There is good news and bad news regarding our electric grid. The bad news is the grid has a peak demand problem. The good news is that it’s a 4-hour problem, not a 24-hour crisis. On a daily basis, we have four hours of peak demand when the grid needs help. From about 4 p.m. to 8 p.m., businesses and households ramp up their heating or air conditioning and people head home to begin cooking dinner, running their washers and dryers and charging their cars, driving up electricity usage. This demand surge strains grid infrastructure and can cause voltage fluctuations and grid instability.
Power Prices Surge During Peak Demand
Graph visualizing a full day of energy generation and demand in California by comparing average power prices during each hour of the day. In the morning, power prices are low and generation is abundant. In the evening, power prices surge as electrons are constrained. Source: Thunder Said Energy
During the same 4-hour period, the sun sets, and solar energy production goes down. In response, grid operators and power producers quickly ramp up conventional power plants, or gas turbine peaker plants, to meet peak demand and compensate for the loss of renewable supply, often resulting in higher power prices, greater emissions, and costly wear and tear on those reserve power plants. For utilities, peak demand can mean difficulty delivering affordable, reliable energy to ratepayers. For power producers, it can cause financial and logistical challenges in meeting fixed-price Power Purchase Agreements (PPAs).
This 4-hour scenario looks much different when battery energy storage systems (BESS) enter the equation. Batteries paired with all energy generation sources can solve the peak demand problem, avoiding the extensive time and capital investment needed to build new peaker plants, avoiding the over-use of current peaker plants, and providing transmission relief to support growing energy demand from sources like data centers.
Consequences of the 4-Hour Problem
While peak demand is only a small portion of everyday power grid operation, it can have far-reaching implications for grid operators and owners, energy producers, and energy users.
Transmission Congestion
We often compare the 4-hour problem to rush hour. Transmission networks—the grid’s highway system that moves large quantities of high-voltage electricity—can get congested during peak demand periods. These transmission traffic jams lead to higher electricity costs, reliability issues, and wasted energy. In worst-case scenarios, an accident can bring traffic to a halt, just as the grid can go down if energy isn’t adequately managed. With more lanes, or better transmission management leveraging batteries (the equivalent of distributed commuter lots), traffic can flow better and may not over-burden common chokepoints.
Stifled Data Center Growth
Transmission constraint significantly impacts energy users like data center operators and owners, who need large amounts of consistent, reliable electricity to power computing needs for applications such as artificial intelligence (AI). The U.S. Department of Energy estimates that data center energy demand will triple by 2028. If the 4-hour peak demand problem goes unaddressed and transmission infrastructure can’t keep up with this rising demand, data center growth will be stifled in the U.S.
Energy Curtailment
The strain of peak demand on transmission congestion also throttles the use and growth of cost-competitive power generation. Transmission lines have physical limits, and oftentimes grid operators must curtail cost-competitive generation sources because there isn’t enough capacity on the grid to transport the power from where it’s generated to where it’s needed. For example, in California, grid operator CAISO curtailed 2.4 million MWh of wind and solar energy in one year, a 63% year-over-year increase. These were electrons available to the grid that should have been available to ratepayers. Without the use of battery storage to park excess energy and discharge it at a later time, we don’t get the full value out of current generation sources on the grid.
Rolling Blackouts
In extreme cases, such as historic heat waves or winter storms, the grid’s peak demand problem can escalate to rolling blackouts as grid operators strive to prevent system-wide failure. While these scenarios were once few and far between, the frequency and intensity of extreme weather events and natural disasters has increased.
Battery Storage Solutions to the 4-Hour Problem
When deployed both behind and in front of the meter, BESS is well-positioned to solve the challenges associated with peak demand today and in the future. Battery storage can ease the 4-hour problem while also addressing rapidly growing energy demand by supporting greater integration of all power sources. For energy asset owners and operators, BESS is one of the fastest asset classes making it to the grid and it can reduce energy costs, create new revenue streams, and ensure a reliable energy supply.
Time to Market for Energy Resources
Graph visualizing time to market for different energy resources, highlighting that the speed to market for batteries is unmatched at one year or less. (These estimates are based on industry reports, project case studies, and regulatory frameworks.)
There is a range of use cases for BESS when it comes to addressing peak demand challenges:
Peak Shaving
Through peak shaving, BESS can store energy generated throughout the day and then discharge that energy during the 4-hour peak demand period. For battery owners and operators, that means avoiding peak demand charges by purchasing power when prices are low and energy generation is plentiful. Integrating BESS can reduce the grid’s reliance on peaker plants and the need to curtail low-cost energy, and it can reduce the wear and tear of ramping traditional generation sources, improving grid efficiency — or in other words, improving the highway’s functionality.
Ancillary Services
Batteries can also support grid stability and improve power quality during peak demand by reacting quickly to grid frequency fluctuations and helping maintain a consistent frequency of 60 Hz. Through frequency regulation and fast frequency response (FFR) services, BESS sites deliver critical support to the grid by preventing power disruptions and supporting the integration of variable energy sources like solar and wind. This grid support is lucrative, as well. In the first half of 2023, ancillary services made up 87% of revenues in ERCOT.
Energy Arbitrage
High power prices during peak demand periods present another opportunity for BESS owners and operators to earn revenue. Through energy arbitrage, battery assets charge from excess power at a lower price during off-peak hours, which is then sold back to the grid when prices are high during peak demand hours. This is the most common use case for utility-scale batteries in the U.S. In California, commissioners estimate BESS sites can earn between $51.6/kW-year and $72/kW-year through arbitrage alone.
Example of Energy Arbitrage Opportunity
Two visualizations highlighting the difference in power prices at noon and 6:00 p.m. in California. Through arbitrage, battery owners can charge assets when electricity is plentiful and inexpensive, then use stored energy when the grid is congested and power is expensive. Time-of-use arbitrage on this day was greater than $100/MWh. Source: CAISO
Data Center Interconnection Acceleration
The 4-hour problem is cascading to data centers, restricting their ability to receive utility interconnections with “firm” agreements or committed, continuous power. Data center developers are innovating by signing “Interruptible Interconnection Agreements” and leveraging 4-hour-duration batteries to cover intermittency periods. On non-critical days, some data centers will participate in peak shaving, ancillary services, and energy arbitrage to reduce energy operating costs.
Engineering the Optimal BESS Solution
There is no one-size-fits-all solution when it comes to BESS. For each of these use cases, there are ideal battery configurations, durations, and power capacities. Fortunately, there are experts in the industry who are engineering systems to best serve all stakeholders based on site and use cases.
As battery technologies continue to advance and improve, they will not only solve today’s 4-hour problem but will also move the needle on complex, long-term challenges, like data center energy demand and emission reduction goals.
To ensure your storage systems are online, available and optimized for maximum performance during 4-hour peak demand, learn more about how FlexGen customers maintain the highest availability in the industry.
