Germany has installed more than 80 gigawatts (GW) of solar and wind power, but so far this has not reduced the country’s CO2 emissions. This is because renewable energy production does not follow the energy demand curve and therefore existing fossil fuel power plants cannot be shut down. Renewable energy must therefore be available when demand is there and for that storage capacity is needed.
This article reasons that the time to invest in storage infrastructure projects has come: prices for storage capacity are declining fast and various business models are ‘in the money’. Last but not least, institutional investors are ready to invest in long-term energy storage projects.
THE RISE OF RENEWABLE ENERGY
Global annual energy consumption per capita has increased to 75 million British Thermal Units (BTU), mainly stemming from additional demand for fossil fuel-based energy sources. This has led to erratic climate conditions in many parts of the world, which in turn has resulted in the introduction of CO2 emission targets by governments around the globe.
Wind and solar power, initially driven by subsidies, are now rapidly being deployed as a more cost- effective power source, reaching grid parity in certain geographies and presenting a reliable (and cheaper) alternative to traditional fossil fuelled generation. Globally, we are still at the beginning of a wave of renewables adoption that will change the energy generation landscape as we know it.
However, the large-scale acceptance of renewable energy comes with a new set of challenges to existing electricity generation and transmission infrastructure, which was initially built for the centralised production of electricity from large power plants through transmission and distribution networks to a large number of end users.
This system was highly effective over the years, but is now ill-suited to handle the integration of new decentralised and fluctuating renewable energy production, demand response programmes, smart meters and other alternatives that are permanently changing electricity supply and demand side dynamics.
These new methods of delivering or managing energy are driven by proximity to end consumers and their individual motives and are more volatile and difficult to predict. This heightened volatility causes increased stress to a grid network that is not used to rapidly changing its input and output parameters over short periods of time, ultimately resulting in grid instability through ‘brownouts’ – or worse, ‘blackouts’.
Considering the economic and societal cost of grid instability, maintaining the status quo is not an option. The one solution available to solve this ever-growing problem is sufficient energy storage capacity, enabling a fuller integration of renewable energy into the grid, which ultimately will allow the closure of older, highly polluting fossil fuel power plants.
THE START OF A MASSIVE ROLL-OUT
Already today, storage is witnessing massive interest and a sustained roll-out in certain geographies (e.g. the US and parts of Europe, like Italy and Germany), with other markets expected to follow in short order. Even though the exact extent cannot yet be determined, capacity markets (payments made for retaining idle generation capacity on the system) have the potential to be severely disrupted by energy storage, which is capable of performing this function better and at a lower cost.
In other markets, countries are increasingly mandating storage to form part of utility tenders for services (e.g. California in the US and Ontario in Canada), while other utilities are taking the lead themselves and issuing requests for proposals on the back of the advances in storage technology (e.g. National Grid in the UK). These actions are driven by a desire to defer highly capital intensive (and costly) investment in transmission and distribution networks, which will ultimately result in lower consumer bills.
Large centralised investment is difficult to justify in a rapidly changing environment and storage allows regulators and utilities to avoid making those decisions. Attractive investment opportunities are consequently already found today and are growing in numbers, with institutional investors asked to provide the necessary capital.
Declines in storage costs (and in particular for batteries) have made a broad range of business models viable and this trend is expected to continue as costs continue to decline. Business models involving some form of battery are experiencing particularly dynamic change due to the increasing scale of battery production (e.g. Tesla’s ‘Gigafactory’) and growing manufacturing efficiency.
Costs for certain battery types are expected to decline by up to 50 percent over the coming five years, an estimate that some market participants think will turn out to be conservative. At the same time, technologies are significantly improving with lithium-ion, network-attached storage and flow batteries likely to take the lead for grid-related applications, due to their flexibility compared to other options. With many companies pursuing grid-scale solutions, energy storage is becoming more and more competitive and is a core focus for large utilities globally looking to adapt to a new operating environment.
The key to integrating renewables on a large scale and ultimately enabling the clean energy transition is energy storage. Introduced at various key locations in the grid, storage allows existing and valuable infrastructure to be fully utilised, while integrating intermittent renewable generation into the system.
Storage assets can be large installations ranging from megawatts (MWs) to tens of MWs or small assets located at the household level, typically a few kilowatts in size (electric cars connected to a charging station are included here). A number of small storage assets, when aggregated together, are capable of performing the functions of larger, more centrally located storage assets.
This potential has been driven and explored by a number of new software and aggregation companies, creating a distinct but related behind-the-meter market. Taken together, storage is a new asset class capable of performing a number of different functions in the core fields of ancillary services (short-term storage), load-levelling (longer-term storage) and isolated area supply, each of them complementary and all strengthening the infrastructure in place today at the lowest possible cost.
The market for large-scale grid-related storage is witnessing extremely high growth rates, an assured pipeline and yield expectation. Studies expect the average annual growth of the sector to be 79 percent over the period 2014 to 2019. For load-levelling applications, several forecasts indicate that in the coming years, between 150 and 450GW will be needed in order to successfully integrate renewables into the grid. This amounts to an investment of some $150 billion.
The US market for peak shaving alone will be worth $45 billion to $71 billion until 2020. Off-grid power systems will offer a target market of an estimated $6 billion within the OECD and emerging countries and for assets serving ancillary services the market is expected to grow at a compound annual growth rate of 22.8 percent in the coming decade.
There are currently over 30 business models for storage reflecting the universal nature of the asset class. Each potential application taps into a separate revenue stream, but most technologies are capable of performing more than one application. This is true irrespective of where the asset is located within the existing energy infrastructure, creating a number of possibilities in terms of technology choice, its use and source of funding.
The combination of declining technology costs, increasing efficiencies, policy support and supportive macro environment creates a situation not experienced in the storage sector to date. In the past, any one of these factors may have progressed, but historically they have never progressed together. When these factors are combined with the real institutional interest in funding storage assets today, the environment is now right for storage to continue its path from a venture capital or private equity-backed business towards a mainstream infrastructure asset.