Grid-scale batteries do not currently reduce emissions. Here's how they could.

Energy storage as deployed on the US grid today has a dirty
secret — it actually increases carbon emissions. In this episode,
Tierra Climate founders Jacob Mansfield and Emma Konet discuss
their vision to incentivize emission reductions by making
batteries and other energy storage eligible for carbon offset.


(PDF
transcript)


(Active
transcript)


Text transcript:


David Roberts


It is widely understood that decarbonizing the grid will require
a large amount of energy storage. What is much less widely
understood is that batteries on the grid today are generally not
reducing carbon emissions — indeed, their day-to-day operation
often has the effect of increasing them.


Yes, you heard me right: most batteries on today's grid are
responsible for net positive carbon emissions.


I was quite disturbed when I first found out about this, mostly
through the research of Eric Hittinger at the Rochester Institute
of Technology, and I wrote a piece on it on Vox way back in 2018.


Contemporary research suggests that nothing has changed in the
ensuing five years — most batteries still behave in a way that
increases emissions. But a new startup called Tierra Climate is
trying to change that. It wants to incentivize emission-reducing
behavior in batteries by making it an eligible carbon offset.


Just as a renewable energy producers can make extra money through
the sale of renewable energy credits (RECs), battery operators
could make extra money through the sale of carbon offsets on the
voluntary market — but only if they change the way they operate.


It’s an intriguing idea and the only real solution I’ve seen
proposed to a problem that no one else is even talking about. So
I wanted to chat with founders Jacob Mansfield and Emma Konet
about why batteries increase emissions today, what incentive they
would need to change their behavior, and what’s required to set
up an offset product. And yes, I recall that Volts recently
featured an episode extremely critical of carbon offsets — we’ll
get into that too.


So, then, with no further ado, Jacob Mansfield and Emma Konet.
Welcome to Volts. Thank you so much for coming.


Emma Konet


Thanks for having us.


David Roberts


Emma, let's start with you. You worked at a battery company
before jumping to this startup. Let's walk through a few basics
here. Let's just start with this question. If I'm an investor and
I want to build a big battery and attach it to the grid, how
would I make money? What are the sort of routes through which I
could make income with a battery?


Emma Konet


So batteries typically have three ways in which they make money.
The first one is, I think, what everyone traditionally thinks of
a battery doing, and it's called energy arbitrage. And basically
that just means that a battery buys power when the price is low
and it sells power when the price is high.


David Roberts


Right.


Emma Konet


And the difference between those prices is what the battery is
paid. Of course, some energy is lost through the process of
storing it, and so batteries are not 100% efficient. So that's
kind of the traditional idea of how batteries operate. But that's
actually not really what a lot of batteries are doing on the grid
today. Instead they provide what are called ancillary services
and those are basically products that help to keep the grid
frequency at 60 Hz. It's really important for reliability, just
in everyday power grid operations, that that happens and the grid
operates more efficiently when it's in a tighter band, around 60
Hz.


Batteries are really good at providing those products because
they can very quickly ramp up and down and they can provide those
products around the clock.


David Roberts


Yeah, this is a really cool thing about batteries, just to sort
of insert kind of an aside here is those grid services used to
only be able to be provided by giant spinning mass, giant fossil
fuel power plants. So it's very cool that we have this basically
digital source now of these grid services — is much more precise.


Emma Konet


Exactly. And just much more efficient. So that's the second
revenue stream available to batteries and then the third is
what's called capacity revenue. And this is not available in
every market, but it's basically available in every deregulated
market outside of Texas. And it's like long-term grid planning.
So the grid operator looks at the expected demand forecast on the
time horizons of years rather than days or weeks and determines
how much power plant generation capacity it's going to need to
satisfy that demand in the future. Then it creates a market to
establish the price of what basically it costs to bring new
generation online to meet that demand and also to satisfy power
plants that are retiring and going offline and that we need to
backfill. So that is another service that batteries can offer.


David Roberts


Paying them to be available basically.


Emma Konet


Exactly. Yeah, exactly.


David Roberts


And you mentioned this, but maybe it's worth clarifying a little
bit. Capacity payments are obviously only available in areas with
capacity markets, so that is restructured areas other than Texas.
Because as Volts listeners may or may not know, Texas has this
energy only market with no capacity market. So what about in
areas where there are still vertically integrated old school
utilities? Can batteries make money in those areas, and is it the
same way?


Emma Konet


So that's actually a really good question. And there's a lot less
transparency in vertically integrated markets, so it's not
obvious to say exactly what batteries are doing. And basically
the utility decides the operating mode of the battery. And I
think the biggest distinction between vertically integrated and
deregulated markets are that in vertically integrated markets,
utilities can rate base the cost of bringing new generation
online, whereby in deregulated markets that has to be supported
by the fundamental economics of the power market. And that's why
deregulated markets are so good at getting lowest cost dispatch.
And that was why basically they deregulated in the 90s. It's
basically that batteries functionally do the same thing, they're
providing frequency services and probably doing some energy
arbitrage and are online for capacity in vertically integrated
markets. There's just much less transparency on how they're being
paid and how much of that is essentially being subsidized by rate
payers.


David Roberts


And let's just say a little word about grid services, because, as
we mentioned, it's very cool that batteries can provide these
services, sort of voltage regulation and stuff like this, but I
think people should understand that this is not a large
burgeoning market. Like the actual demand for grid services is
relatively limited and close to being saturated now. Or sort of
like how much headroom is there in that particular slice of the
market?


