adjustments: Improve pumped storage’s market value by working with Independent System Operators (ISOs) to adjust market rules and mechanisms. An example may be introducing a capacity tariff or rate for ancillary services, such as black start, quick ramp-up, spinning reserve, voltage regulation, and rotating inertia to ensure grid stability and reliability. Assigning a value for reliable capacity and grid stabilization during peak demand times would allow pumped storage to charge for dispatchable and flexible power services, thereby increasing its market competitiveness. Putting these market drivers in place could help to establish the foundation of a futures market for ancillary benefits and also provide revenue certainty to pumped storage investors pushing project proformas to a more favorable return on investment.

As conventional fossil plants are retired, Resource Adequacy (RA) is also becoming increasingly important and valuable. Ensuring RA is properly defined in grid tariffs and markets is critical to a reliable electric grid and pumped storage’s financial picture. Current and future pumped storage projects provide dispatchable capacity for frequency and voltage control in addition to RA capacity.
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3. Classify as a Transmission Asset: By making pumped storage a transmission asset and recognizing it as a vital part of grid infrastructure, utilities could access regulatory support and rate structures exclusive to transmission including:

• enabling capital costs to be included in capital plans and recovered through rates,

• receiving additional regulatory advantages, such as streamlined permitting and siting processes that shorten deployment schedules and speed to market, and

• making it easier for pumped storage to participate in ancillary markets and other various grid services to earn revenue.
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4. Long-Term Power Purchase Agreements (PPAs): Offering long-term PPAs to major power users at competitive rates can provide the revenue certainty developers need to secure financing for pumped storage projects. Data centers are the largest purchasers of PPAs from solar and wind farms. According to a Data Center Dynamics article, published in May of 2022, Amazon, Microsoft, and Google purchased a combined 31GW of PPA power. However, data centers require consistent 24x7 power. Due to variance and fluctuations, it’s nearly impossible for a data center to receive all green power from a renewable PPA alone. So, they must supplement with other power sources (including fossil fuels) to avoid downtime. Pumped Storage is a viable option to balance out a PPA’s renewable energy portfolio and enable major power users to truly go 100% renewable.
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5. Re-design Pumped Storage as Scalable, Modular Energy Storage: One of the reasons behind pumped storage’s high capital costs is the physical size and capacity, typically in the 400MW to 1600MW range. Designing the capacity and longevity of the facility to be more in line with solar and wind’s capacity and capital costs, could help to reduce up-front costs and deployment timelines. The resulting reduced capital costs represent a reduced risk to investors which could spur development.

The pumped storage industry must continue to raise public awareness and educate the market on the benefits of pumped storage including the long life and lower life cycle cost of pumped storage. By further advocating for policy changes, innovative market reform, and technology advancement, we can effectively stimulate pumped storage’s growth and cement its role as a valuable component of a sustainable and resilient energy system.