Community batteries are becoming a popular topic of conversation in the energy sector, sparking debates about their value and fairness.
In this blog, Indigo Power’s analyst Nick Mason-Smith, unpacks the concept of virtual storage, sharing insights from his talk at the Community Energy Congress, and highlighting how Indigo Power’s innovative approach to community batteries works to ensure fairness and sustainability for all our customers.
In a thought-provoking article for the Financial Review, Tristan Edis raised eyebrows by comparing them to a “Ponzi scheme.” His critique focuses on the concept of virtual storage—where exported energy is stored in a shared battery without households needing physical batteries or significant changes to their energy usage. This model, also known as energy storage as a service, raises critical questions about fairness and sustainability.
What is virtual storage?
At its core, virtual storage allows households to sign up for a service that compensates them for the energy they export, even if they don’t have a physical battery. Edis argues that if households can receive payments for doing nothing, it resembles the hallmark of a Ponzi scheme. This assertion challenges the very foundation of community energy initiatives.
During my talk at the Community Energy Congress, I emphasised that virtual storage is fundamentally a financial instrument. In fact, I could provide virtual storage using just smart meter data—no physical battery required.
Modelling the cash flows
To illustrate the dynamics of virtual storage, I modelled the value flows for my home’s energy use with a solar system using Gridcog. I compared four scenarios:
- Baseline Scenario: No storage.
- Virtual Storage: Mimicking battery functions through contracts.
- Home Battery: A straightforward setup where the customer installs a battery.
The home battery advantage.
In the home battery scenario, customers receive fewer feed-in tariffs but benefit from reduced import tariffs. The virtual storage scenarios, however, operate without a physical household battery. Instead, customers pay a small subscription fee, which results in fewer feed-in tariffs and reduced import tariffs.
The cash flow analysis reveals that virtual storage is a zero-sum game: any gain for the customer translates to a loss for the network operator or retailer. In contrast, a home battery reduces the retailer’s costs, benefiting both the customer and the energy provider.
Zero-sum financial instruments are regularly used to manage risks. For example, renewable generators enter into long-term power purchase agreements to ensure stable revenues, which are built around zero-sum contracts for difference. Importantly, this differs from our modelled scenario in that the household faces no market risk – they already have a fixed price contract with their retailer for the financial year.
A different community battery model.
If home batteries present a win-win for a retailer and the household, and virtual storage involves the transfer of value from the retailer to the household, is there a community battery model that works for both? Such an approach implies the linkage between an electricity retail business and a community battery’s operation and it is important to note that many community batteries are managed without any direct connection to electricity retail customers at all, using the batteries to trade the spot market or manage the electricity network.
The approach Indigo Power is taking attempts to share the benefits of community batteries with all customers rather than a select few solar customers. This approach involves managing the community batteries as a fleet, as a hedge for our electricity retail customers and reducing overall risk management costs. Using a fleet of community batteries as a hedge has the following benefits:
- It creates value for both the retailer and the customer. The retailer can cost-effectively manage their retail risk. Cost savings can be passed on to retail customers.
- It benefits all customers, not just those with solar panels. This prevents renters, those with homes unsuitable for solar or those unable to afford solar, from missing out on the benefits of community batteries.
- It allows small retail businesses, like Indigo Power, to manage their retail risk in an environment where the market for effective hedging instruments is rapidly diminishing.
Is it possible to build a fleet of community batteries with enough scale to hedge a small retail load? Indigo Power has approximately 1800 customers, about 1500 in Victoria. In Victoria, our customers export between 1 and 2 MW on average daily, depending on the quarter, above our needs. Customers use a similar amount at peak demand times, particularly in the mornings and early evenings, depending on the time of year. A fleet of community batteries can store this exported solar energy from our customers and shift this to the early morning peak.
Indigo Power is growing a fleet of community batteries commensurate with this scale, with 1.8 MW and 5.5 MWh of community battery storage currently funded. We’re now exploring ways of integrating our fleet of community batteries with our retail load to get the best financial outcome for our customers and our company.
As an analyst, Nick specialises in energy systems and sustainability initiatives. He explains the complexities of integrating community-scale batteries, aiming to revolutionise energy distribution and resilience. Nick leads a federally-funded feasibility study on community-scale batteries in North East Victoria.