Emma Konet


I think a lot of developers also would like to know the answer to
that question, because when ancillary markets saturate with
storage, that's going to be a major revenue stream that has price
pressure on it, so that revenue stream will decline. Basically,
ancillary markets are — I'm just going to use Texas as an
example, because it's the market I'm most familiar with — we just
are hitting around 85 gigawatts of load in the energy market. And
in contrast, ancillary markets are between three and five
gigawatts, so much, much smaller in scale. And we are not far
from having three to five gigawatts of batteries in the ERCOT
market operational.


It's a little bit of a moving target because the grid operator,
ERCOT, can move around the quantity of those services that it
procures, and that's actually changed a bit. They've released a
new ancillary product in ERCOT this summer, so it's not exactly a
certainty. But I think certainly in the next two to three years,
we'll see some significant price pressure on those services. One
thing I just want to note here is that when we talk about
batteries getting compensated, it's not a clear cut "batteries
can win in these markets with respect to paying back their
costs."


A lot of batteries actually struggle to make enough revenue to
meet their break-even hurdle. This is just one more pressure on
the product that's been keeping them afloat in the past couple of
years. So I think this is really concerning to developers and
they're sort of looking for new ways to compensate storage for
the services that it provides.


David Roberts


Right, yeah, I was sort of getting around to that. The grid
services market is relatively close to saturated, let's say, but
if that's true, then it's definitely going to be saturated well
before we get anywhere close to the amount of storage we think
we're going to need to decarbonize. So this is not going to be a
big driver of additional battery deployment. And as you say,
like, just in general, and you made this point to me when we
talked earlier, Emma, it's just very difficult, even today for
batteries to make money, period. For all the sort of talk about
batteries and how much batteries we need and the sort of gigantic
quantities of storage we're talking about needing, it's very
difficult for them to make money in today's market.


Emma Konet


You're right. You're absolutely right. I think they're the sexy
new thing that everyone's really excited about and gets a lot of
buzz. But when you actually operate them and see the revenue they
bring in versus the revenue you expect them to bring in, I think
it's a little bit of a reality check for folks that are investing
in storage, which is really problematic because we need to
continue to invest in storage, continue to build storage in
concert with renewable energy in order to get this power grid to
net zero. So we can't lose momentum here and if we start to see
the economics stall out, that might be what happens.


David Roberts


Putting grid services aside, let's talk about arbitrage. So your
basic: buying power when it's cheap, selling it when it's more
expensive. One of the things that you've found, that Hittinger's
research found, and that your research has found, is that today,
at least, your typical sort of arbitrage will have the effect of
raising emissions. So just explain why that is. How does that
work exactly?


Emma Konet


Yeah, I think it's actually, just to put a little bit of a finer
point on it, it's not necessarily a blanket statement that doing
energy arbitrage will increase emissions, but it really highly
depends on where the battery is located on the grid.


David Roberts


Right.


Emma Konet


In fact, some batteries are located in places where they can
significantly reduce carbon emissions. But energy markets and
power markets do not incentivize batteries to site in those
places. They incentivize batteries to site in places where they
aren't reducing emissions on the grid through energy arbitrage.
And the reason why that happens is because — well, there's a few
reasons — but the big reason is because of the round trip energy
efficiency of batteries. So some energy is lost due to the
resistance when storing the electrons.


David Roberts


What is the average efficiency of deployed lithium-ion batteries
on the grid today, roundabout?


Emma Konet


It's around about 85%. So it's actually quite efficient for
battery technology. It's basically the most efficient batteries
we have. And every other technology that can do longer duration
for cheaper is usually sacrificing efficiency.


David Roberts


Right. But it's still the case that for your arbitrage to make
money, you need not just to sell power when it's more expensive,
but it has to be like more than 15% more expensive because you
got to sort of compensate for the lost power.


Emma Konet


That's exactly right.


David Roberts


Yeah. So as we're saying, arbitrage does not intrinsically
increase emissions. It entirely depends on where the battery is
and what time it is and a lot of other factors. But today we
think they are increasing emissions. So how do we know that? Tell
us a little bit about the study you did.


Emma Konet


So we are partnering with a company called REsurety. It's been
around for about a decade and they produce a data set called a
Locational Marginal Emissions Rate, which basically measures the
carbon intensity of power. So you can kind of think of it in
terms of CO2 tons per megawatt hour at every point in time and
space on the grid. And what it really is truly getting at is the
incremental carbon impact of injecting a clean megawatt hour onto
the grid. And so we can leverage that data to take a look at a
battery's historical behavior and actually measure what the
carbon impact was of its charge and discharge cycles, including
all of the things it may be doing to satisfy other markets like
ancillary services.


So I think what's really critical is that in some cases it's
better for a battery to cycle more and do more energy arbitrage,
but it might be selling an ancillary service instead, because
that's more profitable. And as a result, we're not getting the
carbon impact that we want to see. And some reasons for that
might be a battery might charge uneconomically in the real-time
market to satisfy a state of charge requirement for carrying
ancillary obligation. Or a battery might charge and discharge
very rapidly to respond to the frequency regulation signal that
is completely divorced from the carbon signal.


And so you start to see these behaviors that are incentivized for
the battery to make money, but that don't actually correlate to
emissions reductions.


David Roberts


This is the theme of this whole pod, is there is no freestanding
financial incentive for batteries to operate in a way that
reduces emissions. They're just simply not incentivized to do
that.


Emma Konet


Exactly.


