Modelling the virtual storage 'Ponzi scheme'

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Tristan Edis wrote an article in the Financial Review describing community batteries as a ‘Ponzi scheme’. More specifically, his argument is built around the idea of ‘virtual storage’ whereby customer exports are virtually stored in a battery. This concept is sometimes labelled ‘energy storage as a service’.

The argument runs that, in various community battery trials, households have been able to sign up to a virtual storage service. If households can receive a payment for doing nothing, it bears the hallmark of a Ponzi scheme.

In a talk I gave at the Community Energy Congress this year, I noted that virtual storage is just a financial instrument - I could provide virtual storage without building anything, just with smart meter data.

To illustrate this character of virtual storage, I ran a model in Gridcog of the value flows for my home’s energy use with a modelled solar system. In addition to this baseline scenario, I ran three more models: network virtual storage; retailer virtual storage; and a home battery.

The home battery scenario is relatively simple: the customer puts on a battery, receives fewer feed-in tariffs, and pays fewer import tariffs. The virtual storage scenarios differ in that there is no physical battery - the battery’s financial function is mimicked via contracts. The customer pays a small subscription fee, receives fewer feed-in tariffs, and pays fewer import tariffs. The charts below show the aggregate cash flows and relative cash flows respectively for each party.

Cashflows
Cashflows2238×1553 136 KB

Relative Cashflows
Relative Cashflows2238×1555 126 KB

The cash flows illustrate how virtual storage is zero-sum: the wholesale energy market settlement is unaffected, the network charge settlement is unaffected, and any gain that the customer makes is a loss from the counterparty (either the network or the retailer). The home battery, by contrast, reduces the retailer’s cost to serve the customer, both in terms of the wholesale energy market settlement and the cost of network charges.

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.

If virtual storage is a zero-sum game (before the additional transaction costs are considered), why does it continue to get so much attention? What do you think?

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I think at the heart of the conversation that both your analysis and Tristan’s can’t grapple with is a difference between:

  • how the money should flow vs
  • how the money does flow

Network charges
Nick’s house should probably be paying more toward network charges given that non-solar customers contribute much more to the network than you do but you both demand the same capacity from the network at peak load which is what has been built to accommodate you.
However, Nick’s house with battery rightly gets a discount on network charges because you contribute much less than normal to peak load and mainly use spare network capacity that has already been paid for. (NB how we allocate capital costs is a choice but basing it on how much capacity each home needs at peak load, is not a bad way to allocate that cost).
The network charges should go down for everyone nearby when we locate a battery in a place that stops us from needing to invest in more network capacity. (scenario 2 & 3)

feel good factor
We know that community batteries are struggling to break even so households that subscribe to a virtual ponzi scheme are simply providing a bit of extra cash to the project. But we shouldn’t trivialise why households think its a good idea. At the heart of the proposal is a value proposition - we get to use our local solar resources and our network capacity more efficiently and we will force fossils to leave town sooner.

fwiw

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Thanks for the reply Heather:

I’ve deliberately abstracted away from community batteries to look at virtual storage in isolation. If we wanted, we could imagine another participant - a community group perhaps - that owns a community battery and earns wholesale market revenue, FCAS revenue, network export rebate revenue and possibly network support revenue. The latter two represent (or ideally represent) the benefits that the battery is creating for the system, and suggesting that these flow to the battery owner is consistent with the idea that the ‘agent of change’ benefits. As you note, community batteries struggle to provide a financial return to the asset owner even when all of these revenue streams are captured, let alone if that value is shared with local households.

If virtual storage is a way to generate additional revenue for the battery, then it’s worth noting that additional revenue is not guaranteed. If the same virtual storage offering is provided to Nick’s house except both the load and solar generation are doubled, then Nick’s bill goes down and the virtual storage provider (retailer/network/community group) does so at a loss.

Relative Cashflows 2
Relative Cashflows 22238×1549 126 KB

If the subscription rate is the same for different households, then it stands to reason that virtual storage transfers money to customers with large solar systems and large evening loads, from either the virtual storage provider or other subscribers. A community group could conceivably find themselves with a subscriber base that adds another expense to its already marginal project.

Community batteries can allow us to use our local solar resources and our network capacity more efficiently and force fossils to leave town sooner. Virtual storage is a financial overlay onto this physical system that moves value around but doesn’t create it.

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I think I understand your point but I keep getting tangled between the bit that does create value and the bit that doesn’t.

Presumably the physical asset, any behavioral change from the household and any coordination between battery operation and the household are elements that could produce value.

Part of the question is whether the household should be offered any value from the battery, after all they provide the surplus solar and they provide the regular peak usage.

There’s so often a gap between the production of value and the capture of value - how do we untangle that?