David Roberts


Yeah. And I just want to say about locational marginal emissions,
because this is an important concept for people to get, and it
sounds technical. Locational Marginal Emissions (LMEs), but
basically so at a given point on the grid, at a given time, if
you add a unit of demand for power, what power plant is going to
come online to satisfy that next unit of demand? Righ, so people
will know, in restructured markets, you generally buy power from
the cheapest generators first and sort of stack it up. As demand
increases, you bring the more and more expensive generators on.


And so the locational marginal emissions in a given spot is just
like that next unit of demand. What is the next power plant that
comes online? And if the next power plant that comes online is a
fossil fuel power plant, then you have higher locational marginal
emissions in that one spot, basically. And this will change, as
the name suggests, from place to place on the grid and from time
to time. Like it depends on time and place. And this sort of
ability to — people who listen to my pods on hourly matching and
all that kind of stuff, trying to sort of hourly match your power
consumption to clean generation, will sort of remember this
concept.


It's just very granular. It's different from averaging the
emissions in a particular place over a year or over a month or
something like that. It's really sort of real-time data. And so
this is what you're looking at when you're studying how batteries
behave, is what is their effect on locational marginal emissions
when they charge and discharge? And what you found is that
generally they're increasing Locational Marginal Emissions when
they come on.


Emma Konet


That's right. So we did a study in ERCOT where we looked at 24
operating batteries in the calendar year 2022, and we found that
over the course of the year, 19 of them actually increased carbon
emissions. Only five of them reduced emissions, and only one of
those batteries really did so meaningfully. And that battery was
a paired solar plus storage facility. Kind of telling, definitely
sort of tells us where we think the market needs to go to have a
big carbon impact from storage. But what I think is the most
interesting thing we modeled out in this paper is what could have
happened or what would have happened if we were actually
compensating a battery for the carbon that it abates.


And how does that change behavior? And we really found three
things, and that's some batteries that are not in locations that
allow for carbon reduction and that are just not emissive, we can
actually reduce their carbon footprint and make them less
emissive. And then batteries that are in locations where they can
reduce emissions, but they're not doing so because there are
financial incentives for them to sell other services. We could
actually flip those batteries from being emissive to being
abating. And then a battery that is already abating because it's
in a really good spot on the grid and it's paired with solar, for
example, we can actually double the impact and pull even more
carbon off the grid.


So it kind of runs the gamut of all the different places and
operating modes that a battery might be located and operating in,
and it can have a substantial impact on its behavior.


David Roberts


So before you leave the study behind, though, this is just you
just studied batteries in ERCOT, which is the Texas energy-only
market, as you say. Other restructured markets are somewhat
different in that they tend to have capacity markets as well. And
then there are vertically integrated markets. How confident are
you that you would find roughly the same thing if you studied
other power markets? In other words, is this a generalizable
phenomenon that arbitrage tends to increase emissions?


Emma Konet


It really depends on the stage of renewable penetration of the
grid. So I think when we think of grids that are furthest along
in the renewable energy transition, we think of California. We're
actually, our company is not targeting markets like California
because they have a lot of state regulatory support in the form
of mandated procurements for storage. So batteries are kind of
just getting built off the back of that. And then Texas has a
pretty significant renewable energy penetration, but it's also a
market where there's not state support for storage or really
green energy in general from a regulatory perspective.


The other markets that we think of are probably the biggest
opportunity, are probably MISO and SPP. Because there's a wealth
of renewable energy in that part of the country and that
renewable energy is getting built. It's in the interconnection
queue right now. So we're going to see that penetration increase
and I think we can start to basically see the trends of these
markets move as more and more renewable energy comes online. So
to answer your question about "do we think this is replicable?" I
think the answer is yes, especially as more renewable energy
comes online. But the critical difference being capacity markets,
which is kind of the one little wrinkle — like Texas doesn't have
those.


So we have to think about how does this all play nice together
with capacity markets.


David Roberts


Yeah. And you say the grid services market tends to lure
operations away from what might otherwise reduce emissions. Does
the capacity market have the same effect?


Emma Konet


Well, I think the capacity market impacts a battery's decision
making actually with respect to siting more than anything else.
Different capacity markets have different rules with respect to
operations, maybe some must-offer rules or just availability
requirements. So in terms of like operating mode, I don't expect
it to have a big impact but it's more in terms of where you put
the battery. So when you have a capacity market that power has to
be deliverable to load in order to get a capacity payment. And to
be deliverable to load, it has to be studied under a system
impact study which is an AC power systems model that looks at
power flow and it can be not deliverable if there's not
transmission capacity.


And really unfortunately where all the renewables are located is
where the transmission capacity is bottlenecked. So it doesn't
incentivize a battery to go site itself near renewable energy
where it can have the highest carbon impact because it's going to
have to sacrifice potentially a capacity payment or pay hundreds
of millions of dollars in transmission upgrades which would kill
a project.


David Roberts


Right.


Emma Konet


So that kind of points to why this product is even more necessary
in markets with capacity markets because we need to incentivize
storage to site in places that have high impact but we need to
pay them so that they are not having this opportunity cost in the
capacity market.


David Roberts


Right, because right now if they deliberately sited in places
where they could have the most positive effect on emissions they
would be sacrificing capacity revenue basically.


Emma Konet


Yeah, they could be and I think "would be" is probably the right
word. Obviously every location is different and transmission
infrastructure is getting built and things are changing. But
generally speaking yeah, where the power is bottlenecked is
typically where the renewables are producing and so it's kind of
a misalignment of incentives and I think there are a lot of
people working on transmission and interconnection reform and I
think that needs to happen as well. Given my experience trying to
work with stakeholders and ISOs and all the different people that
make those processes go, this is a much faster path.


It's to just build the batteries where they need to be and pay
them to be there. And then in that case, the battery acts as an
aid to the transmission system as well. So it can be highly
beneficial.


David Roberts


And so it's fair to say that in the fullness of time, this
problem will go away. Right. Like eventually, once we have enough
renewables on the grid and there's enough transmission built,
then batteries will start just naturally behaving in a way that
reduces emissions.


Emma Konet


That's right.


David Roberts


But that's potentially quite far away.


Emma Konet


Yeah, I think it's quite far away. And anyone who's worked in
development and interconnection and trading, it's a sticky,
sticky process.


David Roberts


I'm a bit of a wonk, so always my first instinct when I hear a
problem like this, we have batteries out there that could
potentially be having positive impacts on the social good, but
are not because of screwy financial incentives I want to reach
for public policy. So I just have to ask: If you were emperors
for a day and the US political system was not grossly
dysfunctional at almost every level, what type of public policy
would solve this?


Emma Konet


Yes, I also like public policy, so I looked into this and did
some modeling. Basically, we can use a production cost model
which simulates a power grid on a fundamental level. It looks at
bids and offers and structure and generators and all that stuff.
Essentially, what we found is that if you add a battery to a grid
without a carbon price, based on how all the mechanisms of power
markets work, you would see emissions increase today. If you add
a carbon tax and we just threw one in for $50, basically. So
essentially what it's doing is it's causing generators to just
bake that cost into their power offers.


You see emissions go down, same grid, same model, all you're
doing is changing — you're internalizing that externality and it
basically solves the problem. So, a carbon tax, I think, is
probably the most effective way to go about that. And I think
Jacob has some thoughts on this too. So I know I've been talking
a lot; I'd love to bring him in. But that's kind of my take on
it. And like you said, it's really hard to imagine a world in
which that happens at a federal level in this country.


David Roberts


I'm painfully aware. So the carbon benefits are not being valued
today. A straight-up carbon tax would value them and would
probably solve the problem at some reasonable level of carbon tax
or some of the many sort of kludgy ways we have of kind of
simulating a carbon tax, like maybe something sector-specific or
something that goes through utilities. But anything that
basically sort of values carbon is going to get at this problem.


Emma Konet


That's right.


David Roberts


Jacob, any policy thoughts before we sadly abandon public policy
and move on?


Jacob Mansfield


Yeah, I think in an ideal world, I think having something close
to, like a Pigouvian tax, which is kind of a fancy economics term
from my undergrad, would be a good way in which you could build
something that's somewhat revenue neutral, where you're taxing
the emitters, you're subsidizing the abators. And that would
create this clear transfer of value that's really meant to
eventually decarbonize and transition the entire grid. I think
the challenge is just there's not the political wherewithal or
the willpower to do so. And especially in an inflationary
environment like we are right now, it probably seems somewhat
unsavory to use a tax-based approach. Which is why I think we
lean more into leveraging voluntary carbon markets.


David Roberts


But taxes are good. I'm just going to plant that flag before we
move on. Yay, taxes. Okay, so given that politics, US politics is
pretty dysfunctional, we're probably not going to see a carbon
tax anytime soon. Tell me about this idea. So the idea basically
is that a battery that reduces emissions, that changes its
operations in such a way as to reduce rather than increase
emissions, could sell those reduced emissions as carbon offsets.
So just tell me a little bit about the idea and how it would
work.


Jacob Mansfield


To back up a little bit, I think the reason why we're talking
about this is because of the fact that, one, we've seen voluntary
corporate activity be a huge driving force for adopting new
technologies.


David Roberts


Yes.


Jacob Mansfield


So my background was all in power origination, doing transactions
between large scale wind farms and solar farms and corporate
clients that were looking to procure renewable energy for their
sustainability goals. And just to level set right now where
things stand, over half of all the renewables developed in the
United States have offtake agreements in place with large
commercial and industrial customers.


David Roberts


Yeah, that's really wild. I don't think people get that because I
think maybe people in my world have a little bit of a skepticism
towards corporations. I don't think people get just what a huge
force corporate procurement has been in driving renewable energy
in this country. As you say, like half the renewable energy in
development is for a corporate entity that wants to claim it's
reducing its emissions. I mean, that's not small potatoes.


Jacob Mansfield


Yeah, no it's incredible and I think that it's a really good
thing, in terms of free markets and companies themselves adopting
these initiatives voluntarily. And I think if you take it one
step further so if you put that in context with batteries now
batteries have not had that to date, right? They don't have any
sort of environmental attribute that they can sell. They don't
have renewable energy credits as an alternative revenue stream.
So the question is what do they really sell or what do they
package to receive more investment? And given the state of
affairs where batteries may not be a great financial investment
for some developers, the reality is that there's not a lot of
investment going into batteries.


And so Bloomberg put out a report earlier this year about how the
green energy transition eclipsed a trillion dollars of
investment. But when you actually look at the numbers, about half
of that went to renewables. And when you compare battery
investment to renewable investment, $0.03 for every dollar that
goes towards renewables is being invested in batteries. So
there's gross underinvestment in batteries. I think it's in part
because there isn't the financial revenue stream to really
compensate batteries as net abating assets versus being
generating assets.


David Roberts


Right. And as Emma said, there are some markets like California,
where the penetration of renewables is sufficient to cause
problems unless you have energy storage. And in those markets,
they are kind of getting off their butts and trying to explicitly
support batteries and battery investment. But that's only in the
places that have kind of been forced to it by the physics of the
power system. Not these sort of larger markets where penetration
is lower.


Jacob Mansfield


Right. And I would even say beyond California there's other
markets like Massachusetts has the clean peak standard. New
Jersey has been bouncing around the idea of adopting something
similar to compensate batteries for reducing emissions. I think
that there is some momentum towards supporting batteries in some
mechanism. I think that the tension there is: What is the actual
instrument used to encapsulate those environmental attributes?


David Roberts


Yeah. Is there no consensus? Is there no sort of like standard
model?


Jacob Mansfield


No, not really. And I think that's where it's really being
derived in private markets where you have companies that are also
adopting an emissions-first principles kind of framework for
thinking about this and where they allocate resources. And then
at the same time, you have kind of the burgeoning data space
around LMEs with REsurety, Singularity, Watt Time, Energy Maps.
You have a whole host of folks that are dedicating themselves to
building out these data sets that I think we're getting to the
point where you can really use an emissions-based approach to
estimating and quantifying what the abatement impact is of a
battery.


David Roberts


If I can just pick up on one bit of that and spell it out a
little bit. So this emissions focus by corporates is somewhat
new. So to date they've mostly just been sort of like stampeding
to buy renewable energy wherever, wherever and whenever and
counting that against. But now that we have this, more
sophistication about the granular effect on emissions of a given
investment — so, like a wind farm in one place might reduce net
emissions much more than a wind farm in a different place.
Especially true for solar, I think. So now corporates are taking,
like, as you said, a sort of emissions-focused look at this,
which is where can we invest in things that have the maximum
emissions impact?


And that's what locational marginal emissions, that's what all
that data gathering is allowing them to do.


Jacob Mansfield


Yeah. And if I could add just one more thing. I think there are
some changes in the actual standards within corporate
sustainability that are going to move in that direction. Chiefly,
the greenhouse gas protocol, which I think like 97% of Fortune
500 companies have adopted, provides guidance on how to estimate
your emissions in the scope 1, 2, and 3.


David Roberts


Right, so they're being pushed to do this not just voluntarily.


Jacob Mansfield


Exactly. And so, scope 2 guidance, which is how you essentially
estimate your emissions from electricity, is going through its
biggest overhaul in the last decade. And so in 2014, they updated
it to have a market-based approach, where you could take
advantage of if you purchase RECs or you enter into PPAs to
megawatt match and say "I'm offsetting my total annual load of
electricity." But now, given that we have the data to more
granularly estimate our emissions, we're starting to think about
well, maybe if I'm on a dirty grid where I'm consuming
electricity mostly from gas and coal, and I'm buying power, from
a wind farm in Texas, where in the panhandle, where it's already
mostly green, maybe I'm not actually having the impact of being
carbon neutral while I'm still claiming that I'm 100% renewable
energy supplied.


David Roberts


Right, you can offset your electricity without offsetting your
electricity emissions.


Jacob Mansfield


Exactly.


David Roberts


And so they're going to need to do this. And so enter batteries
then. So how do you slipstream batteries into that kind of
system?


Jacob Mansfield


It's worth noting that under that construct where people are
already supporting wind and solar, I think the next evolution is
batteries. And from the corporates that we spoke to, some of them
have told us that they think that buying more wind and solar is
sort of table stakes and they see a lot of importance in
supporting batteries as the next stage in decarbonization. And
it's worth noting too, as we add more renewables to the grid and
as penetration goes up, you're going to have more resiliency
issues potentially, and you're going to have to rely more on
fossil fuels to solve for the intermittency problems. And the
benefit is that potentially batteries, if sited and operated
appropriately, can really supplant thermal units like coal and
gas, wean off the grid's reliance on fossil fuels and allow us to
run the grid the way that we hope it to be, which is 100%
renewable energy.


David Roberts


Right. So to do that, we have to incentivize that behavior. So
the idea here is corporates going out on the voluntary carbon
offset market, corporates looking to offset their emissions.
Basically, you want to make batteries that reduce emissions
eligible as an offset. So tell me a little bit about how that
would work because I have no idea. Is there a governing body
running voluntary carbon offset markets? Do you just go out and
say, "hey, we've got some offsets" and people start buying them?
Do you have to get certified by someone or how does all that
work?


Jacob Mansfield


Yeah. So it's interesting because it is a voluntary space, so
there are a lot of different players and lots of folks trying to
figure it out and chart new paths every single day. But I think
generally speaking, the accepted pathway would be for us to work
with a carbon registry. And so we've joined a consortium of
players. It's called the Energy Storage Solutions Consortium,
which is comprised of corporates and battery developers. And so
we're charting a pathway to try to get a methodology in place
with Verra. And so Verra is one of the key carbon registry bodies
that exists, it's a nonprofit.


Verra actually accounts for 70% of all the voluntary carbon
offsets that are issued. It's gotten some bad press recently due
to nature-based offsets, but the reality is that they've actually
become much more stringent as a result of it, which hopefully is
a boon for us in terms of getting something passed and getting
something through that passes muster. And the goal for that is to
have a check in place such that if we're working with developers
to certify projects, issue offsets, get them minted through Verra
and have a validator that's a third party audit the entire
process.


You have all these checks and balances in place to ensure that
whatever's being purchased by a corporate really is going to pass
the test of time. And it's really going to be something they can
use for their sustainability goals.


David Roberts


Right, well, this seems like a good time to sort of wrestle with
the offset question then. Because a few weeks ago I had Joe Romm
on, very critical of the offset market generally. And I know at
this point that offsets have kind of even, I think, maybe among
the general public gotten a little bit of a bad reputation as
sort of scammy. So talk a little bit about how you see these
kinds of offsets fitting into the market and sort of how
confident people should be in them relative to other kinds of
offsets. Like how would you pitch this to someone who's skeptical
of offsets, let's say?


Jacob Mansfield


Right. And those are the folks that we talk to on a weekly basis,
so it's nothing new from that end. I think the reality is that
this is just a fundamentally different type of product than what
exists on the market. To zoom out a little bit, there's sort of a
bifurcation between avoidance and removal offsets and then also
between nature-based and things that are not nature-based. So
avoidance typically means there is some sort of activity which
might increase emissions. If we forego that activity, then we
will avoid emissions.


David Roberts


Right. This is the classic counterfactual that is so problematic.


Jacob Mansfield


Right. So it's been pretty challenging in terms of deforestation,
like someone threatening to chop down a forest or a parcel of
land and then claiming that's an avoidance because they didn't do
it, because they got compensated. And that's pretty problematic.
And the reality is that that requires you to make a guarantee of
some sort of activity for hundreds of years, meanwhile still
recognizing revenue up front for something that hasn't yet fully
come to fruition. I think the reason why this is pretty different
is that we're getting to the point now where power markets are
pretty instantaneous and things — the grid, what supplies
electricity is fairly instantaneous.


And so the reality is that at the end of any given day, we can
look back and calculate what was the empirical impact of a
battery on the grid, and we're not making claims of 100 years
into the future, what's going to happen. We can actually look
back and say, "this battery that was charged with renewables at
this time, discharging at this point in time reduced our reliance
on this thermal unit." And that's the type of avoidance that I
think is markedly different than a nature-based solution.


David Roberts


Right. So this would be then maybe if we think of it in terms of
— because I think as a rough and ready heuristic in the offset
market, generally, you get what you pay for. So these
nature-based offsets are sort of legendarily, notoriously cheap,
which is why people buy so many of them. But they're cheap
because they're mostly junk, I think. And then you have, as you
said, the removal offsets, which are literally tons of carbon
buried, right, tons of carbon sequestered, which is about as
certain as you can get, that you're offsetting a ton if you
literally bury it.


And those are incredibly expensive right now, I think, because
the technology for capturing and burying carbon remains
incredibly expensive. So where do you think battery offsets would
come in between those two poles?


Jacob Mansfield


Yeah, I think right now, nature-based offsets, the high end is
probably like $20. And then you have CDR DAC that are in the
hundreds of dollars, even north of $1,000. And then you have some
things in between. But for the most part, I would use those as
the key price points. Now, going back to our study, what we saw
was we did a sensitivity analysis on carbon price because we
wanted to know how much can you shift behavior? We found that
there were diminishing returns. Like batteries can't infinitely
abate carbon unfortunately. No matter what price of carbon you
attach to them, there is a finite limit.


And so what we found was it comes down to the proverbial question
of: Is the juice worth the squeeze for a battery operator? Like,
if we attach a price of $5 per ton of CO2, it might move the
needle slightly. But if you're only increasing the total revenue
to the operator by a couple of percentage points, that's not
meaningful enough to go through all these hoops and hurdles. So
then it comes down to, "okay, what's the point at which this is
meaningful money for batteries to move from being in the red to
being in the black and changing their behavior?"


And so based on our study, we found that it's between fifty
dollars to one hundred dollars. And to put kind of more mental
benchmarks around that, if you think about RECs, and specifically
high impact RECs which are increasing in popularity right now,
people are paying as much as $20 per REC or more with maybe a
carbon abatement of maybe 0.3 to 0.4 tons per megawatt hour. And
when you convert that to per tons, that's already between thirty
dollars to fifty dollars per ton of CO2. So we don't think we're
totally off from that, but also with the co-benefits of improving
grid resiliency and building more batteries which will help us in
enabling more renewables to be built as well.


David Roberts


So in the middle then, somewhere cheaper than carbon removal, but
probably more expensive than nature-based and RECs.


Jacob Mansfield


Yes.


David Roberts


In the $50 to $100 per ton range. And would that amount of money
be different in different markets or is the idea to sort of
standardize here across markets so that the market sort of
allocates efficiently across different regions?


Jacob Mansfield


Yeah, I think the beauty of this is that you can actually have
price differentiation across batteries where the batteries that
are the lowest hanging fruit that are more easily enabled to
change their behavior, to reduce emissions, they may fetch a
lower price than someone who's a little bit stickier or harder to
abate. So I think that there is opportunity for price discovery
where based on the price point, maybe we need to hover closer to
$50, in which case we need batteries that are going to more
easily shift their behavior to do so, to justify creating these
offsets. But as the price goes up through time or there's higher
demand for these types of offsets, maybe that's where you get to
the higher hanging fruit of other batteries that are more
difficult to change their behavior starting to be economically
incentivized to change their behavior. So I think in general it
would be a market force where the product generally could be
fungible.


There's a claim that maybe it could be an inset or someone could
want to source these from the ISO or the grid that they operate
in. But the benefit of it being denominated in carbon is that it
could be fungible across batteries, which is also beneficial in
the event that you have an outage or you have an issue with any
single asset, you now all of a sudden have a number of other
assets that can offer a similarly qualified product.


David Roberts


Right, and you can imagine corporates wanting, preferring to pay
batteries that are on the grids where they are operating right in
the name of this sort of hourly matching. People are talking
about some sort of hybrid of hourly matching and emissionality
that's probably too geeky to get into in this pod. But you can
imagine a corporate paying a little bit more to change the
behavior of batteries that are producing the power that they're
using.


Jacob Mansfield


Yeah, and I think this also affects the siting as well. And I
actually would probably hand it off to Emma to kind of chat more
about how that affects the siting.


David Roberts


Emma, let's talk a little bit about if, say, $50 a ton carbon
offset money were available to batteries, grid-scale batteries,
how would that change their behavior and who builds what and
where?


Emma Konet


Well, batteries are always operating in the market to maximize
their revenues. So, you know, one of the products that Tierra
Climate is offering is optimization services to help batteries
maximize their revenues across carbon markets and energy markets.
It's kind of difficult to answer that question as a blanket
statement because every market has different prices for different
things, and those prices are constantly changing as the grid is
evolving. But generally speaking, as soon as you attach a price
to carbon, even a smaller price of carbon, like once you
basically jump the hurdle of like, "okay, we are in the contract
and I'm actually going to operate my battery in a different way,"
even a smaller price of carbon can start to change behavior. And
so basically, batteries will stop selling perhaps responsive
reserve service or spinning reserves in favor of cycling the
battery more to capture arbitrage opportunity that maybe it
otherwise wouldn't have gone for.


And a really critical example I think we see is that on a typical
grid, pretty much anywhere in the US, you're going to see maybe a
$20 - $30 difference between the lowest price and the highest
price of the day. But batteries degrade when you cycle them,
right? And basically the kind of value that I think that the
industry has landed on is about $25 to cycle the whole thing. And
so if you are only making like a couple of bucks or it's
uncertain if you're going to be able to capture that, it's like,
"why do I cycle my battery, I'll just sit there and sell
something else and not take the degradation and just collect my
money doing ancillary."


David Roberts


Right.


Emma Konet


But as soon as you attach $50 to that and obviously carbon and
megawatt hours are not one to one, but let's just assume roughly
you're displacing a unit that's one ton per megawatt hour, then
all of a sudden your arbitrage opportunity goes from 20 - 30 to
70 - 80. And that now can incentivize much more cycling. And I
think as battery developers are looking to the future, they're
going to start saying, "hey, this part is available to us. So
let's go to the place in the grid where we get the max arbitrage
opportunity and kind of let's maybe not so much worry about these
small ancillary markets that aren't going to be relevant to us in
the next five years."


And so we might actually see battery operators and developers
flocking to renewable-energy-rich areas that allow them to cycle
the battery frequently and capture that arbitrage. And then we
have that whole discussion about capacity markets which kind of
throws a wrinkle into it. But I think generally speaking, the
price of carbon should be discovered in a way — we'll have price
discoveries such that it incentivizes the behavior based on the
demand for the tons.


David Roberts


Presumably, if there's a spot on the grid where there are
considerable arbitrage opportunities that could reduce emissions,
those will saturate too, right? Those are not infinite. So the
idea of putting a price on these is to just start filling those
in, basically.


Emma Konet


Yeah, and I think a lot of the big energy arbitrage opportunities
that we see are driven by transmission constraints where
basically you have one part of the grid that's bottlenecked. The
emissions factor gets really low, basically zero or perhaps
negative. And so it's a charging opportunity. So that's going to
change as we both build more batteries and build more
transmission. But I will make a comment just on what we've seen
happen in markets where it's kind of like "if you build it, they
will come." You build a transmission and you alleviate a
constraint and now all the power can get out and then a bunch
more renewables build right behind that transmission because
that's where the renewable-energy-rich areas are.


Those aren't moving right. Like we know where wind is in Texas,
it's in the panhandle. So we go build projects there and then we
fill up the transmission again. And we've just seen this, it's
like history repeats itself. So I don't really have the concern
that on the long time horizon for batteries that they're somehow
going to cannibalize the opportunity, I mean, maybe for a few
years and we see a cycle where the opportunity is less. But we
got to build a lot of transmission to solve this problem and
transmission is very hard to get done in this country and we also
need more renewables and we need more batteries.


And so these trends are going to continue. You're going to
continue to see an arbitrage gap in both price and emissions in
certain parts of the grid, basically in perpetuity.


David Roberts


Yeah. And this might be kind of a dumb question, but it occurs to
me that if you establish a situation where batteries are making
money because there is grid congestion, right, I mean, that's
sort of like what is making some of these arbitrage opportunities
so big is that there's a lack of transmission. Then if somebody
comes in and builds transmission in that area, they are going to
be taking revenue opportunities from those batteries. And do you
worry at all that this is going to sort of set battery owners and
operators against transmission, put their incentives against more
transmission?


Emma Konet


This is something I've thought about a lot and I think, just not
to get too technical here, but there's kind of two different
flavors of transmission constraints. One of them is like a
thermal constraint which is basically like an isolated singular,
one line or a couple of lines that's causing extreme price
action. And typically we see that price action on the upside,
where we see really expensive units have to ramp up to satisfy
demand. Then the other type of flavor is a voltage constraint
where basically you're trying to push a large amount of power
across a wide region of very — we call it like an interface.


And those constraints are more persistent, harder to solve with a
single transmission line. You can't just come in and say, "oh, I
built a transmission line, problem solved." It's kind of this
integrated whole process that you have to go through to solve
that. And in the meantime, the interconnection queue is filled
with generators that want to interconnect. So I don't really
think that's going to happen. I think it could happen if you're
trying to site a battery to just capitalize on a small constraint
— like we saw this in West Texas with the Permian demand with oil
and gas load.


Basically, as oil and gas started to electrify their process of
extracting, we saw a bunch of electricity demand in West Texas
and it caused prices to skyrocket. Some batteries sited there
took advantage of that for a couple years. They built like two
transmission lines and the opportunity went away. But that's not
really what we're talking about. We're talking about just these
endemic structural issues within the grid where we're trying to
get renewables from the middle of the country to the coasts to
the load centers. That structure is not changing.


Jacob Mansfield


And if I could just add something else, I would say that MISO did
a study where they examined what would be the most cost-effective
way of decarbonizing and they evaluated if you used purely
batteries, used purely transmission or a combination of both,
which would be the most cost-effective way. And the answer really
is you need both. So it's sort of an "all of the above" approach
where this isn't going to supplant the need for transmission, but
it certainly is going to help alleviate it. And especially where
we are so far behind, and we'll be constantly behind as we
electrify everything.


I think it'll be really imperative that we are building more
batteries in tandem with building more transmission.


David Roberts


Yeah, I think we can see in a couple of ways that in some sense
this opportunity that you're trying to monetize is temporary and
going to go away at some point. But that point is far away, it's
plenty far away that there's plenty of money to be made in the
interim. So maybe by way of wrapping up, I would just ask this
seems like a good idea, right? We have this problem with
batteries. Now they're operating in a way that increases
emissions. We have a relatively simple intervention which is just
monetizing carbon reductions in battery operation by way of
offsets getting some of that corporate money flowing to batteries
to incentivize them to operate in a smarter way or a way that is
more emissions conscious.


Where are you in this effort? And have you had when you talk to
corporates, are they open to this idea? When you talk to sort of
offset the people analyzing and sort of assessing offset quality,
all these entities involved, who would be involved, is there
interest? How far away are we from seeing this happen somewhere?


Jacob Mansfield


I think it's a spectrum, depending on the corporate, their stance
on sustainability, the tools that they're looking to use. What I
have found generally in our conversations, the short of your
answer is "yes, there is interest from corporates." And in fact,
there was a deal executed last September that was made public
where Meta did a pilot transaction with a battery developer in
Texas called Broad Reach. And I think that's really put it on the
radar that this is potentially feasible.


David Roberts


Wait, what did Meta pay for?


Jacob Mansfield


We don't know the exact contract terms, but in general, the idea
was they were compensating these batteries in Texas to reduce
emissions through this type of LME construct alongside REsurety.
And I think that's like a really core data point to say there are
pioneers in the space that are looking to do these types of
transactions. And I think that the corporates that are most
closely aligned with doing this are ones that, again, have done a
litany of renewable transactions. They're looking to now move
towards grid resiliency as the next phase of their sustainability
agenda, maybe have an emissions based approach, and their other
alternatives aren't that great.


Whether it's doing a toll with a battery, financing batteries, a
lot of things that would involve incurring significant risk to a
project versus a very elegant instrument where you pay for
performance for these projects to have an incremental revenue
stream and also reduce emissions in an empirically validated way.


David Roberts


What's between you and this happening?


Jacob Mansfield


I think it's just that it's so early days, so that transaction
was done a little less than a year ago. Now, I guess we're
entering September. But yeah, it's putting the wheels in motion
in terms of corporates wanting it to be validated through a
nonprofit like Verra and getting that stood up. I think there's a
lot in terms of getting batteries to the table and formalizing
those partnerships, and that's where we hope to really play a
role as an intermediary. Again, going back to my experience as an
originator, looking at the PPA market, it's taken decades to get
to the point where things are becoming standardized by
intermediaries.


And I think that there's a lot of value to doing that at the
outset where this can be a standardized fungible product that
corporates can easily execute in and standing it up early
relative to it being something far down the line later on when
the market's already taken off.


David Roberts


If you had to put a time prediction, like, what year will the
first corporate buy the first official battery offset?


Jacob Mansfield


So in some ways, you could say it already happened with Meta, but
I would say —


David Roberts


Yeah, did Meta get an offset out of that? And if so, how? If that
product hasn't been set up yet, or did Meta just get a good
feeling out of that?


Jacob Mansfield


I can't speak for them, but I would say in general, I think it
was the idea is that eventually, with a certified process in
place through a carbon registry firm like Verra or Gold Standard,
they can use those assets towards their sustainability goals. I
mean, but there's a lot of other companies that have done
transactions that have been off registry. You could say a lot of
CDR support has been for projects that don't have methodologies
in place, but they're doing it to support novel technologies. But
to go back to your original question of when, I mean, putting
that aside, I would say next year is probably a really good bet
in terms of maybe having something in place to get approved
offset. Everything in terms of the stars aligning and corporates
being interested in supporting batteries. I think more and more
we talk to corporates, I'm pleasantly surprised into how much
they're already talking to developers, how much they're already
thinking about this issue. And so I think we're just bringing it
to the foreground and also providing a solution as opposed to
pointing at all the problems. And I think that's really important
for moving this area forward versus just setting it back and
saying, "headline, there's all these issues and there's no
solutions to it."


David Roberts


Awesome. Well, hopefully, yeah, when I revisit this in five more
years, there will be a different story to tell. All right, well,
Jacob and Emma, thanks so much for coming on and walking through
this. This is like a weird, obscure little side problem in the
renewable energy world that I feel like hardly anyone's aware of,
and it's great to see someone actually attempting to solve it. So
thanks again.


Jacob Mansfield


Thanks again for having us on. Appreciate it.


David Roberts


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